Different Forms of Business Organizations & Registration Sole Proprietorship – Setting Up of Business Entities and Closure Important Questions

Different Forms of Business Organizations & Registration Sole Proprietorship – Setting Up of Business Entities and Closure Important Questions

Question 1.
What formalities and procedures are required to be followed to start a business by a sole proprietor?
Answer:
Sole Proprietorship is formed, managed, and controlled by one individual.

No deed or agreement is required to constitute a Sole Proprietorship. However, in actual practice and keeping in mind the nature of the business activity, registration may be required under the following enactments as prevailing in the respective States or of the Central Government, such as:

  • Shops and Commercial Establishments Act (State-specific)
  • Law relating to Professional Tax (State-specific)
  • Registration under the Micro, Small & Medium Enterprises Development Act, 2006.
  • Registration as a Small Scale Industry (State-specific)
  • GST registration?
  • Intellectual Property laws.

Question 2.
Distinguish between: Sole Proprietor & One Person Company (OPC)
Answer:
Following are the main points of difference between Sole Proprietor & One Person Company (OPC):

Points Sole Proprietor One Person Company (OPC)
Meaning The word ‘sole’ denotes single and ‘proprietorship’ signifies ownership. A sole proprietorship is recognized as one of the most common, simplest, and oldest forms of business entity. It is owned and controlled by one person only and the person running it is known by the name of ‘sole proprietor’ or a ‘sole trader’. One Person Company is a fusion of Sole-Proprietorship and Company form of business. The Companies Act, 2013 brought in the new concept of One Person Company, thereby enabling a person who is carrying on the business in the Sole- Proprietorship firm to enter into a corporate outline with relaxed requirements under the Act.
Registration In the case of a sole proprietorship, formal registration is not required. A-One Person Company requires registration under the Companies Act, 2013.
Distinct legal entity A Sole Proprietorship is not a distinct legal entity from the proprietor. A-One Person Company is a distinct legal entity from the business owner.
Liability A proprietor of a sole proprietorship has unlimited liability for the debts incurred by him. This means that if the business is in debt, even the personal assets of the proprietor may be used to recover the debt. As a Person Company is a separate legal entity, hence the owner has limited liability. This is the most desirable reason why many individuals are opting for an OPC.
Taxation In a proprietorship, the tax liability of the proprietorship firm is borne by the proprietor. He can claim a basic exemption under the Income Tax Law. For OPC, the tax liability of the company and the single member is independent. OPC is liable to be taxed at 30% as it formed as a private company. No basic exemption is available for OPC.
Succession In the case of a sole proprietorship, succession takes place through the execution of a Will. In a One Person Company, nominee designated by its member, who shall, in the event of the death of the member, become a member of the company and shall be responsible for the running of the company.
Separate Property As there is no distinction between the owner and business in a sole proprietorship, therefore, any creditor of the proprietorship can also claim all the assets of the owner. In OPC there is an added advantage as a company is a separate legal entity. Any property purchased by OPC will be the asset of that OPC. The member does not have an insurable interest in the property of the company.

Question 3.
Ankur has passed out MBA from a premier institution. He wants to become an entrepreneur but he is confused in choosing the form of ownership. Advice Ankur on the aspects which he should consider before deciding the form of ownership. [Dec. 2018 (4 Marks)]
Answer:
One of the first decisions that are faced by entrepreneurs is how the business should be structured. All businesses must adopt some legal configuration that defines the rights and liabilities of participants in the business’s ownership, control, personal liability, life span, and financial structure. This decision will have long-term implications, so one has to select the form of ownership that is right for him/her.

Thus, while choosing the form of ownership one must consider the following aspect:

  • His vision regarding the size and nature of the business.
  • The level of control he wishes to have.
  • The level of “structure” he is willing to deal with.
  • The business vulnerability to litigation.
  • Tax implications of the different organizational structures.
  • Expected profit (or loss) of the business.
  • Whether or not he will need to re-invest earnings into the business.
  • His need for access to cash out of the business for himself.

