Business trade and commerce

Q1: Which of the following does not characterise a business activity?

(a) Production of goods and services

(b) Presence of risk

(c) Sale or exchange of goods and services

(d) Salary or wages

Solution:

Salary or wages is not a characteristic of business. In a business activity, the

entrepreneurs work for themselves, solely for the profit motive. A business involves
production and exchange of goods and services. Risk is also involved in carrying on a
business because of the unpredictable events associated with it.

Hence, the correct answer is option (d).

Q2:

Which of the broad categories of industries covers oil refinery and sugar mills?

(a) Primary

(b) Secondary

(c) Tertiary

(d) None of them

Solution:

An oil refinery and a sugar factory are categorised as secondary industries as their raw
materials (crude oil and sugarcane) are processed into finished goods (oil and sugar).

Hence, the correct answer is option (b).

Q3:

Which of the following cannot be classified as an auxiliary to trade?

(a) Mining
(b) Insurance

(c) Warehousing

(d) Transport

Solution:

Mining cannot be classified as an auxiliary to trade. This is because it does not facilitate
trade but infact forms the basis of trade. Mining is classified as a primary industry as it
involves the extraction of natural resources.

Hence, the correct answer is option (a).

Q4:

The occupation in which people work for others and get remunerated in return is
known as

(a) Business

(b) Employment

(c) Profession

(d) None of them

Solution:

Employment is a business activity in which people are hired and are remunerated in
return. Those engaged in a business or a profession work with the main motive of
earning a profit for themselves.

Hence, the correct answer is option (b).

Q5:

The industries which provide support services to other industries are known as

(a) Primary industries

(b) Secondary industries

(c) Commercial industries

(d) Tertiary industries

Solution:

Tertiary industries provide facilities to primary and secondary industries, such as

transport and banking, to enable them to function.

Hence, the correct answer is option (d).

Q6:

Which of the following cannot be classified as an objective of business?

(a) Investment

(b) Productivity

(c) Innovation

(d) Profit earning

Solution:

Investment is not an objective of business. Rather, it is a basic requirement of every

business. It is the profit motive that serves as the sole objective of every business
activity. Business enterprises also need to improve their productivity and engage in
research and development activities for innovating new products to be able to sustain
themselves in the market. Thus, increasing productivity, innovating and earning a profit
are objectives of business. However, investment cannot be considered as a business
objective.

Hence, the correct answer is option (a).

Q7:

Business risk is not likely to arise due to

(a) Changes in government policy

(b) Good management

(c) Employee dishonesty

(d) Power failure

Solution:
Good management enables an enterprise to achieve new milestones and does not bring
on a business risk. Changes in government policy, dishonesty on the part of employees
and power failure can lead to losses and thus are considered business risks.

Hence, the correct answer is option (b).

Short answer type questions

Q1:

State the different types of economic activities.

Solution:

The following are the different types of economic activities.

(a) Business: It basically involves trading of goods and services on a regular basis. The
sole motive with which a business is conducted is profit.

(b) Profession: A profession is an occupation that requires highly specific and in-depth
knowledge of the relevant field. Every profession is different from another in terms of
the knowledge and skills required to practise it. For instance, a doctor cannot engage in
the profession of an engineer.

(c) Employment: In this type of economic activity people are hired by organisations to
work on a regular basis and are paid in exchange of their services. Normally, a monthly
salary is paid. The payments are generally in monetary terms along with certain non-
monetary compensations such as perks and other types of allowances. The
remuneration paid to blue-collar employees (basically, workers) is termed ‘wages’,
while the remuneration paid to white-collar employees (particularly, officers) is termed
‘salary’. All the employees of an organisation work together for the achievement of the
common goals.

Q2:

Why is business considered an economic activity?

Solution:

Business is primarily undertaken with an objective to earn money to finance one’s

livelihood. It can be said that the sole motive with which a business is run is profit. That
means, the decision to carry-out a business is not out of love or to perform charitable
activities. Hence, business is considered an economic activity.

Q3:

State the meaning of business.

Solution:
The term ‘business’ has been derived from the word ‘busy’, which means ‘engaged in an
activity’. A person who is engaged in business trades goods or services for a profit,
which is the sole motive of conducting business. In the pursuit of earning a profit, a
businessperson aims to produce goods and services that are in demand. This is because
it is economically prudent to produce such goods and services as they ensure higher
profits. Thus, a business fulfills the need of the businessperson to earn a living while
simultaneously fulfilling the needs of the consumers.

Q4:

How would you classify business activities?

Solution:

Business activities can be classified into the following two broad categories.

(a) Industry: It refers to economic activities in which raw materials are processed and
converted into final products. During the process, value addition to the raw materials
takes place, and the final products have a higher value compared with the raw
materials. For instance, a piece of cloth has a higher value than the cotton from which it
is produced. Therefore, we can say that industries produce goods that are readily
consumable by the final consumers. Among the major activities that are performed by
an industry are production, processing and manufacturing. Industries are classified into
the three categories—primary, secondary and tertiary.

(b) Commerce: Unlike industry, commerce does not involve manufacturing or

production. It basically involves trading and its related activities. Commerce includes
exchange of goods and services. It primarily aims at the circulation of these goods and
services so as to keep them within the reach of the final consumers. The major
commercial activities are transportation, advertisement, packaging, warehousing,
banking, communication, etc. Hence, it can be said that commerce bridges the gap
between the producers and the consumers. Trade can be further classified into two—
internal and external trade.

Q5:

What are the various types of industries?

Solution:

The following are the different types of industries.

(a) Primary industries: These industries basically undertake activities related to the
extraction and processing of natural resources. These industries directly use natural
resources as the raw materials and convert them into a consumable form. Agriculture,
mining and fishing are some of the activities undertaken by primary industries. Based
on the nature of the activities performed, primary industries can be classified into
‘extractive’ or ‘genetic’ industries.

