Chapter 02 - Forms of Business Ownership

8/10/2019 Chapter 02 - Forms of Business Ownership

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Chapter Two:

Forms of Business

Ownership


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What Type of Business Is right for You?

Consider the following factors before

starting a business

Capital Requirements

The amount of fundsnecessary to finance the operation

Risk The amount of personal property aperson is willing to lose by starting the business

Control The amount of authority the owner

exercises


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Managerial Abilities The skills needed toplan, organize and control the business

Time Requirements The time needed tooperate the business and provide guidance tothe employees

Tax Liability What taxes a business must payto various government organizations onearnings of the business

Each of these factors shou ld be considered

along w i th your own personal

Values and phi losophy

What Type of Business Is right for You?


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A. Sole Proprietorship

A business owned and managed by oneIndividual.

Sole proprietorships are typically small

business operations such as drugstoresvariety shops barbershops and repair

shopsetc.

The capital (money) needed to start andoperate the business is normally providedby the owner through personal wealth orborrowed money.


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Sole Proprietorship

The sole proprietor usually is anactive manager

Controls the operation

Supervises the employees and

Makes decisions

The managerial ability of the ownerusually accounts for the success

or failure of the business.


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Sole Proprietorship

In the eyes of the law, the ownerand the organization in a soleproprietorship are inseparable.

The sole proprietor not only owns thebusiness but also is responsible for

the operation of the business.


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Advantages of Proprietorship

Ease of starting it involves a minimum number ofproblems, No general laws.

Control as boss make final decisions

Sole participation in profits and losses

Use of owners abilities, managerial expertisefor thesuccess of the business

Tax breaks no income tax for the business

organization.

Secrecy no information to the public

Ease of dissolving- there will not be any legal

complications.


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Disadvantages of Proprietorship

Unlimited liability

Difficulty in raising capital

Limitations in managerial abilityLack of stability

Demands on timeDifficulty in hiring and keeping high-

achievement employees


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B. Partnerships

A partnership is an association of two ormore people who are co-owners of a

business for profit.

Partnerships are created to pool talents,

provide more financial resources than

are possible with a sole proprietorship.

Number of partners: highest 20 persons

but for banking it is 10.


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B. Partnerships

Essential Elements : Contractual Relation

Legal Form of Business

Plurality of Number

Sharing Profit & Loss

Free Consent

Mutual Operation


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B. Partnerships

Types of partnerships

(A) General Partnerships

A partnership in which partners has unlimitedliability for the debt of the business; A general

partner has authority to act and make binding

decisions as an owner.Partners generally share profits and losses

according to a plan specified by agreement

between them.


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A) General Partners

The general partners arrange and run thebusiness.

General partners have unlimited liability in thepartnerships.

B) Limited Partnerships

A partnership with at least one general partner,

and one or more limited partners who are liablefor loss and up to the amount of theirinvestment.

B. Partnerships


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B. Partnerships

Limited Partners# The limited partners are investors only.

# They receive special tax advantages

and protection from liability.

# Legally, may have no say in managing

the business.# They are liable for loss only up to the

amount of capital invested.


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B. Partnerships

C) Joint Venture

Special type of partnership

characterized by cooperation between

two or more businesses to share

business decision making, investment

risks, and profits in a business venture

for a specific purpose.(Kings

Confectionary-Malaysia/Bangladesh

joint venture)


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Partnership ContractA contractual agreement is called articles of partnership. A

written partnership agreement includes the following mainfeatures

Name of the business partnership

Type of business

Location of the business

Expected life of the partnership Names of the partners and the amount of each ones

investment

Procedures for distributing profits and covering losses

Amounts that partners will withdraw for services Procedure for withdrawal of funds

Duties of each partners

Procedures for dissolving the partnership


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Advantages of Partnership

-More capital. -Combined managerial

skills.

-Ease of starting.

-Clear legal status. sound

legal advice available

about partnership issues

-Tax advantages

partnership as business

does not pay tax


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Disadvantage of Partnership

Unlimited liability

Potentialdisagreements

Investmentwithdrawal difficulty

Limited capitalavailability

Instability


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Other unincorporated forms of business

Syndicate:two or more business joinedtogether to accomplish specific business

goals

Business trusts:A business used to hold

securities for investors; allows the transfer

of legal title to a property of one person forthe use and benefit of another.


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Corporations

A Corporation is a business that is a

legal entity separate from its owners.

A company is an artificial person. It

can sue or be sued , make contracts,

own property ,and even be a partner in

a partnership.


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Formation of a Company

It is usually a promoter who thinks up the idea of abusiness to be run by a company. The promoter thenmakes detailed investigations about the proposed

business.

If he/she thinks that the proposed company will runsuccessfully, then he/she gets the documents preparedand sends them to the Registrar of Joint StockCompanies for approval. After the approval the companyis ready to start its business.


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c. Limits the number of its members

(minimum 2 and maximum 50).

d. Prohibits any invitation to the

public to subscribe to any of its

shares and debentures.

Types of Company


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Types of Company

2. Public Limited Company :

A public limited company may be

defined as one which offers its sharesor debentures to the public for

subscription and is not subject to the

restrictions as applicable in the case ofthe private limited company.


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Other Types of Corporations

Domestic Corporation

An enterpriseorganized under the laws of one state orcountry and doing business within that state orcountry.

Foreign Corporation A businessincorporated in one sate or country and doingbusiness in another state or country.

Nonprofit Corporations An enterprise(universities, mosques) that is not driven by aprofit-seeking motive.


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Advantages of Corporation

-Limited liability

-Skilled management team

-Transfer of ownership-Greater capital base

-Stability

-Legal entity status


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Disadvantages of Corporation

-Difficulty and expense of starting

-Lack of control

-Multiple taxation-Government involvement

-Lack of secrecy

-Lack of personal interest

-Credit limitations


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Business Combination

Businesses combine to achieve greaterprofitability, efficiency, and competitiveness.Business combination can be done in theseveral ways:

1. Acquisition

2. Merger

3. Amalgamation orConsolidation


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1. Merger :A merger occurs when one firm buys a

majority interest in another firm, but both

retain their identities.

2. Acquisition :

An acquisition occurs when a company

purchases another company or companies

and purchasing company retains its

identity.


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3. Amalgamation or Consolidation:

When one firm combines with other firms to form an

entirely new company, former identities are

relinquished.

For example:

Company A + Company B = Company C


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End of Chapter - 2

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Chapter 02 - Forms of Business Ownership