Question 4.
What are the various types of partnership firms?
Answer:
Various types of partnership are as follows:
1. Partnership at will [Section 7]: Where no provision is made by contract between the partners for the duration of their partnership, or when no provision is made as to whom and how the partnership will come to an end, the partnership is known as partnership-at-will.

The partnership-at-will has no fixed or definite date of termination and, therefore, the death or retirement of a partner does not affect the existence of such partnership.

Dissolution of partnership at will [Section 43]: Partnership-at-will can be dissolved at any time by any of the partners by giving notice in writing to all other partners. The firm is dissolved as from the date mentioned in the notice as the date of dissolution or, if no date is so mentioned, as from the date of the communication of the notice.

2. Particular Partnership [Section 8]: When two or more persons come together for particular adventures or undertakings it is known as a particular partnership. Where the adventure is complete, such a partnership can be dissolved. When the persons decide to continue the partnership after the completion of the adventure, it becomes a partnership at will.

Example: A and B enter into a joint trading adventure for the sale of sesame seeds grown in both their fields during its harvest season. The partnership comes to an end after the sale.

3. Partnership for fixed-term: It is a partnership entered into for a fixed duration, after the expiry of which it comes to an end. When the partners carry on the business even after the expiry of the said period, it is said to be a partnership at will.

4. Sub-partnership: When a partner of a firm agrees to share his own share of profits with an outsider, it is called sub-partnership and such outsider is called a sub-partner. A partner is free to make an agreement of sub-partnership, provided it does not affect the position of other partners with reference to him.

Important points relating to sub-partnership:

  • A sub-partner is not connected with the firm.
  • A sub-partner has no relationship with other partners.
  • A sub-partner has no right to take part in a firm’s business,
  • A sub-partner cannot examine the firm’s accounts.
  • A sub-partner can claim his agreed share from the partner with whom he enters into a sub-partnership.

Question 5.
Write a short note on Registered partnership. [Dec. 1994 (5 Marks)]
Answer:
Registration of a firm is not mandatory under the Act. Certain privileges are available only to registered firms, thus indirectly making it compulsory to register so as to enjoy those privileges. Registration does not j create a partnership but is only evidence of the existence of a partnership. It is advantageous both to the firm and also to outsiders.

Provision & procedure for registration of partnership [Sections 58 & 59]:
Time: Registration of partnership may be effected at any time during the continuance.
1. Application form & fee: Application for registration has to be made in the prescribed form along with the prescribed fee.

2. Documents to be attached: Following documents are required to be attached with the application of registration:

  • Affidavit
  • Partnership Deed on requisite stamp paper.
  • Proof of place of business or Rental/Lease Agreement.
  • Other documents are may be required by the Registrar.

3. Signing & verification: Application for registration has to be signed by all the partners, or their agent specially authorized on this behalf.

4. Registration by Registrar: If Registrar is satisfied that all requirement relating to registration of firm has been fulfilled, he issues a certificate of registration.

5. The effective date of registration: Registration is effective from the date when Registrar makes entries in the ‘Register of Firms’ and not from the date of presentation of the statement to him.

Question 6.
A B & C are partners. They admit D, a minor, to the benefit of the partnership. Within the six months of attaining majority, D gives public notice that he has become a full-fledged partner. But all other partners refuse to take him. Can D become a partner or not? Give reason. [June 1996 (5 Marks)]
Answer:
Facts of Case: A, B & C are partners. They admit D, a minor, to the benefit of the partnership. Within the six months of attaining majority, D gives public notice that he has become a full-fledged partner. But all other partners refuse to take him

Provision: As per Section 30 of the Partnership Act, 1932, deals with the exercise of the option by minor on attaining majority. Section 30 provides that at any time within 6 months of his attaining majority, or of his obtaining knowledge that he had been admitted to the benefits of partnership, which-ever date is later, such person may give public notice that he has elected to become or that he has elected not to become a partner in the firm. Conclusion: In the given case, D has given public notice within 6 months of his attaining majority and his contention that he has become a full-fledged partner is correct.