(b) Secondary industries: These industries (also known as manufacturing industries)

acquire raw materials (which are the final products of primary industries) and convert
them into final goods after further processing and value addition. These industries aim
at making raw materials more readily consumable by the final consumer.

(c) Tertiary industries: These industries are regarded as the lifeline of an economy and
act as the basic facilitators for the operation of primary and secondary industries.
Among the major services provided by the tertiary industries, a few are banking and
credit facilities, communication and transportation. These industries are not engaged in
hardcore production activities but are basically service providers.

Q6:

Explain any two business activities which are auxiliaries to trade.

Solution:

Auxiliaries to trade include trade-related activities which facilitate the exchange of

goods and services. Among the major auxiliaries to trade, a few are transportation,
advertisement, packaging, warehousing, banking and communication. The following are
two business activities which are auxiliaries to trade.

(a) Banking and finance: Finance is the most important input to run any business.
Purchasing raw materials and meeting day-to-day expenses demand finance. Besides
the availability of the right amount of funds, their easy and cheap availability is also
equally important. In today’s world, where a majority of trading activities are conducted
on credit, the need for finance is immense. This is because, as goods are sold on credit,
the funds that are invested are not realised until the sale proceeds are ultimately
received by the producer or the trader. Thus, the absence of a banking and finance
system can obstruct the free movement of goods. In these contexts, an efficient banking
facility ensures the easy and ready availability of cheap credit to businessmen and
traders, and thus acts as an auxiliary to trade.

(b) Advertising: We all know the importance of advertisement in today’s world. It is

through advertisements that businesspersons are able to reach a large number of
potential buyers. Advertisements through television, the Internet, newspapers, the
radio and various other media educate the buyers and make them more aware of the
goods on sale. Advertising helps businesspersons to increase their sales and hence plays
the role of an auxiliary to trade.

Q7:

What is the role of profit in business?

Solution:
Earning a profit is the sole motive of any business activity. It is not possible for a
business to sustain itself for a long time if it does not earn sufficient profits. This is
because, for a business to continue, a part of profit has to be reinvested in the business.
Reinvestment also ensures the growth prospects of a business and enhances its future
profit-earning capacity. Profits are regarded as the reward for undertaking the risks
associated with a business. If a business is not earning profits, then it is considered a
non-viable venture.

Q8:

What is business risk? What is its nature?

Solution:

Business risk is the possibility of failing to earn sufficient profits or incurring losses as a
result of various unforeseen circumstances which are beyond the control of a business.
For instance, there is always a risk associated with the demand for a product, which is
highly influenced by changes in consumer preferences. It is extremely difficult for a
businessperson to correctly anticipate consumer preferences, as a result of which he or
she always faces the risk of unforeseen fluctuations in demand. In case consumer
preferences go against the product, then, because of the fall in the demand, the
businessperson would earn lower profits.

Nature of Business Risk

(a) Risk is part and parcel of business: Risk is an essential feature of a business. Every
business, irrespective of its size and nature, whether organised or unorganised, faces
risk.

(b) Varying degree- The extent of risk that a business faces depends upon the nature or
type of goods produced and the scale of operation. A business that produces goods of
daily use, such as soap and toothpaste, faces a lower business risk than a business that
produces goods which are highly dependent on consumer preferences, such as cell
phones. Similarly, a business operating on a large scale (i.e., a large business firm) faces
a higher business risk compared to a small-scale business.

(c) Directly related with profit- We know that profit is the reward for undertaking
business risk. The higher the degree of risk involved, the higher would be the amount of
profit earned and vice versa.

(d) Results due to unforeseen circumstances: Risks emerge because of unforeseen

circumstances and uncertainties. Unforeseen circumstances may include strikes and
thefts (termed ‘human uncertainties’) or business uncertainties—such as price change,
changes in government policies and natural disasters, such as earthquake and floods.
Long Question

Q1:

Define business. Describe its important characteristics.

Solution:

Business refers to an economic activity that basically involves trading of goods and
services on a regular basis. The sole motive with which a business is conducted is profit.
The following are the main characteristics of business.

(a) As mentioned in the definition, business is considered to be an economic activity as

it is run with the sole objective of earning a profit.

(b) Business involves procurement of raw materials and semi-finished goods and
services, which are then processed further and thereafter sold to the final consumers at
higher prices. It is because of this value addition that the prices of finished goods and
services are higher.

(c) All types of business activities are conducted to pursue just one single
motive, profit. It is the capacity to earn profits that decides the sustainability and future
growth prospects of a business.

(d) Business basically involves an exchange of goods and services. The common
medium of exchange is money.

(e) The exchange of goods and services (as mentioned in the point above) is done on
a regular basis. Business is a continuous process in which semi-finished goods are
procured, some value is added to them and the final goods are traded in the market. It
should be noted that one single deal or transaction cannot be called a business.

(f) Every business, irrespective of its size (whether it is a large or a small business) and
the types of goods produced, faces business risk. Although the degree of risk may differ
from business to business, there is no way in which a business can escape risk. It is
because of risks that no business can accurately anticipate the returns on investments.

(g) Besides the profit motive, a business aims at satisfying consumers’ wants. A
business must produce goods and services considering consumers’ needs. If goods and
services are produced only to fulfill the businessperson’s own needs, then this activity
cannot be considered a business as the goods and services are meant merely for self-
consumption.
Q2:

Compare business with profession and employment.

Solution:

Business, profession and employment can be compared as shown in the chart below.

