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Forms of Business Ownerships Sole Proprietorships

It is the simplest form of business organization, which is owned and controlled by one man. Sole proprietorship is the oldest form of business organization which is owned and controlled by one person. In this business, one man invests his capital himself and enjoys the whole of the profit. The features of sole proprietorship are: Capital: In sole proprietorship, the capital is normally provided by the owner himself. However, if additional capital is required, such capital can be increased by borrowing. Easy Dissolution: The sole proprietorship can be easily dissolved, as there are no legal formalities involved in it. Easily Transferable: Such type of business can easily be transferred to another person without any restriction. Freedom of Action: In sole proprietorship, single owner is the sole master of the business; therefore, he has full freedom to take action or decision. Formation: Formation of sole proprietorship business is easy as compared to other business, because it dos not require any kind of legal formality like registration etc. Legal Entity: In sole proprietorship, the business has no separate legal entity apart from the sole traders. Legal Restriction: There are no legal restrictions for sole traders to set up the business. But there may be legal restrictions for setting up a particular type of business. Limited Life: The continuity of sole proprietorship is based on good health, or life or death of the sole owner. Management: In sole proprietorship, the control of management of the business lies with the sole owner. Ownership: The ownership of business in sole proprietorship is owned by one person. Profit: The single owner bears full risk of business, therefore, he gets total benefit of the business as well as total loss. Size: The size of business is usually small. The limited ability and capital do not allow the expansion of business. Success of Business: The success and goodwill of the sole proprietorship is totally dependent upon the ability of the sole owner. Secrecy: A sole proprietorship can easily maintain the secrecy of his business. Unlimited Liability: A sole proprietor has unlimited liability. In case of insolvency of business, even the personal assets are used by the owner to pay off the debts and other liabilities. Advantages of Sole Proprietorship 1. Contacted with the customers: In sole proprietorship a businessman has direct contact with the customer and keeps in mind the like and dislikes of the public while producing his products. 2. Direct Relationship with Workers: In sole proprietorship a businessman has direct relationship with workers. He can better understand their problems and then tries to solve them.

2 3. Easy Formation: Its formation is very easy because there are not legal restrictions required like registration etc. 4. Easy Dissolution: Its dissolution is very simple because there are no legal restrictions required for its dissolution and it can be dissolved at any time. 5. Easy Transfer of Ownership: A sole proprietorship can easily be transferred to other persons because of no legal restriction involved. 6. Entire Profit: Sole proprietorship is the only form of business organization where the owner enjoys 100% profit. 7. Entire Control: In sole proprietorship the entire control of the business is in the hands of one person. He can do whatever he likes. 8. Flexibility: There is great flexibility in sole proprietorship. Business policies can easily be changed according to the market conditions and demand of people. 9. Honesty: The sole master of the business performs his functions honesty and effectively to make the business successful. 10. Independence: It is an independent form of business organization and there is no interference of any other person. Other advantages include Quick decision making Personal Interest Saving in Interest on Borrowed Capital Saving in Legal and management Expenses as well as in taxes Secrecy Disadvantages of Sole Proprietorship 1. Continuity: The continuity of sole proprietorship depends upon the health and life of the owner. In case of death of the owner the business no longer continues. 2. Chances of Fraud: In sole proprietorship, proper records are not maintained. This increases the chances of errors and frauds for dishonest workers. 3. Expansion Difficulty: In sole proprietorship, it is very difficult to expand the business because of the limited life of proprietor and limited capital. 4. Lack of Advertisement: As the sources of single person are limited so he cannot bear the expense of advertisement, which is also a major disadvantage. 5. Lack of Capital: Generally, one-man resources are limited, so due to financial problems he cannot expand his business. 6. Lack of Inspection and Audit (qualified expertise): In sole proprietorship there is lack of inspection and audit, which increases the chances of fraud and illegal operations. Other disadvantages include Lack of Innovation Lack of Public Confidence Management Difficulty Much Strain on Health Not Durable