Question 7.
A, B & C, who are partners of an unregistered firm, sell washing machines to D for ₹ 10,000 on a credit basis. After some time, the firm purchases from D a photocopying machine for ₹ 40,000 on a credit basis. On failure to pay the price, D files a suit against the firm, but the firm insists that the amount of ₹ 10,000 should be adjusted against the claim in question Will the firm succeed? Give reasons. [Dec. 1997 (3 Marks)]
Answer:
Facts of the case: A, B & C, who are partners of an unregistered firm, sell washing machines to D for ₹ 10,000 on a credit basis. After some time, the firm purchases from D a photocopying machine for ₹ 40,000 on a credit basis. On failure to pay the price, D files a suit against the firm, but the firm insists that the amount of ₹ 10,000 should be adjusted against the claim in question.

Provision: As per Section 69 of the Partnership Act, 1932, registration of firms is not compulsory, but an unregistered firm suffers from certain disabilities. An unregistered firm cannot file a suit against a third party to enforce any right arising from a contract. However, a third party can file suit against an unregistered firm.

Further, an unregistered firm cannot claim set-off or another proceeding to enforce a right arising from a contract above ₹ 100. Conclusion: Hence, the firm will not succeed in claiming set-off as the amount is exceeding ₹ 100.

Question 8.
Anian and Barun are partners carrying on the business of shoemaking. Their firm is not registered. The firm purchases raw material worth ₹ 20,000 on credit from Chetan. But the firm refuses to pay the price of raw material on the plea of its non-registration. Chetan institutes a suit against the firm to claim the amount due. Will Chetan succeed? Give reasons. [June 2005 (5 Marks)]
Answer:
Facts of Case: Aman and Barun are partners carrying on the business of shoemaking. Their firm is not registered. The firm purchases raw material worth ₹ 20,000 on credit from Chetan. But the firm refuses to pay the price of raw material on the plea of its non-registration. Chetan institutes a suit against the firm to claim the amount due.

Provision: As per Section 69 of the Partnership Act, 1932, registration of T firms is not compulsory, but an unregistered firm suffers from certain disabilities. An unregistered firm cannot file a suit against a third party to enforce any right arising from a contract. However, a third party can file suit against an unregistered firm.

Non-registration of a firm does not affect the right of a third party to file a suit to claim the amount due. The firm cannot take the plea of its non-registration.

Conclusion: Hence, Chetan will succeed.

Question 9.
Rohit is not a partner in a particular firm. But, he knowingly permits himself to be represented as a partner of that particular firm to Sanjay, who on the faith of such a representation gives credit to the firm. Is Rohit liable as a partner in the firm? [Dec. 2005 (5 Marks)]
Answer:
Facts of Case: Rohit is not a partner in a particular firm. But, he knowingly permits himself to be represented as a partner of that particular firm to Sanjay, who on the faith of such a representation gives credit to the firm

Provision: As per Section 28 of the Partnership Act, 1932, if a person represents himself or knowingly permits himself to be represented as a partner of a particular firm, when actually he is not, such person is liable as a partner of the firm.

Thus, a stranger, who represents himself to be a partner in a firm and induces others to give credit to the partnership firm is called a partner by holding out.

Conclusion: Hence, Rohit is liable as a partner by holding out.

Question 10.
Explain the position of a minor in a partnership firm. [June 2007 (5 Marks)}
Answer:
As per Section 11 of the Contract Act, 1872, an agreement with or by a minor is void and in-operative ab initio. Minor cannot be a promisor. However, all agreements with minors are not void; if an agreement is for the benefit of minors then it is valid and enforceable.

Minors admitted to the benefits of partnership [Section 30]: If all the partners agree, a minor may be admitted to the benefits of an already existing firm. There must be at least two major partners before a minor is admitted into the benefits of a partnership.

Share of profits & property: Such minor has a right to such share of the property and of the profits of the firm as may be agreed upon.

Inspection & copying of accounts: Minor has a right to access and inspect and copy any of the accounts of the firm.