Basis of distinction Business Profession Employment

1. Commencement A business can be started A profession can be Employment
by an entrepreneur commenced only commences when
depending on his or her after the successful the appointment
decision to do so and completion of a letter and the
subject to the fulfillment (professional) service agreement
of certain legal degree or a are signed by the
formalities. certificate course. employer and the
employee.
2. Investment The amount of capital Limited capital Capital is not
required depends on the investment is required.
size and nature of the required.
business.
3. Risk involved Profits are unpredictable. A comparatively Negligible risk
The degree of risk low degree of risk involved.
involved depends on the is involved.
nature of the types of
goods produced by a
business and the scale of
business operations.
4. Transfer of ownership Ownership can be Ownership cannot Ownership is not
transferred subject to the be transferred as a possible.
fulfillment of some legal professional has
formalities. acquired the
required degree and
the skills only for
himself or herself.
5. Reward or Profit earned Professional fees Salary
remuneration
6. Code of conduct No code of conduct As prescribed by As per the terms
the professional and conditions laid
association down by the
concerned. organisation
concerned.
7. Qualification No minimum Prescribed Depends upon the
qualification is necessary. professional nature of the job.
qualification is For instance, for the
necessary. blue-collar jobs,
low educational
 qualifications are
adequate, whereas
higher
qualifications are
required for white-
collar jobs.

Q3:

Define industry. Explain various types of industries giving examples.

Solution:

Industry refers to all those economic activities which are concerned with converting the
raw materials and resources into useful goods. The terms is often used to describe a
group of firms producing similar type of products.

The following are the various types of industries.

(a) Primary industries: These industries basically undertake activities related to the
extraction and processing of natural resources. These industries directly use natural
resources as their raw materials and convert them into a consumable form. Agriculture,
mining, fishing, etc., are among the activities undertaken by primary industries. Based
on the nature of the activities performed, primary industries can be classified as
‘extractive’ or ‘genetic’ industries.

(i) Extractive industries: These industries deal with extraction and refinement of natural
resources. The products of these industries serve as raw materials for other industries,
which further process these products into useful goods. Agriculture, fisheries, mining,
etc., are among the extractive industries.

(ii) Genetic industries: These are the industries that undertake breeding of plants and
animals which can be used for further reproduction. Seeds and nursery industries and
poultry farming are examples of genetic industries.

(b) Secondary industries: These industries, also known as manufacturing industries,

acquire raw materials (i.e., the final products of primary industries) and convert them
into final goods after further processing and value-addition. In other words, these
industries aim at making the raw materials that they procure more readily consumable
by the final consumer. Secondary industries can be further classified in the following
manner.

(i) Manufacturing industries: These industries further process raw materials or semi-
finished goods into finished products that can be readily used by the final consumer. On
the basis of the method of production used by manufacturing industries, they can be
further divided into four main categories.
1. Analytical industries: These industries analyse a single product (raw material) and
then refine and separate different elements from it to prepare their final products. For
example, an oil refinery is an analytical industry in which different products are
segregated from crude oil as petroleum, wax, paraffin, etc.

2. Synthetic industries: Synthetic industries combine different raw materials (which

serve as ingredients) to produce a completely new product. For instance, a cosmetic
cream industry combines various ingredients such as calamine and perfume extracts to
produce a final product.

3. Processing industries: In processing industries, the raw material is processed and

refined in various stages and converted into the final product. Among the prominent
examples of processing industries are the sugar and paper industries.

4. Assembling industries: These type of industries combine various smaller components

to form a new final product. As against synthetic industries that combine different raw
materials to prepare a new product, assembling industries combine parts that are final
products in themselves to produce a new product. The electronics goods industry is an
example of an assembling industry.

(ii) Construction industries: These industries are concerned with the construction and
development of infrastructure such as buildings, bridges, dams and roads.

(c) Tertiary industries: These industries are regarded as a lifeline of an economy and
act as the basic facilitators for the operation of primary and secondary industries.
Among the major services provided by tertiary industries , a few are banking and credit
facilities, communication and transportation. These industries are not engaged in
hardcore production activities but are basically service providers.

Q4:

Describe the activities relating to commerce.

Solution:

Commerce includes two types of activities—trade and auxiliaries to trade. It mainly

involves activities that bridge the gap between the producers and the sellers. Auxiliaries
to trade are activities that facilitate the trading process.

The following are the various auxiliaries to trade.

(a) Banking and finance: Finance is the most important input to run any business. The
absence of a banking and finance system can obstruct the free movement of goods. An
efficient banking facility ensures the easy and ready availability of cheap credit to
businessmen and traders, and thus acts as an auxiliary to trade.

(b) Advertising: It is through advertisements that businessmen are able to reach a large
number of potential buyers. Advertisements through television, the Internet,
newspapers, the radio and other various media educate the buyers and make them
more aware of the goods available. This helps businessmen to increase their sales.
Hence, advertisement plays the role of an auxiliary to trade.

(c) Warehousing- It refers to the holding or preservation of goods until they are
transported for final consumption. It helps businesses to store goods and facilitates the
availability of goods when required.

(d) Insurance: Every business activity involves various types of risks because of the
existence of factors beyond control. Insurance acts as a protection against these risks.
On payment of a nominal premium, the loss suffered by a business can be recovered
from the insurance company concerned.

(e) Transportation- It enables a producer to purchase raw materials and other inputs
from various places and sell the final products in different regions. Transport facilitates
the selling and buying of goods.

Q5:

Explain any five objectives of business.

Solution:

Although business is run solely to earn a profit, nowadays, with growing diversity, the
objectives of business have expanded. It is no more limited to earning profits and have
multiple objectives. The following are the multiple objectives that a business aims at
achieving simultaneously.

(a) Innovation: It means developing new techniques by incorporating new ideas to

meet new demands. It is a continuous and never-ending process. With the help of new
techniques, a business can reduce its cost of production and provide new and superior
products at a low price compared with competitors. Thus, innovation is of immense
need if a business wants to attract new consumers and grow. In today’s world, it has
been realised that innovation is the only way by which a business can remain ahead of
its competitors.