Partnerships
According to Partnership Act 1932 section 3(1) defines partnership as the relation which subsists between persons carrying on a business in common with a view of profit. Partnership means a lawful business owned by two or more persons. The profits (and losses) of the business are shared by the partners in agreed ratio. There are different types of partners [general, limited, active and sleeping: (silent or dormant)]. It is an extension of the sole proprietorship owing to the fact that the sole trader usually cannot run the business efficiently. Small and medium size business activities are performed under this organization. Formation of a Partnership A partnership business may come into business in four main ways: a) Orally b) By simple actions of the concerns parties e.g. when they are acting as partners c) By a simple agreement in writing d) By a deed i.e. an agreement under seal, signed by persons who have agreed to become partners. A partnership is governed by a Partnership Deed/Articles/Agreement or agreement which is a document in which the relations of partners with one another are clearly written. It is the most important document of partnership, which includes the terms and conditions related to partnership and the regulations governing its internal management and organization. It may be oral or written. But it is necessary to have the agreement in writing. The Partnership Deed/Articles/Agreement contains the following: Date of starting the business Name of the Business Nature of Business Location of Business List of Partners Duration of partnership Dealing Bank Capital Characteristics of Partnerships Agreement -partnership agreement may be written or oral. Agency: in partnership every partner acts as an agent of another partner. Business: partnership is a business unit and a business is always for profit. It must not include club or charitable trusts, set up for welfare. Cooperation: Partnership cannot take place with cooperation. Dissolution: Partnership is a temporary form of business. It is dissolved if a partner leaves dies or declared bankrupt. Legal Entity: partnership has no separate legal entity from its members and vice versa. Management: In partnership all the partners can take part or participate in the activities of business management.

4 Number of Partners: In partnership there should be at least two partners and a maximum of 20 people. Profit and loss distribution is done according to their agreement. Share in Capital: According to the agreement, every partner contributes his share of capital. There is no transfer of rights to another person, without the consent of all partners. Advantages of Partnerships Simplicity in formation and dissolution Sufficient capital from the partners as compared to sole proprietorship. There are skilled workers or talent Unanimous decision making which leads to sound decisions It inculcates a sense of responsibility among the members Satisfaction of Partners: In this type of business organization each partner is satisfied Expanding the business is easy due to different talents, ambition and resources of various partners. Unlimited Liability: In case of loss, personal property of the partners can be sold to pay off the firms debts. Limited Life of Firm: It may come to an end if any partner dies or new partner enters into business. Disadvantages of Partnerships The likelihood of partners not pooling their resources and talents together Lack of mutual trust from partners Frequent disagreements over important policy matters which could delay decision making Some active partners could use business assts for personal gain Partnerships do have a small lifespan e.g. in cases of death of a partners Dissolving/Terminating a Partnership Although the partnership deed provide provided for dissolution of a partnership, nevertheless, in the absence of, or subject to, these regulations, a partnership may be dissolved in the following ways: When the fixed term stated in the partnership deed expires If the partnership was specifically entered into for a govern venture, transaction, or undertaking the completion of such will automatically dissolve the partnership If the partnership is a partnership at will i.e. no fixed period, it can be dissolved by a partner giving notice to other partners of their intentions to dissolve the partnership By mutual consent of all partners By bankruptcy or death of any given partner If one partners allows hi/her shares to be charged or attached under court order for private debts If any event occurs which makes the partnership business illegal to carry on.

Automatic or Compulsory Dissolution of a Partnership Section 39 of the Partnership Act 1934 lays down the following grounds under which a partnership will compulsorily be dissolved by a court of law: If one partners becomes insane or of permanent unsound mind If a partners becomes permanently incapable of performing their partnership duties Where a partner has acted in a manner which is prejudicial to the carrying on of the firms business and his counties association with business would bring the mane of the business into disrepute Where a partners has been found to be guilty of breach of the partnership contract Where the firm has been operating at a loss When any circumstance arises which renders it fair and equitable that the partnership business be dissolved e.g. a situation of mutual hostility is incompatible with partnership spirit. Conditions when Partnership is Ideal When the amount of capital requirement is reasonably large In professions where polling for efforts is necessary for better performance e.g. in legal and auditing In some professional areas where the law prohibits the formation of body corporate e.g. in auditing professions Where there are clear and specific controls of a business such that each partner can be identified to specific areas and his/her efforts out-rightly judged accordingly e.g. engineering fields. Where the would-be partners have common bond and would not like to dilute it by inviting other parties e.g. relatives, families e.t.c. with long standing associations.