Liability of minor: Minor’s share is liable for the acts of the firm but the minor is not personally liable for any such act.

Filing of the suit: Minor has the right to file a suit for his share of profits of the firm’s property when he is not given his due share. This right can be exercised only when he decides to sever his connections with the firm.

Election by minor: At any time within 6 months of his attaining majority, or of his obtaining knowledge that he had been admitted to the benefits of partnership, whichever date is later, such person may give public notice that he has elected to become or that he has elected not to become a partner in the firm.

If he fails to give such notice, he shall become a partner in the firm on the expiry of the said 6 months.

Exercise of option by minor on attaining majority:
If minor elects to become a partner: When the minor elects to become a partner of his own volition or by his failure to give public notice within the specified time:

  • He becomes personally liable to third parties for all acts of the firm done since he was admitted to the benefits of the firm.
  • His share in the property and profits of the firm remains the same as he was entitled as a minor.

If minor elects not to become a partner: If minor elects not to become a partner:

  • His right and liabilities continue to be those of a minor up to the date of giving public notice.
  • His share is not liable for any acts of the firm done after the date of the public notice.
  • He is entitled to sue the partners for his share of the property and profits in the firm.

Question 11.
What are the effects of the non-registration of a partnership firm? [June 2007 (5 Marks)]
Answer:
Effects of non-registration [Section 69]: Registration of firms is not compulsory, but an unregistered firm suffers from the following disabilities as mentioned:
1. Suit between partners and firm: A partner of an unregistered firm cannot sue the firm or any other partner of the firm to enforce a right arising from a contract, or conferred by the Partnership Act.

2. Suit between the firm and third party: An unregistered firm cannot file a § suit against a third party to enforce any right arising from a contract.

However, a third party can file suit against an unregistered firm.

3. Claim of set-off: An unregistered firm or a partner thereof cannot claim set-off or other proceedings to enforce a right arising from a contract above ₹ 100.

Non-registration not to affect the following [Section 69]:
1. Even if the firm is unregistered partners can sue for –

  • Dissolution of the firm or
  • Settlement of accounts of a dissolved firm or
  • Realizing the property of a dissolved firm.

2. Right of the firm to institute a suit or claim of set-off not exceeding ₹ 100.

3. An unregistered firm can bring a suit against third parties to enforce a right arising otherwise than out of a contract e.g. for enforcing a trademark.

Question 12.
There can be different kinds of partners. State briefly about any five kinds of partners. [Dec. 2008 (5 Marks)]
Answer:
Various types of partners are as follows:
1. Actual/Ostensible Partner: Active partner is one who is actively engaged in the conduct of the business of the partnership. He is the agent of other partners, in the ordinary course of business. Acts of such partner are binding to the firm and he is bound by the act of other partners which is done in the ordinary course of business and in the firm’s name.

2. Nominal Partner: He is a partner only by name and only his name is used. He is not entitled to share profits but held liable. He shall give notice of his retirement or otherwise terminating his relationship with the firm.

3. Sleeping/Dormant Partner: He is one who contributes to the capital and has a share in Profits, but does not actively participate in the business. He is liable like any other Partner but was specifically excluded, he is not so. He is not required to give notice after he ceases to be a partner, nor does his insanity dissolve the firm.

4. Partner in profits only: When all partners agree that a partner shall share only profits and not losses then such partner is known as a partner in profit only. Even though such partner shares profit and not loss, but he is liable for all the debts of the firm are jointly and severally with other partners.

5. Sub-partner: A sub-partnership comes into existence when one of the partners agrees to share his profits from the firm with a stranger. Such a third party is called a sub-partner. He is not a partner in the eyes of law and, therefore, has no right against the firm. He is also not liable for the debts of the firm.

6. Partner by estoppels or holding out: If the behavior of a person arouses misunderstanding that he is a partner in a firm when actually he is not; such a person is stopped from later on denying the liabilities for the acts of the firm. Such a person is called a partner by estoppels and is liable to all third parties.

