Unit 8 Solutions: Forms of Business Organization

Answers to the Unit 8 exercises. Each answer is as long as its marks call for: a sentence or two for 1 mark, four explained points for 4 marks, and an introduction, explained points and a conclusion for 8 marks.

A. Very Short Answer Questions (1 Mark Each)

1. What is meant by unlimited liability in a Sole Trading Concern?

Unlimited liability means that the sole proprietor is personally responsible for all the debts of the business, so if the business assets are not enough to pay the creditors, the proprietor’s personal property, such as a house and land, can be sold to pay them.

2. What is a Partnership Deed?

A Partnership Deed is the written agreement signed by the partners that sets out the terms of their partnership, such as the capital contributed by each partner, the ratio for sharing profits and losses, and the rights and duties of the partners.

3. State the minimum and maximum number of shareholders in a Private Limited Company and a Public Limited Company in Nepal.

A Private Limited Company must have a minimum of 1 and a maximum of 101 shareholders, while a Public Limited Company must have a minimum of 7 shareholders and has no maximum limit.

4. Why is a Joint Stock Company called an artificial person created by law?

A company is created by law (incorporated under the Companies Act, 2063 B.S.) and has a separate legal entity, so it can own property, make contracts, and sue and be sued in its own name like a person, but it has no physical body and acts through its directors and common seal.

5. Give two examples each of Public Enterprises and Multinational Companies operating in Nepal.

Public Enterprises: Nepal Electricity Authority (NEA) and Nepal Oil Corporation (NOC). Multinational Companies: Unilever Nepal Ltd. and Dabur Nepal Pvt. Ltd.

B. Short Answer Questions (4 Marks Each)

1. Explain four advantages and four disadvantages of a Sole Trading Concern.

Advantages:

1. Easy and inexpensive formation and dissolution: A sole trading concern needs few legal formalities. It is registered with the Department of Commerce, Supplies and Consumer Protection, the Department of Cottage and Small Industries or the local ward or municipal office, and can be closed just as easily.
2. Quick decision-making: The owner does not have to consult anyone, so decisions are taken quickly and business opportunities are not missed.
3. Complete secrecy: The owner can keep the business accounts, formulas and plans completely secret from competitors.
4. Strong personal incentive: Since 100% of the profit belongs to the proprietor, the owner works hard and runs the business efficiently.

A fifth advantage is direct personal contact with customers, which helps the owner understand and satisfy their needs.

Disadvantages:

1. Unlimited liability: If business assets are not enough to pay the creditors, the proprietor’s personal house and land can be sold to pay business debts.
2. Limited capital: Capital is limited to the owner’s own savings and the small amount he or she can borrow, so the business cannot grow large.
3. Limited managerial skill: One person cannot be an expert in buying, selling, accounting and management at the same time.
4. Uncertain continuity: The illness, insolvency or death of the owner may close the business.

2. Differentiate between a Sole Trading Concern and a Partnership Firm.

Both have unlimited liability: the sole trader alone, and the partners jointly and severally.

3. What is a Cooperative Society? Explain any four features of a cooperative organization in Nepal.

A Cooperative Society is a voluntary, democratic and autonomous association of people, especially small farmers, artisans, workers and middle-income citizens, who unite on the principle of equality and mutual self-help to promote their common economic, social and cultural interests without exploitation by middlemen. In Nepal, cooperatives are regulated under the Cooperative Act, 2074 B.S.

Features of a cooperative organization:

1. Voluntary and open membership: People who share a common economic bond can join the society of their own free will and can leave it when they wish. No one is forced to become a member. Under the Cooperative Act, 2074 B.S., at least 30 members are needed to form a cooperative.
2. Democratic control (one member, one vote): Every member has only one vote, however many shares he or she holds. The members elect their own committee to manage the society.
3. Service motive and mutual self-help: The main aim is service to members, not profit, under the motto “Each for all and all for each.” For example, a milk producers’ cooperative collects and sells its members’ milk directly, so they are not exploited by middlemen.
4. Limited liability and separate legal entity: A cooperative registered under the Cooperative Act, 2074 B.S. has a separate legal entity, and each member’s liability is limited to the shares he or she holds.

Other features come from the seven Rochdale principles, such as autonomy, education and training, cooperation among cooperatives and concern for community.

4. Define a Multinational Company (MNC) and state four characteristics of MNCs.

A Multinational Company (MNC), also called a Transnational Corporation, is a giant corporate enterprise that has its registered headquarters in one country (the home country) and operates production plants, assembly units or marketing subsidiaries in two or more other countries (the host countries). Examples in Nepal are Unilever Nepal Ltd., Dabur Nepal Pvt. Ltd. and Standard Chartered Bank Nepal.

Characteristics of MNCs:

1. Massive capital and financial strength: MNCs have huge financial resources and bring Foreign Direct Investment (FDI) into host countries such as Nepal.
2. Advanced technology and Research & Development (R&D): They spend heavily on research and transfer modern technology and production methods to the countries where they operate.
3. Global brand recognition: Their brands, such as Coca-Cola and Unilever, are known and trusted by customers in many countries.
4. Professional management: They are run by trained, professional managers who follow modern management practices, while the headquarters keeps overall control of all branches.

C. Long Analytical Questions (8 Marks Each)

1. Define a Joint Stock Company. Explain its main characteristics and differentiate between a Private Limited Company and a Public Limited Company on any six bases.

A Joint Stock Company is a voluntary association of individuals formed for profit, with a separate legal entity, perpetual succession, a common seal, and capital divided into transferable units called shares. According to Prof. L.H. Haney, “A company is an artificial person created by law, having separate entity with a perpetual succession and a common seal.” In Nepal, companies are incorporated at the Office of the Company Registrar under the Companies Act, 2063 B.S.

Main characteristics:

1. Voluntary association: A company is formed by people who come together voluntarily and contribute capital to earn profit.
2. Artificial person created by law: It comes into existence only when it is incorporated under the Companies Act. It cannot act physically, so it works through its directors.
3. Separate legal entity: The company is separate from its shareholders. It can own property, make contracts, and sue and be sued in its own name.
4. Perpetual succession: Its life does not depend on its members. The death, insolvency or retirement of a shareholder does not end the company.
5. Common seal: The common seal acts as the official signature of the company on important documents.
6. Limited liability: The liability of shareholders is limited to the nominal (face) value of the shares they hold; their personal property cannot be used to pay the company’s debts.
7. Capital divided into transferable shares: The capital is divided into shares. Shares of a public company can be freely transferred, while those of a private company are transferred only under the restrictions in its Articles of Association.
8. Separation of ownership and management: The shareholders own the company, but it is managed by a Board of Directors elected by them.

Differences between a Private Limited Company and a Public Limited Company:

Conclusion: A joint stock company combines limited liability, perpetual succession and transferable shares, which lets it collect large capital from many people. A private limited company suits a family or small group that wants limited liability while keeping control in a few hands, whereas a public limited company suits large undertakings such as banks and telecom companies that need capital from thousands of investors.