Class 11 Business Studies Notes

Chapter 2: Forms of Business Organisation (CBSE)

Chapter Overview

A business organisation is the legal structure under which a business operates. The choice of organisation affects ownership, liability, control, capital, continuity, and profit distribution.

Learning Objectives

Understand different forms of business organisation.
Explain their features, merits and limitations.
Compare different forms.
Identify factors affecting the choice of organisation.

Forms of Business Organisation

Sole Proprietorship
Joint Hindu Family Business (HUF)
Partnership
Cooperative Society
Joint Stock Company

1. Sole Proprietorship

Meaning

A business owned, managed and controlled by one person, who receives all profits and bears all risks.

Definition

A sole proprietor is the only owner of the business.

Features

Single owner
Easy formation and closure
Unlimited liability
Sole risk bearer
Sole profit recipient
Complete control
No separate legal entity
Lack of business continuity

Merits

Quick decision making
Business secrecy
Direct incentive
Personal satisfaction
Easy to start and close

Limitations

Limited capital
Limited managerial ability
Unlimited liability
Limited life of business

Suitable For

Grocery shops
Medical stores
Beauty parlours
Tailoring shops
Small retail businesses

2. Joint Hindu Family Business (HUF)

Meaning

A business owned by members of a Hindu Undivided Family (HUF) and governed by Hindu Law.

The head of the family is called the Karta.

Features

Membership by birth
Minimum two members
Governed by Hindu Succession Act
Karta has control
Karta has unlimited liability
Other members have limited liability
Business enjoys continuity
Minors can become members

Merits

Effective control
Stable business
Limited liability of members
Loyalty among family members

Limitations

Limited resources
Unlimited liability of Karta
Dominance of Karta
Limited managerial skills

3. Partnership

Meaning

A business owned by two or more persons who agree to share profits and losses.

Governed by

Indian Partnership Act, 1932

Features

Formed by agreement
Minimum 2 partners
Maximum 50 partners (present rule)
Unlimited liability
Mutual agency
Shared risks
Joint management
Lack of continuity

Merits

Easy formation
Balanced decisions
More capital
Sharing of risks
Business secrecy

Limitations

Unlimited liability
Limited resources
Possibility of conflicts
Lack of continuity
Low public confidence

Types of Partners

Active Partner

Invests capital
Participates in management
Shares profits
Unlimited liability

Sleeping Partner

Invests capital
No management
Shares profits
Unlimited liability

Secret Partner

Identity hidden
Participates in management
Unlimited liability

Nominal Partner

Lends name only
No capital
No management
Unlimited liability

Partner by Estoppel

Acts like a partner and becomes liable.

Partner by Holding Out

Allows others to represent him as partner and becomes liable.

Types of Partnership

Based on Duration

Partnership at Will

Continues until partners decide otherwise.

Particular Partnership

Created for a specific project or period.

Based on Liability

General Partnership

Unlimited liability.

Limited Partnership

Some partners have limited liability.

Partnership Deed

A written agreement containing:

Name of firm
Nature of business
Capital contribution
Profit-sharing ratio
Duties of partners
Interest on capital
Admission and retirement rules
Dissolution procedure
Settlement of disputes

Registration of Partnership

Registration is optional but advisable.

Advantages

A registered firm can:

Sue outsiders
Partners can sue each other
Enjoy legal recognition

4. Cooperative Society

Meaning

A voluntary association formed to protect the economic interests of members through cooperation.

Governed by

State Cooperative Societies Act
Multi-State Cooperative Societies Act, 2002

Features

Voluntary membership
Separate legal entity
Limited liability
Democratic control
Service motive

Merits

Equality in voting
Limited liability
Stable existence
Economy in operations
Government support
Easy formation

Limitations

Limited resources
Poor management
Lack of secrecy
Government control
Internal conflicts

Types of Cooperative Societies

Consumer Cooperative Society
Producer Cooperative Society
Marketing Cooperative Society
Farmer Cooperative Society
Credit Cooperative Society
Cooperative Housing Society

5. Joint Stock Company

Meaning

A company is an artificial legal person formed under the Companies Act, 2013.

Ownership lies with shareholders.

Management lies with the Board of Directors.

Features

Artificial person
Separate legal entity
Perpetual succession
Limited liability
Common seal (traditional concept)
Transferability of shares
Professional management

Merits

Limited liability
Easy transfer of shares
Perpetual existence
Large capital
Professional management

Limitations

Difficult formation
Lack of secrecy
Complex legal formalities
Delay in decision making
Numerous regulations
Conflict of interests
Oligarchic management

Types of Companies

Private Company

Minimum members: 2
Maximum members: 200
Restricts transfer of shares
Cannot invite public to subscribe
Minimum directors: 2

Public Company

Minimum members: 7
No maximum limit
Free transfer of shares
Can invite public
Minimum directors: 3

Difference Between Private and Public Company

Basis	Private Company	Public Company
Minimum Members	2	7
Maximum Members	200	Unlimited
Share Transfer	Restricted	Free
Public Invitation	Not Allowed	Allowed
Minimum Directors	2	3

Factors Affecting Choice of Business Organisation

Cost of formation
Ease of formation
Liability
Continuity
Capital requirements
Managerial ability
Degree of control
Nature of business

Comparative Summary

Form	Owners	Liability	Continuity	Control
Sole Proprietorship	One	Unlimited	Low	Owner
Partnership	2–50	Unlimited	Moderate	Partners
HUF	Family Members	Karta Unlimited	High	Karta
Cooperative Society	Members	Limited	High	Managing Committee
Company	Shareholders	Limited	Very High	Board of Directors

Important Definitions (Exam)

Sole Proprietorship: Business owned and managed by one person.
Partnership: Agreement between two or more persons to share profits.
Joint Hindu Family Business: Business run by members of a Hindu Undivided Family.
Cooperative Society: Voluntary association formed for mutual benefit.
Company: Artificial legal person with separate legal entity and perpetual succession.

Important CBSE Exam Points

Learn features, merits and limitations of every form.
Memorize types of partners.
Learn types of cooperative societies.
Understand the difference between Private and Public Company.
Practice comparison tables for 3–5 mark questions.
Revise the factors affecting the choice of business organisation, a frequently tested topic.