Holding out means to represent, a stranger, who represents himself to be a partner in a firm and induces others to give credit to the partnership are. called as a partner by holding out.

Example 1: Arun introduces Balu as a partner in his business to Chandan. Balu, in fact, was not a partner but he did not deny the statement. Chandan advanced a loan to Arun. Arun could not repay the loan. Balu is responsible for the repayment of the loan because Balu is a partner by estoppel.

Example 2: Where a partner retires but does not give notice, he holds himself to be a partner. He can be held liable by establishing the fact that he has held himself as a partner and on the faith of such representation a third party has lent money to the firm.

Question 13.
Write a short note on Sleeping or dormant partner [June 2009 (5 Marks)]
Answer:
Various types of partners are as follows:
1. Actual/Ostensible Partner: Active partner is one who is actively engaged in the conduct of the business of the partnership. He is the agent of other partners, in the ordinary course of business. Acts of such partner are binding to the firm and he is bound by the act of another partner which is done in the ordinary course of business and in the firm’s name.

2. Nominal Partner: He is a partner only by name and only his name is used. He is not entitled to share profits but held liable. He shall give notice of his retirement or otherwise terminating his relationship with the firm.

3. Sleeping/Dormant Partner: He is one who contributes to the capital and has a share in Profits, but does not actively participate in the business. He is liable like any other Partner but was specifically excluded, he is not so. He is not required to give notice after he ceases to be a partner, nor does his insanity dissolve the firm.

4. Partner in profits only: When all partners agree that a partner shall share only profits and not losses then such partner is known as a partner in profit only. Even though such partner shares profit and not loss, but he is liable for all the debts of the firm are jointly and severally with other partners.

5. Sub-partner: A sub-partnership comes into existence when one of the partners agrees to share his profits from the firm with a stranger. Such a third party is called a sub-partner. He is not a partner in the eyes of law and, therefore, has no right against the firm. He is also not liable for the debts of the firm.

6. Partner by estoppels or holding out: If the behavior of a person arouses misunderstanding that he is a partner in a firm when actually he is not; such a person is stopped from later on denying the liabilities for the acts of the firm. Such a person is called a partner by estoppels and is liable to all third parties.

Holding out means to represent, a stranger, who represents himself to be a partner in a firm and induces others to give credit to the partnership are. called as a partner by holding out.

Example 1: Arun introduces Balu as a partner in his business to Chandan. Balu, in fact, was not a partner but he did not deny the statement. Chandan advanced a loan to Arun. Arun could not repay the loan. Balu is responsible for the repayment of the loan because Balu is a partner by estoppel.

Example 2: Where a partner retires but does not give notice, he holds himself to be a partner. He can be held liable by establishing the fact that he has held himself as a partner and on the faith of such representation a third party has lent money to the firm.

Question 14.
Aman, Bhuvan, and Chaman are partners in a partnership firm. Their firm is unregistered. After some time, Aman and Bhuvan decide to get their firm registered. They request Chaman also to put his signature on the registration papers. Chaman refuses to do so. Now Aman and Bhuvan file a suit against Chaman for compelling him to join in the registration of the firm. Will they succeed? Give reasons.
Answer:
Facts of Case: Aman, Bhuvan, and Chaman are partners in a partnership firm. Their firm is unregistered. After some time, Aman and Bhuvan decide to get their firm registered. They request Chaman also to put his 2 signatures on the registration papers. Chaman refuses to do so. Now Aman and Bhuvan file a suit against Chaman for compelling him to join in the X registration of the firm

Provision: As per Section 69 of the Partnership Act, 1932, registration of firms is not compulsory, but an unregistered firm suffers from certain disabilities. An unregistered firm cannot file a suit, against a third party to enforce any right arising from a contract. However, a third party can file suit against an unregistered firm.