Companies
A company may be defined as an association of persons for the purpose of making profit. It is a corporation by nature and an artificial person, created or authorized by a legal statue for some specific purpose. This means that a company is an incorporated association of persons formed usually for the pursuit of some commercial purpose. We have three kinds of companies: Joint Stock Companies [Private & Public Limited Companies] A joint stock company is a voluntary association of persons created by law. It has a separate legal entity apart from its members. It can sue and be sued in its name. In the joint stock company, the work of organization begins before its incorporation by promoters and it continues after incorporation. The joint stock company has the following feature: o Creation of Law

6 o Separate Legal Entity: As a legal person, has the usual right of any person to carry on the business in its own name, to own property, to borrow or lend money and to enter into contract. o Limited Liability o Transferability of shares o Number of Members: In case of private limited company, minimum number of shareholders is 2 and maximum is 50; but in case of public limited company, minimum number is 7 and there is no limit for maximum number. o Capital Borrowing: The Company can borrow capital in its own name to expand the business. o Long Life: A joint stock company has long life as compared to other forms of business organizations. o Large Scale Business
Advantages of Joint Stock Company

Expansion of business is easy Easy access to credit Easy to Exit Experts services Employment creation in the economy There is flexibility Limited liability i.e. in case of loss, the shareholders are not required to pay anything more than the face value of the shares. Large scale production Larger capital Long life i.e. a joint stock company has a permanent life. If one or more than one shareholder dies, or sells their shares, it makes no difference to the company. New shareholders take their place.
Disadvantages of Joint Stock Company

Initial difficulties in establishment as compared to other business organizations. Lack of interest since most shareholders become relaxed and leave all the functions to be carried out by the directors. Labor disputes: In such organization there is no close contact of the workers with the owners or the shareholders. This leads to formation of labor unions to fight against the companys management. Lack of responsibility: There is lack of personal interest and responsibility in the business of a joint stock company. Lack of secrecy Lack of freedom
Public Limited Company

It is a company which is formed by a least 7 members, and there are no restrictions: o For the transfer of shares. o For maximum numbers, and

7 o For subscription of shares and debentures.

Private Limited Company

It is a company which is formed by at least 2 members and has certain restrictions: o For the transfer of shares o For maximum number of members, o For subscription of shares and debentures. Distinction between Public and Private Limited Companies Public Limited Company 1. Number of Members: Should be 7 and with no restriction for the maximum 2. Number of Directors: Minimum of 7 with maximum according to AOA. 3. Issue of Security: It can invite the public for subscription 4. Prospectus: It is compulsory for public to file its prospectus with registrar of companies 5. Certificate of Incorporation: It cannot start the business until it receives a certificate of commencement 6. Shares transferability: Shares transferable without restrictions 7. Title. Has to use the title limited after its name 8. Dissolution: Dissolved according to Companies Act Private Limited Company Minimum number of members is 2 and a maximum of 50 At least 2 directors and maximum according to AOA. It cannot invite the public for subscription of its shares It is not compulsory to file the company prospectus with registrars Can start the business soon after receiving the certificate of commencement Shares cannot be transferred and disposed off to others without restrictions. Every company has to use the title private limited after its name Separate legal procedure adopted during dissolution

Cooperative Societies
Cooperation is an action of persons voluntarily united for utilizing reciprocally their own forces, resources or both under mutual management for their common profit or loss. In this form of organization, all members enjoy equal rights of ownership. The features of cooperative society are as under: Easy Formation Protection of Mutual Interest Limited Liability Equal Distribution of Wealth Equal Rights
Advantages of Cooperative Society

Easy formation Equal rights

8 Equal distribution of wealth Economic democracy: Every member is allowed to participate in the management of the business. Each member has the right to cast vote. Financial assistance: These societies also provide financial assistance to its members. Friendly relations: A cooperative society is a mean of developing friendly relations among the members. Improve the standard of living Increase in employment Limited liability: The liability of each member in cooperative society is limited to the share capital invested. Open membership: It is a voluntary association of persons of any caste, color and creed.

Disadvantages of Cooperative Society Lack of capital Untrained supervision Defective organization: The organizations of cooperative societies are defective and these cannot operate efficiently to fulfill their objectives. Lack of experience and expertise: The members of societies have less experience of business. Due to lack of capital, they cannot hire the services of experts. Lack of discipline: Every member of the cooperative society considers himself as the owner of the business. Due to lack of discipline, business suffers a loss. Lack of profit incentive: Sometimes due to absence of profit incentive, the progress of cooperative society is very poor. Lack of secrecy Delay in decision making Government control