(b) Maximum profit: Profit has always been the sole motive of every business. It is
quite rational for anyone who invests a certain amount of money in business to expect a
higher amount in return. The profit-earning capacity of a business decides its growth
prospects. The higher the profits, the higher is the amount reinvested in the business,
and consequently, the higher are the growth prospects and vice versa.

(c) Market share: Usually, every business faces competition. Moreover, each business
wants to stay ahead of its competitors. The only way to do this is to capture the
maximum market share (i.e., by catering to the needs of a large number of consumers).
A business with this objective must aim at providing products of superior quality to
consumers at a comparatively low price.

(d) Workers’ performances and their attitude: The productivity and profitability of a
business are dependent on its workers’ performances and their attitude. A motivated
and satisfied worker contributes the maximum to the achievement of the goals of a
business. Thus, every business must aim at creating a healthy environment that
encourages its workers to make a positive contribution .

(e) Social responsibility: It has been realised that a business does have certain
responsibilities towards society. These are termed social responsibilities. Business, as
an integral part of society, must contribute to solving social problems such as poverty,
lack of employment opportunities and environmental pollution. The fulfilment of these
social objectives helps a business to earn a positive reputation—that is, goodwill.

Q6:

Explain the concept of business risk and its causes.

Solution:

Business risk is the possibility of a business failing to earn sufficient profits or incurring
losses as a result of various unforeseen circumstances which are beyond its control. For
instance, there is always a risk associated with the demand for a product, which is
highly influenced by changes in consumer preferences. It is extremely difficult for a
businessperson to correctly anticipate consumer preferences, as a result of which he or
she always faces the risk of unforeseen fluctuations in demand. In case consumer
preferences go against the product, then, because of the fall in the demand. the
businessperson would earn lower profits.

There are two types of business risks, namely, speculative business risk and pure
business risk.

(a) Speculative business risk refers to an equal chance of earning gains or incurring
losses. It arises because of changes in the external forces, such as changes in the
competitor’s policies, changes in government policies, price change, and changes in
consumer preferences.

(b) Pure business risk refers to the chance of either incurring only losses or incurring
no loss at all. Examples of pure business risk are the risk associated with theft, fire and
various natural calamities.

Causes of Business Risk

The following are the various causes of business risk.

(a) Natural causes: Unforeseen natural calamities such as earthquake, flood and famine
cause heavy and irreplaceable losses to a business. The business risk that comes from
natural factors is beyond the control of businesses.

(b) Economic causes: These causes are related to the uncertainties associated with
changes in competitors’ policies, price change and change in consumer preferences.
(c) Human causes: These causes are related to the actions of human beings. Among the
human causes of business risk are carelessness, strikes and riots.

(d) Other causes: Besides the causes mentioned above, there are a few unpredictable
events that cause business risk—for example, political disturbances, exchange-rate and
interest-rate fluctuations and budget amendments.

Q7:

What factors are important to be considered while starting a business? Explain.

Solution:

Before starting a new business venture, an entrepreneur must carefully consider

various aspects. He or she must evaluate each aspect, considering the various positive
and negative consequences. The following are some of the important factors that must
be considered while starting a business.

(a) Selecting the line of business: The line of business is the foremost decision that
involves choosing the kind of product to produce, analysing its existing and future
market demand, profit considerations and the level of technical knowhow possessed by
the entrepreneur.

(b) Scale of the business: Once the line of business is selected, the entrepreneur needs
to decide the scale of the business, i.e., the business size, whether to operate on large
scale or small scale. The choice of scale of business is made on the degree of risk
embedded in

(i) the line of business

(ii) the ease of obtaining capital and

(iii) the projected demand for the product

A larger scale of business is preferred if the risk involved is low and the entrepreneur is
confident about the high demand for the product. Similarly, the greater the ease of
obtaining capital, the greater is the ease of operating a business on a large scale and vice
versa.

(c) Location: The choice of business location is dependent on numerous factors such as
easy and cheap availability of raw material and labour, well-connected transportation
facilities, and power and other infrastructural facilities. Generally, locations where good
infrastructure is available are preferred.

(d) Financial requirement: Finance is required for every aspect of business—from the
purchase of raw material and machinery to further investment for the growth of the
business. Therefore, while starting a business, the availability of alternatives to raise
funds must be carefully analysed.
(e) Efficient workforce: A competent and trained workforce is the basic input to carry
on various business activities. In this regard, the entrepreneur must appropriately
identify the requirement of human resources for the business, both at the worker level
and at the managerial level.

(f) Physical requirements: These requirements include machinery, other equipment,

tools and technology that add to the efficiency of a business. The entrepreneur must
carefully consider and decide the physical requirements on the basis of the nature and
production scale of the business.

Chapter 2 Forms of business organisations

Q1:

The structure in which there is separation of ownership and management is called

(a) Sole proprietorship

(b) Partnership

(c) Company

(d) All business organisations

Solution:

The organisational structure in which there is separation of ownership and

management is called a company. In a company, management and ownership lie in the
hands of different individuals. A company is owned by its shareholders, while its
management is handled by a group of elected persons known as the board of directors.
The board of directors in turn appoints the top officials for managing the day-to-day
operations of the business.

Hence, the correct answer is option (c).

Q2:

The karta in Joint Hindu family business has

(a) Limited liability

(b) Unlimited liability

(c) No liability for debts

(d) Joint liability

Solution:
The karta is the eldest male member of a Joint Hindu family who is responsible for
decision making in the family business. He needs no permission from the coparceners
(joint heirs) before taking any action. Since the karta has complete control over the
business, his liability is unlimited. On the other hand, the liability of all coparceners is
limited to their share in the family business.