Conclusion: Hence, Aman and Bhuvan will not succeed in their suit against Chaman for compelling him to join in the registration of the firm. The only remedy of such partners is to institute a suit for dissolution. [Keshav Lai v. Chuni Lai]

Question 15.
“Registration of partnership firm is not compulsory, yet it is desirable.” Comment. [June 2010 (5 Marks)]
Answer:
Effects of non-registration [Section 69]: Registration of firms is not compulsory, but an unregistered firm suffers from the following disabilities as mentioned:
1. Suit between partners and firm: A partner of an unregistered firm cannot sue the firm or any other partner of the firm to enforce a right arising from a contract, or conferred by the Partnership Act.

2. Suit between the firm and third party: An unregistered firm cannot file a § suit against a third party to enforce any right arising from a contract.

However, a third party can file suit against an unregistered firm.

3. Claim of set-off: An unregistered firm or a partner thereof cannot claim set-off or other proceedings to enforce a right arising from a contract above ₹ 100.

Non-registration not to affect the following [Section 69]:
1. Even if the firm is unregistered partners can sue for:

  • Dissolution of the firm or
  • Settlement of accounts of a dissolved firm or
  • Realizing the property of a dissolved firm.

2. Right of the firm to institute a suit or claim of set-off not exceeding ₹ 100.

3. An unregistered firm can bring a suit against third parties to enforce a right arising otherwise than out of a contract e.g. for enforcing a trademark.

Question 16.
Define ‘partnership’. Discuss the essential elements of the partnership. [June 2010 (5 Marks)]
Answer:
Partnership [Section 4]: Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.

Essential elements of partnership:
1. Association of two or more persons: Minimum of 2 persons are required to form a partnership. The maximum number for partners is 50 whether it banking or any other business.

2. Carrying on business: Partnership can be formed only for the purpose of carrying on some business. Associations created for charitable, religious, and social purposes are not partnerships.

3. Agreement: The relationship of partnership arises from contract and not from status.-Agreement may be express or implied. Further, the agreement must be a valid agreement and for a lawful object and purpose and between the persons competent to contract.

4. Sharing of profit:

  • Sharing the profits of a business is the essence of the partnership but it cannot be conclusive evidence as to the existence of a partnership.
  • Sharing of profits implies sharing of losses as well unless agreed otherwise. Partners may shares profit in one ratio and losses in some other ratio.
  • A person may become a partner only for profits and not for losses by agreement between all partners.
  • The ratio in which profits and losses will be shared is based on agreement amongst the partners.
  • Though sharing of profits of a business is essential, it does not mean that everyone who participates in the profits of a business is necessarily a partner.

Example: A Manager, as a part of his remuneration, may be given a share in profits of.the business. He does not thereby become a partner.

5. Mutual Agency T Partnership business is carried on by all or any of them acting football, Hence, a partner is both an agent and a principal. Partner by his acts bind other partners and is in turn bound by acts of other partners. It is to be noted that all partners should not actively participate in the business. The business may be managed by one or more partners and remaining partners will be bound by their acts provided such acts relate to carrying on the firm’s business and have been done in the firm’s name.

6. Consideration: As no consideration is required to create agency u/s 185 of the Contract Act, 1872, no consideration is required to create a partnership which is an extension of the law of partnership.

Question 17.
A partnership can be formed according to the nature of the agreement amongst partners. Explain. [Dec. 2018 (4 Marks)]
Answer:
Meaning of Partnership: Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have entered into a partnership with one another are collectively called Firms.

Creation of Partnership: Partnership is formed on the basis of an agreement between two or more persons to carry on business. It does not arise out of the operation of law as in the case of joint Hindu family business. The terms and conditions of partnership are laid down in a document known as Partnership Deed.

A partnership can be formed only for the purpose of carrying on some business. Associations created for charitable, religious, and social purposes are not partnerships. Thus, a partnership can engage in any occupation – production and/or distribution of goods and services with a view to earning profits.

