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

The answers to the given case are explained below in detail:

(a) Identify the form of business set up by Anandita and Rukhsana:
The form of business is a Partnership Firm.

Explanation:
A partnership is formed when two or more persons agree to carry on a business and share its profits and losses. In this case, Anandita and Rukhsana started a business together and agreed to share financial outcomes, which clearly indicates a partnership.

(b) Which feature is highlighted here?
The feature highlighted is Sharing of Profits and Losses.

Explanation:
Even though the partners contributed unequal capital, they agreed to share the profits equally. This reflects the essential feature of partnership where partners mutually decide how profits and losses will be shared.

(c) Examine one probable risk of starting a business based on a verbal understanding:
One major risk is lack of legal clarity and potential disputes.

Explanation:
Since there is no written agreement (partnership deed), terms and conditions may be misunderstood or disputed in the future. This can lead to conflicts regarding profit sharing, responsibilities, or decision-making, and resolving such disputes becomes difficult without documented evidence.

(d) Can Rukhsana continue the business in the same form if Anandita leaves?
No, Rukhsana cannot continue the business in the same form.

Reason:
A partnership requires at least two persons. If one partner leaves, the partnership gets dissolved. To continue the business, Rukhsana must either admit a new partner or change the form of business (e.g., sole proprietorship).

Conclusion:
The case highlights key features and risks of partnership, especially the importance of a written agreement and the requirement of a minimum number of partners.