Hence, the correct answer is option (b).

Q3:

In a cooperative society the principle followed is

(a) One share one vote

(b) One man one vote

(c) No vote

(d) Multiple votes

Solution:

When individuals voluntarily join together to protect and promote their common
interests, they form a cooperative society. A cooperative society is managed by an
elected body known as the managing committee. The elections in cooperative societies
are based on the principle of ‘one man, one vote’. This principle guarantees equal voting
rights to the members of a society, thereby preventing any discrimination in the body.

Hence, the correct answer is option (b).

Q4:

The board of directors of a joint stock company is elected by

(a) General public

(b) Government bodies

(c) Shareholders

(d) Employees

Solution:

A joint stock company is owned by individuals known as shareholders. The

shareholders elect the board of directors as the chief managing body of the company
and grant it indirect control over the business. The board of directors in turn appoints
the top officials for managing the business operations.
Hence, the correct answer is option (c).

Q5:

The maximum number of partners allowed in the banking business are

(a) Twenty

(b) Ten

(c) No limit

(d) Two

Solution:

In the case of the banking business, the maximum number of partners allowed is 10. In
other businesses, the maximum number of partners allowed is 20.

Hence, the correct answer is option (b).

Q6:

Profits do not have to be shared. This statement refers to

(a) Partnership

(b) Joint Hindu family business

(c) Sole proprietorship

(d) Company

Solution:

Profits do not have to be shared in a sole proprietorship form of business. This is

because, in a sole proprietorship, the business is owned, managed and controlled by a
single individual known as the sole proprietor. Thus, being the sole owner of the
business, he or she becomes the single recipient of all the profits of the business.

Hence, the correct answer is option (c).

Q7:

The capital of a company is divided into number of parts each one of which are called

(a) Dividend

(b) Profit
(c) Interest

(d) Share

Solution:

The capital of a company is divided into a number of parts, each one of which is called
a share. These parts (or shares) are freely transferable except in the case of a private
company.

Hence, the correct answer is option (d).

Q8:

The Head of the joint Hindu family business is called

(a) Proprietor

(b) Director

(c) Karta

(d) Manager

Solution:

The head of a joint Hindu family business is called the karta. The karta is the eldest
male member of a joint Hindu family who is responsible for the control and
management of the joint Hindu family business and has unlimited liability.

Hence, the correct answer is option (c).

Q9:

Provision of residential accommodation to the members at reasonable rate is the

objective of

(a) Producer's cooperative

(b) Consumer's cooperative

(c) Housing cooperative

(d) Credit cooperative

Solution:

A housing cooperative has the responsibility of ensuring the provision of residential

accommodation to the members at a reasonable rate. A housing cooperative aims at
providing accommodation to its members by constructing houses and giving them the
option of paying the cost in installments.

Hence, the correct answer is option (c).

Q10:

A partner whose association with the firm is unknown to the general public is called

(a) Active partner

(b) Sleeping partner

(c) Nominal partner

(d) Secret partner

Solution:

A secret partner in a firm is a partner whose association with the firm is unknown to the
general public. Secret partners do not contribute any capital to the business but have
participation rights in the management of the partnership firm. They are also entitled to
a share in the profits and losses of the business and have unlimited liabilities.

Hence, the correct answer is option (d).

Short

Q1:

For which of the following types of business do you think a sole proprietorship form of
organisation would be more suitable, and why?

(a) Grocery store

(b) Medical store

(c) Legal consultancy

(d) Craft centre

(e) Internet cafe

(f) Chartered accountancy firm

Solution:

A sole proprietorship refers to a form of business organisation in which an individual is

the sole owner of the business. All operations, management and activities of the
business are handled by this individual. Thus, it is a favourable form of organisation for
small businesses. Among the given alternatives, the sole proprietorship form of
organisation is more suitable for the following businesses.

(a) Grocery store

(b) Medical store

(c) Craft centre

(d) Internet cafe

This is because these businesses require a lower capital and lesser managerial ability to
handle the day-to-day operations. The sole proprietor has all the rights to make
decisions and carry out plans as per his or her own will. Hence, the sole proprietorship
form of business is more suitable for the four business types mentioned above.

Q2:

For which of the following types of business do you think a partnership form of
organisation would be more suitable, and why?

(a) Grocery store

(b) Medical store

(c) Legal consultancy

(d) Craft centre

(e) Internet cafe

(f) Chartered accountancy firm

Solution:

We know that in a partnership form of organisation, there are two or more persons who
work together, pool their respective funds and finally share the profits earned (or bear
the losses incurred). Among the given alternatives, a partnership is highly suitable for
the following types of businesses.

(a) Legal consultancy

(b) Chartered accountancy firm

The reason is that a legal consultancy and a chartered accountancy firm require high
managerial ability to handle the diverse activities and the comparatively wide range of
operations. Besides, these businesses require balanced decision making and risk-taking
in order to earn the maximum possible gains. Hence, a partnership is the most suitable
form of business for the two businesses mentioned above.

Q3:

Explain the following terms in brief

(a) Perpetual succession

(b) Common seal

(c) Karta

(d) Artificial person

Solution:

(a) Perpetual succession: It implies that a company will continue to exist until and
unless it is forced by the law to wind up. This implies that a company, as a separate legal
entity, cannot come to an end by itself and will continue to operate forever. It will not
cease to exist even in situations such as death, retirement or insolvency of any of its
members—that is, a company will continue to operate even if all its members die.

(b) Common seal: A company is an artificial entity that is created under the law. Unlike
human beings, it cannot sign official documents. This is where the role of a common seal
becomes important. A common seal is the official signature of a company that is used by
its board of directors in almost all the important official documents. The presence of this
seal authenticates the documents, and documents with a common seal can be provided
as evidence in a court of law.