Question 18.
Paramvir & Associates, a firm of practicing professionals consists of Ashok, Paramvir, and Vir having one-third share each in the firm. According to Ashok and Paramvir, the activities of Vir are not in the interest of the firm and thus want to expel Vir from the firm. Advice Ashok and Paramvir whether they can do so quoting the relevant provisions of the Indian Partnership Act, 1932. [June 2019 (4 Marksj]
Answer:
Facts of Case: Paramvir & Associates, a firm of practicing professionals consists of Ashok, Paramvir, and Vir having one-third share each in the firm. According to Ashok and Paramvir, the activities of Vir are not in the interest of the firm and thus want to expel Vir from the firm

Provision: As per Section 33 of the Partnership Act, 1932, a partner can be expelled from the firm if the following conditions are fulfilled:
(a) Decision of a particular partner is taken by a majority of the partners.
(b) The contract/partnership deed provides for such expulsion.
(c) Such right of expulsion is exercised in good faith and for the firm’s benefit.

The test of good faith includes:

  • That the expulsion must be in the interest of the partnership.
  • That the partner to be expelled is served with a notice.
  • That the partner has been given an opportunity of being heard.

Conclusion: Thus, in the given case Paramvir and Ashok the majority of partners can expel the partner Vir only if the above conditions are satisfied and procedure, as stated above, has been followed.

Further, the invalid expulsion of a partner does not put an end to the partnership and it will be deemed to continue as before.

Question 19.
What do you understand by ‘Hindu Undivided Family? Also, state the characteristics of HUF.
Answer:
Meaning of HUF Business: Joint Hindu Family Business is a different type of organization, which is found only in India. As the name suggests, it is a type of organization in which all the members of the Hindu Undivided Family manage and control the business with the direction of the head of the family.

Joint Hindu Family Firm is created by the operation of law. It does not have any separate and distinct legal entity from that of its members.

The business of the Joint Hindu Family is controlled and managed by one person who is called ‘Karta’ or ‘Manager’. The Karta or manager works in consultation with other members of the family but ultimately he has a final say. The liability of Karta is unlimited while the liability of other members is limited to their shares in the business.

Characteristics of a Joint Hindu Family Business:
1. Governed by Hindu Law: The business of the Joint Hindu Family is controlled and managed under Hindu law.

There are two schools of Hindu law:

  1. Dayabhaga and
  2. Mitakshara.

2. Management: All the affairs of a Joint Hindu Family are controlled and managed by one person who is known as ‘Karta’ or ‘Manager’. The Karta is the senior-most male member of the family. He works in consultation with other members of the family but ultimately he has a final say. The members of the family have full faith and confidence in Karta. Only Karta is entitled to deal with outsiders. But other members can deal with outsiders only with the permission of Karta.

3. Membership by Birth: The membership of the family can be acquired only by birth. As soon as a male child is born in the family, he becomes a member. Membership requires no consent or agreement.

4. Liability: Except the Karta, the liability of all other members is limited to their shares in the business. Karta is not only liable to the extent of his share in the business but his separate property is equally attachable and the amount of debt can be recovered from his separate property.

5. Permanent Existence: The death, lunacy, or insolvency of any member of the family does not affect the existence of the business of the Joint Hindu Family. The family goes on doing its business.

6. Implied Authority of Karta: In a joint family firm, only Karta has the implied authority to contract debts and pledge tire credit and property of the firm for the ordinary purpose of the businesses of the firm.

7. Minor can also take part in business: In a partnership, minor cannot become co-partner though he may be admitted to the benefit of the partnership. In a Joint Hindu Family firm, minors can take part in business activities under the supervision of Karta.

8. Dissolution: The Joint Hindu Family Business can be dissolved only at the will of all the members of the family. Any single member has no right to get the business dissolved.

Question 20.
What are the key points in the creation of HUF and HUF deeds?
Answer:
The following points need consideration while drafting a HUF Deed:

  • One person cannot form HUF.
  • A HUF is formed by a family.
  • A HUF is automatically created at the time of marriage.
  • HUF consists of a common ancestor and all of his lineal descendants, including their wives and unmarried daughters.
  • Hindus, Buddhists, Jains, and Sikhs can form HUFs.
  • HUF usually has assets that come as a gift, a will, or ancestral property, or property acquired from the sale of joint family property or property contributed to the common pool by members of HUF.
  • Under the Income Tax Act, a HUF is a separate entity for the purpose of the income tax return.
  • A HUF deed is written on stamp paper.
  • The eldest male member of HUF becomes Karta of HUF.
  • The name of members of HUF and the name of the HUF is also required to be stated in the HUF Deed at the time of creating of HUF.
  • It is recommended that the Deed should be notarized.

