Question

(i) Two friends, Anandita and Rukhsana, started a business based on a verbal understanding. Anandita invested ₹ 20,00,000 and Rukhsana invested ₹ 30,00,000 in the business. They agreed to share the financial outcomes of the business equally, despite contributing unequal amount of capital.
(a) Identify the form of business set up by Anandita and Rukhsana.
(b) Anandita and Rukhsana agreed to share the financial outcomes of the business equally. Which feature of this form of business is highlighted here?
(c) Examine one probable risk of starting a business based on a verbal understanding.
(d) If Anandita decides to leave the business in future, can Rukhsana continue the business in the same form? Justify your answer by giving a reason.

Hint:

While a written agreement (Partnership Deed) is not legally compulsory, it is highly recommended to avoid the "verbal trap" and ensure the smooth functioning of the business!

Answer 1

Step 1: Understanding the Concept:
This case study explores the fundamentals of a Partnership firm. A partnership is an association of two or more persons who agree to share the profits of a business carried on by all or any of them acting for all.
Step 2: Detailed Explanation:
(a) The form of business is a Partnership. It involves two people (Anandita and Rukhsana) coming together to contribute capital and run a business.

(b) The feature highlighted here is Sharing of Profits and Losses. In a partnership, the ratio of profit sharing is determined by an agreement. Since they agreed to share equally despite unequal capital, the "Agreement" (Contractual relationship) feature is also evident.

(c) A major risk of a verbal understanding is the Lack of Legal Evidence in case of future disputes. Without a written "Partnership Deed," it becomes difficult to prove the agreed-upon terms regarding profit sharing, interest on capital, or duties in a court of law, which may lead to litigation and the dissolution of the firm.

(d) No, Rukhsana cannot continue the business in the same form.
Reason: A partnership requires a minimum of two persons to exist. If Anandita leaves, the partnership is automatically dissolved as a single person cannot form a partnership. Rukhsana can continue the business, but its form will change from a Partnership to a Sole Proprietorship.
Step 3: Final Answer:
The business is a Partnership. The shared financial outcomes highlight the Profit Sharing feature. Verbal agreements carry the risk of legal disputes due to lack of proof. If one partner leaves, the partnership dissolves because a minimum of two members is legally mandatory.