(c) Karta: The term karta is used for the head of a joint Hindu family who runs a family
business. The karta of a Joint Hindu family is responsible for carrying out the business
operations of the family business and exercising full control over the business. He is the
eldest member of the family and has unlimited liabilities along with absolute decision-
making powers.

(d) Artificial person: By the term artificial person, we mean that a company is created
as a separate legal entity under the law and is a juristic person. However, unlike human
beings, a company, as an artificial person, cannot breathe or talk, cannot sign its
documents and cannot negotiate with its customers. In contrast, like human beings, a
company does have its own life that is truly independent of the life of its members.
Hence, because of these dissimilarities and similarities, a company is regarded as an
artificial person.
Q4:

Compare the status of a minor in a Joint Hindu Family Business with that in a
partnership firm.

Solution:

As per the Indian law, any person below the age of 18 years is considered a ‘minor’. The
status of a minor in a Joint Hindu Family differs from that in a partnership firm. In case
of a Joint Hindu Family, membership in the family business is by birth. This means that
as soon as a boy child is born in a Joint Hindu Family, he is automatically entitled to a
share in his family business. In this case, the minor enjoys an equal ownership right
over the inherited property as the other members of the family. However, his liability is
limited only to the extent of his share in the joint property.

As per the Partnership Act, 1923, no minor can be a partner in a partnership firm. But a
partnership firm, with the consent of all the partners, can admit a minor to share the
profits of the firm; but he cannot be asked to either contribute capital or bear the losses
incurred by the business. A minor is not legally competent to enter into any legal
contracts, and therefore, he or she cannot be considered a partner. However, a minor,
after attaining the age of 18 years, has the option of either continuing with the
partnership firm or withdrawing his interest from it.

Q5:

If registration is optional, why do partnership firms willingly go through this legal

formality and get themselves registered? Explain.

Solution:

Although registration in case of a partnership firm is optional yet many firms

voluntarily opt for it. This is because of the various legal disadvantages associated with
non-registration. A few of these disadvantages are listed below.

(a) The partners of a non-registered firm cannot file a suit against a third party;
however, non-registration of a partnership firm does not prevent other firms from suing
it .

(b) The firm cannot file a case against any of its partners. Similarly, a partner of a non-
registered firm cannot file a case against his or her co-partners or the firm.

(c) A non-registered partnership firm cannot enforce its claims against a third party in a
court.
Q6:

State the important privileges available to a private company.

Solution:

A private company enjoys certain exemptions or privileges which are often not available
to a public company. Some of the privileges enjoyed by a private company are given
below.

(a) Lesser number of members required: A private company requires only two
members for formation, while a public company requires at least seven members.

(b) Commencement of business: A private company can start its business operations
right from the day of receiving the certificate of incorporation. On the other hand, it is
mandatory for a public company to obtain a certificate of commencement along with a
certificate of incorporation before starting business.

(c) No restriction on advancing loans to the directors: In the case of a private

company, there is no restriction on the amount of loans that can be granted to the
directors. No prior permissions are required to be sought for advancing such loans. In
contrast, a public company has to seek permission from the government before
advancing loans to its directors.

(d) Lesser number of directors required for operations: A private company can
continue operations with just two directors, whereas a public company must have at
least three directors to continue its operations.

Q7:

How does a cooperative society exemplify democracy and secularism? Explain.

Solution:

In a cooperative society, management is in the hands of a managing committee elected

by the members of the society. The elections in such societies are governed by the
principle of ‘one member, one vote’. This implies that all members have equal voting
rights irrespective of the amount of capital they have contributed to the society. This
principle prevents the dominance of the richer members (who may own a higher
number of shares) in the decision-making process. Thus, as in a democracy, a
cooperative society treats all its members equally and provides equal rights to its
members. Moreover, there is no discrimination among the members on the basis of
their religion, caste or sex. In addition, the members are free to elect the members of the
managing committee of their choice. Therefore, a cooperative society exemplifies a
secularist system.

Q8:

What is meant by 'partner by estoppel'? Explain.

Solution:

A person can be regarded as a 'partner by estoppel', if he or she through his/her actions

or behaviour, leaves an impression on third parties that he or she is a partner in a
particular firm. This means that if a person behaves in a manner that makes third
parties consider this individual as one of the actual partners, then he or she is regarded
as a ‘partner by estoppel’. Such a partner (by estoppel) is actually not a partner, as he or
she neither contributes any capital to the firm nor actively participates in the operations
of the firm and is not entitled to any share in the firm’s profits or losses. Nevertheless,
he or she can be held liable for the debts that the firm owes to third parties. Accordingly,
if the funds available to the firm fall short of requirement for the repayment of debts,
then the private assets of a partner by estoppel can be used to repay the debts.

Long

Q1:

What do you understand by a sole proprietorship firm? Explain its merits and
limitation?

Solution:

In a sole proprietorship form of business, the business is owned, managed and

controlled by a single individual who is known as the sole proprietor. As the sole owner
of the business, the proprietor becomes the single recipient of all the profits earned by
the business and, in the same way, has to bear all losses.

Merits of Sole Proprietorship

A sole proprietor enjoys the following benefits.

(a) Ease in formation and closure of business: There are hardly any legal formalities
to be fulfilled for setting up a sole proprietorship firm. However, if a proprietor is
dealing in drugs and liquor products, then a licence has to be acquired. The procedure
for closing down a sole proprietorship firm is also hassle-free and easy.

(b) Quick decision making: A sole proprietor enjoys complete control over the
business. This makes decision making quick and easy.

(c) Direct incentive: A sole proprietor is the sole bearer of all types of risks associated
with the business and, at the same time, is the single recipient of all the profits and gains
earned in the business. Thus, this direct link between efforts and rewards motivates the
sole proprietor to operate the business efficiency and effectively.