Question 21.
What.do you understand by ‘Multi-State Co-operative Society’? What types of co-operative societies can be registered under the MultiState Co-operative Societies Act, 2002?
Answer:
Presence in More than one State: Multi-State Co-operative Society means a society whose main objective is to serve the interests of its members in more than one state. Thus, such societies have members from more than one State and also have business transactions in more than one State.

Governing Law: The Multi-State Co-operative Societies Act, 2002 facilitates the incorporation of co-operative societies.

Object: The main object and function of Multi-State Co-operative Society are to spread over to several states.

Body Corporate and Limited Liability: Types of Multi Co-operative Society

The Act provides for the formation of both the types of Co-operative Societies i. e.

  • Primary co-operatives [with both individual and institutional members] and
  • Federal co-operatives [with only institutional membership].

Various types of Multi-State Co-operative Society are as follows:

  • Multi-State Solar Co-operative Society
  • Farming Co-operative Society
  • Credit Co-operative Society
  • Agricultural Co-operative Society
  • Real Estate Co-operative Society
  • Diary Firm Co-operative Society
  • Transport Co-operative Society etc.

Question 22.
Write a short note on Benefits of Multi-State Co-operative Society
Answer:
Various benefits of Multi-State Co-operative Society are given below:
1. Loans at Reasonable Rates: Multi-State Co-operative Society provides loans at reasonable rates of interest to the poor. This benefits them, as they do not have to go to financiers who lend at high-interest rates.

2. Democracy: Multi-State Co-operative Societies are democratically governed (one-member, one-vote)

3. Low Compliance: Regulatory requirements of filing are minimum; hence Multi-State Co-operative Societies have low compliance costs.

4. Members are the Owners and Customers: A Multi-State Co-operative Credit Society belongs to its members, who are at the same time the owners and the customers of their society; this creates a sense of belonging and ownership among the members.

Question 23.
Prathik has studied mass farming and is keen on uniting farmers in various states by forming a Multi-State Co-operative Society. Brief Prathik on the documentary requirements for the formation of a Multi-State Co-operative Society and the Authority with whom the application needs to be filed. [Dec. 2019 (5 Marks)]
Answer:
An application for registration of a Multi-State Co-operative Society shall be made in Form I. Following documents are required to be attached with Form I.
1. A certificate from the bank stating credit balance there in favor of the proposed multi-state co-operative society.

2. A scheme explaining how the proposed multi-state cooperative society has reasonable prospects of becoming a viable unit.

3. Four copies of bye-laws in original.

4. The proposed area of operation for registration shall initially be permitted for two contagious states only.

5. List of at least 50 members from each State along with the copies of ID proofs of the members duly attested by Chief promoter.

6. Certified copies of the resolutions passed by the proposed society along with the certified copy of the resolution of the promoters which shall specify the name and address of one of the applicants to whom the Central Registrar may address correspondence under the rules before registration and dispatch or hand over registration documents.

7. Contact number and e-mail address of the Chief Promoter or Society on the cover page.
For societies having objects related to thrift and credit and for multi-purpose societies following additional documents are required to be submitted:

8. No Objection Certificate from the Registrar of Co-operative Societies of the States/U.T. where the area of operation of the society is proposed to be confined.

9. A certificate to the effect that the credentials of the Chief Promoter/ Promoters have been verified by the Registrar of Co-operative Societies of the state where the head office is proposed to be located.

10. All documents to be submitted in original with the signatures of the Chief Promoter/Promoters on each page.

Setting Up of Business Entities and Closure Questions and Answers

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