LECTURE 1 –

INTRODUCTION
What is a Business?
An economic system in which
goods and services are
exchanged for one another or
money, on the basis of their
perceived worth.
What is a Business Organization?
• A business organization is a collective effort
consisting of contractual relationship among the
various parties involved in some productive
activity.

• Business can be large or small. To produce a

million light bulbs demanded by consumers, the
economy could support 10,000 small businesses
that each produce 100 light bulbs or 5 business
that each produce 200,000 bulbs.
Nature of Business
The nature of business can be classified in
the following types:

1. Manufacturing

2. Trading

3. Services
Forms of Business
A business may be carried on in any one of
the following form:

1. Sole proprietorship

2. Partnership

3. Corporation
Forms of Business Cont….
Sole Proprietorship
• The business is solely owned by one person;
• Management rests on that one person,
• If such a business fails or is declared bankrupt, the creditors can
sue the proprietor for all debts incurred. A legal claim can be made
against the personal assets of the proprietor.
Advantages
• Easiest to start
• Least regulated
• Single owner keeps all the profits
• Taxed once as personal income
Disadvantages
• Limited to life of owner
• Equity capital limited to owner’s personal wealth
• Unlimited liability
• Difficult to take complicated decisions.
Forms of Business Cont….
Partnership
Definition: According to Partnership Act 1932;
“The relation between persons who have agreed to share the profits of
business carried on by all or any of them acting for all.”
Characteristics:
• A partnership is not a legal entity such that the partnership has to sue
or be sued in the names of the partners.
• A partnership must comprise of 2 to 20 persons (Banking sector 2 to
10) but Banking Ordinance 1962 does not allow banks to incorporate
as partnership firms in Pakistan.
• Partnerships are governed in Pakistan under Partnership Act 1932.

• If the partners do not make their own agreement, or if their own

agreement does not cover any particular matter specified in the
Partnership Act 1932, provisions of the Partnership Act dealing with
that particular matter will become applicable.
Forms of Business Cont….
Partnership
Advantages:
• Disclosure of financial statements not required to the general public;
• Easy to form compared to a limited company;
• Higher capital is available compared to a sole proprietorship;
• Taking advantage of the different expertise and skill of the different
partners;
• Low cost of formation;
• Tax advantage;
• Less regulations compared to limited companies.
Disadvantages:
• Lack of flexibility unlike the one-man show of a sole proprietorship;
• Unlimited liability;
• Limited life when one of the partners withdraws or dies, then the
partnership will dissolve by itself;
• Capital though higher than a sole proprietorship but still limited
compared to a limited company.
Forms of Business Cont….
Corporation
A corporation is a separate legal entity incorporated and governed
under the Companies Ordinance 1984 in Pakistan. It can be
categorized as follows:
• A company limited by shares;
• A company limited by guarantee;
• An unlimited company with or without a share capital.

Forming of corporation involves preparing;

• Charter i.e. Memorandum of Association explaining the
limitations of the powers of company and including six clauses;
Name Clause Registered Office Clause
Object Clause Liability Clause
Capital Clause Association or Subscription Clause
• Set of bylaws i.e. Article of Association which describes the
regulations for the business.
Forms of Business Cont….
Corporation
Company Limited By Shares:
• The total liability of a shareholder in a company limited by shares is his portion of the
share capital.
• A company limited by shares can be:
 Private Limited Company
 Member is 1 for Single member company
 Member is 2 to 50 for ordinary company
 Public Limited Company
 3 to unlimited members for Unlisted Companies
 7 to unlimited members for Listed Companies
Advantages:
• Limited liability
• Unlimited life
• Separation of ownership and management
• Transfer of ownership is easy
• Easier to raise capital
Disadvantages:
• Separation of ownership and management
• Double taxation (income taxed at the corporate rate and then dividends taxed at personal
rate)
 Forms of Business Cont….
Corporation
Company Limited By Guarantee:
• The liability of members is limited to such amount as they undertake
to contribute to the assets on winding-up. That amount is specified
in its memorandum of association.

• Such companies are normally non-profit-making concerns. They

include professional bodies, trade societies, clubs etc.

Companies Unlimited:
• There is no limit to the liability of the members. Such undertakings
do not materially differ from partnerships or individual traders.
THANK YOU