Limitations of Sole Proprietorship:

The following are a few limitations of a sole proprietor firm.

(a) Limited capital: The financial resources that are available to a sole proprietor are
limited merely to this person’s personal savings and borrowings that can be raised from
relatives and friends. Thus, the amount of capital available to a sole proprietor is
limited, which often prevents him or her from expanding the business.

(b) Limited managerial abilities: A sole proprietor manages all the core functions such
as purchasing, selling and planning. As a result, the benefits of specialisation are not
available to a sole proprietor. Also, because of limited resources, a sole proprietor may
not be able to employ specialised employees to handle specific business operations.

(c) Uncertain life: In the eyes of the law, a sole proprietor and his or her business are
regarded as the same entity. In the event of death, insanity, bankruptcy or physical
ailment of a sole proprietor, the life of the business is adversely affected.

Q2:

Why is partnership considered by some to be a relatively unpopular form of business

ownership? Explain the merits and limitations of partnership.

Solution:

Partnership is considered to be a relatively unpopular form of business ownership

because of the various limitations associated with it. These limitations include unlimited
liability, limited resources, possibility of conflicts and lack of continuity.

Limitations of Partnership

(a) Unlimited liability: In a partnership, all the partners have unlimited liability. This
means that if the firm’s assets fall short of the requirement for the repayment of the
firm’s debts, then the personal assets of the partners can be used.

(b) Limited resources: A partnership firm faces limited availability of finance, because
of the restrictions imposed on the following fronts:

(i) maximum number of partners allowed in a partnership firm by definition

(ii) maximum number of new partners who can be admitted in the firm

Hence, as a result, a partnership firm faces financial constraints, which in turn impedes
its growth prospects.

(c) Possibility of conflicts: In a partnership firm, the power of decision making is

shared among the partners. This further depends on their respective levels of skills,
capabilities and foresightedness. The differences in these qualities may possibly lead to
conflicts among the partners.

Merits of Partnership
(a) Easy formation and closure: A partnership firm involves an agreement (either oral
or written) between two or more partners. The registration of a partnership firm is not
compulsory, which eases its formation. Similarly, a partnership firm can be shut down
at any time with the mutual consent of all the partners.

(b) Balanced decision making: In a partnership firm, all the decisions related to the
business are taken collectively by all the partners. This makes the decision-making
process in a partnership firm comparatively more balanced than in any other form of
business ownership.

(c) Sharing of risks: The risks in a partnership firm are shared jointly by all the
partners. As a result, anxiety, burden and stress of the individual partners are shared
among all the partners, which reduces the burden on a single partner.

Q3:

Why is it important to choose an appropriate form of organisation? Discuss the factors

that determine the choice of form of organisation.

Solution:

The choice of an appropriate form of business organisation is important for the

following reasons.

(a) Options to choose among various business forms: As there exist numerous forms
of business organisations such as sole proprietorship, partnership, cooperative society
and company, the choice of an appropriate business organisation is important, because
each business form has its own merits and demerits.

(b) Business factors: Every type of business form is influenced by its respective
business-related factors, namely, need of funds, risk involved, amount of profits and
legal obligations. Therefore, the choice of the appropriate business form is made only
after the evaluation of all these business factors.

(c) Long-term growth prospects: The growth prospects of each type of business form
are different. If a businessperson opts for a particular business form without correctly
evaluating the growth prospects, then the business may fail or the long-term growth
prospects of the business will suffer.

Factors determining Choice of a Business Form

The following are the factors that determine the choice of a business organisation.

(a) Nature of business activity: Any individual first needs to decide upon the nature or
kind of business activity that he or she desires to undertake. In case the business type
requires direct personal contact with customers, then the sole proprietorship form of
business proves beneficial. On the other hand, if direct personal contact is not required,
then a partnership or a company form of business is more suitable.
(b) Degree of control: The choice of a business form also depends on the degree of
control that a businessperson wants to exercise over its management. If a
businessperson aims to have direct control over all the business operations, then sole
proprietorship may be considered appropriate. However, if he or she does not mind
sharing the decision-making powers with others, then a partnership or company form
of business would be more suitable.

(c) Degree and specialisation of managerial abilities: If the business operations are
large and require specialised and skilled professionals for managing them, then a
company form of business may be selected. However, if the business operations are not
very complex and the scale of operations is also not very large, then sole proprietorship
proves to be a better alternative.

Q4:

Discuss the characteristics, merits and limitations of cooperative form of organisation.

Also describe briefly different types of cooperative societies.

Solution:

The word ‘cooperative’ means an organisation in which the stakeholders work with one
another. Thus, a cooperative society is a voluntary association of individuals who join
together to protect or promote their common interests.

Features of Cooperative Societies

(a) Separate legal entity: The registration of a cooperative society is compulsory under
the Cooperative Societies Act, 1912. Once the registration is complete, the cooperative
society is granted the status of a separate legal entity. This implies that the cooperative
society can hold properties in its own name and enter into contracts. Moreover, it can
sue others and can be sued by others.

(b) Management and control: A cooperative society is a democratic form of

organisation as it is managed and controlled by a managing committee which is elected
by the members of the society on the principle of ‘one member, one vote’.

Merits of Cooperative Societies

(a) Ease of formation: The formation of a cooperative society is quite easy as it

requires the induction of only 10 adult members. The registration procedure of a
society under the Cooperative Societies Act, 1912, is quite simple.

(b) Continued existence: A cooperative society is a stable form of organisation as it

enjoys the status of a separate legal entity that is considered distinct from its members.
As a result, the life of a cooperative society remains unaffected by the death, insolvency
or insanity of its members.

Limitations of Cooperative Societies

(a) Excessive government control: Cooperative societies have to follow certain rules
and regulations as imposed on them by the cooperative departments of the state
government concerned. These rules include submission and auditing of accounts.

(b) Inefficiency in management: The management of a cooperative society generally

comprises part-time or inexperienced people. They may not be well equipped with the
skills required to handle the managerial functions effectively. Consequently, cooperative
societies often lack efficiency.

Types of Cooperative Societies

Cooperative societies are classified into the following six types.

(a) Consumer cooperative societies: These are formed to provide consumer goods at
reasonable prices to its members.

(b) Producer cooperative societies: The objective of producer cooperative societies is

to procure raw materials and other inputs at low costs and supply them to small
producers.

(c) Marketing cooperative societies: These societies pool the outputs of the member
and perform certain marketing functions for them such as transportation, labelling,
packaging and warehousing.

(d) Farmers’ cooperative societies: Such societies are formed by small farmers who
pool their resources to reap the benefits associated with large-scale operations. These
societies ensure the availability of better and advanced inputs at low rates to farmers.

(e) Credit cooperative societies- These societies ensure the availability of funds to its
members at comparatively low interest rates on reasonable terms.

(f) Cooperative housing societies: The aim of housing cooperative societies is to solve
the problem of finding residential accommodation of its members by constructing
houses for them. These societies provide its members with easy repayment schemes
through which the cost of the houses can be repaid in form of installments.

Q5:

Distinguish between a Joint Hindu family business and partnership.

Solution:

Difference between Joint Hindu family business and Partnership

Basis of difference Joint Hindu Family Business Partnership
Governance Governed by the Hindu law. Governed by Partnership Act, 1932.
Liability The head has unlimited liability, while All the partners have unlimited
the liabilities of other members are liability.
 limited to the extent of their share in
the business.
Decision making and The karta is responsible for the All the partners jointly manage and
control management and control of the control the firm.
business.
Number of members Minimum: 2 Minimum: 2

Maximum: No limit Maximum: 10 for the banking

business and 20 for other businesses
Minor Minors can be members. Minors cannot be members.

Q6:

Despite limitations of size and resources, many people continue to prefer sole
proprietorship over other forms of organisation? Why?

Solution:

Despite the limitations in terms of size and resources, many people prefer sole
proprietorship over any other forms of business primarily because of the numerous
benefits associated with the sole proprietorship business form.

The following are a few important benefits that a businessperson enjoys by being a sole
proprietor.

(a) Ease in formation and closure: There are hardly any legal formalities that are
required to be fulfilled for setting up a sole proprietorship firm. However, if a proprietor
wants to deal in drugs and liquor, then he or she must to acquire a licence. Just as
setting up a sole proprietorship firm is easy, its closure is also hassle-free.

(b) Quick decision making: A sole proprietor enjoys complete control over the
business, facilitating quick and easy decision making.

(c) Direct incentive: A sole proprietor is the sole bearer of all types of risks associated
with the business and at the same time is the single recipient of all the profits and gains
earned from the business. Thus, it is due to this direct link between the
businessperson’s efforts and the rewards which keeps this individual motivated to
operate the business efficiency and effectively.

(d) Flexibility in operations: A sole proprietorship firm is highly flexible in operations.

It can adapt itself to various situations, and vital changes can be incorporated, as per the
dynamism of the business environment. The reason for the high degree of flexibility can
be attributed to the fact that a sole proprietor is the only person who is involved in
every aspect of the business.
Q1:

In which form of organisation is a trade agreement made by one owner binding on the
others? Give reasons to support your answer.

Solution:

It is under partnership that the trade agreement made by one owner becomes binding
for others. This is because every partner acts for each other. In other words, every
partner is both a principle as well as an agent. As an agent he binds others through his
actions and as a principle he is bind by the action of others.

Q2:

The business assets of an organisation amount to Rs. 50,000 but the debts that remain
unpaid are Rs. 80,000. What course of action can the creditors take if
(a) The organisation is a sole proprietorship firm
(b) The organisation is a partnership firm with Anthony and Akbar as partners. Which
of the two partners can the creditors approach for repayment of debt? Explain giving
reasons

Solution:

(a) In case of a sole proprietorship the creditors can claim the personal property of the
proprietor. This is because the proprietor has unlimited liability.

(b) The creditors can approach either Akbar or Anthony. Both of them would have the
liability to pay according to their profit sharing ratio. Moreover, in case one of them
becomes insolvent the creditors can approach the other partner.

Q3:

Kiran is a sole proprietor. Over the past decade, her business has grown from operating
a neighbourhood corner shop selling accessories such as artificial jewellery, bags, hair
clips and nail art to a retail chain with three branches in the city. Although she looks
after the varied functions in all the branches, she is wondering whether she should form
a company to better manage the business. She also has plans to open branches
countrywide.

(a) Explain two benefits of remaining a sole proprietor

(b) Explain two benefits of converting to a joint stock company
(c) What role will her decision to go nationwide play in her choice of form of the
organisation?
(d) What legal formalities will she have to undergo to operate business as a company?

Solution:
(a) The following are two of the benefits of sole proprietorship.

i. A sole proprietor is the single recipient of all the profits of the business.
ii. A sole proprietor takes all business decisions independently and enjoys complete
control over the business.

(b) The following are two benefits of converting to a joint stock company.

i. In a joint stock company capital can be easily expanded by issuing fresh, new shares.
ii. The liability of the owners is limited to the amount of capital invested by them.

(c) If she plans to go nationwide then converting to a joint stock company would be
more appropriate as it will lead to large scale business operations.

(d) Some of the legal formalities to be completed for operating a joint stock company
are as follows.
i. Promotion of the company
ii. Submitting documents such as Memorandum of Association, Articles of Association,
statutory declaration and agreement
iii. Getting the certificate of incorporation
iv. Getting the certificate of commencement of business