Chapter 02

Forms of Business
 Businesses or business organizations are
divided into three main categories namely;

1.Sole proprietorship
2.Partnership
3.Companies

Each one of them is discussed in this

chapter.
PART I

Sole
Proprietors
hip
 Sole Proprietorship

A business which is owned by one

person or One man business

Examples of Sole proprietorship:

Bakery
Store
Service stations
Barber shops etc.
 Characteristics
Ownership: Single person ownership

Management: Owner managed business, being

small in size, it is managed by the owner

himself/herself, anyway they can have some paid
human resources as well.
Capital: The necessary capital to run the business

is provided by the owner. However, he may borrow

from other sources such as friends or bank etc.
 Unlimited liability: The sole trader is

personally liable for debts of the business. The

creditor can lay claim not only on his business
assets but also on his personal property such as
car, houses, furniture etc to recover the loan
Ease of dissolution: The sole proprietorship

business is as easy to end or dissolve as its

formation. The decision of the proprietor alone
ends the business.
 Advantages
Easy and inexpensive formation and

management.
Low tax, since the income of the business

is considered to be the personal income of

the owner, therefore the tax payable is on
the basis of personal income not in
commercial rate, as is in corporate
organizations.
Business, Profession and
Employment
A business is organized to produce or

distribute goods or services to society in

order to earn profit. It involves various
kinds of activities like purchase, sale,
store, transport, finance etc which aims at
gaining profit.
 Profession: Profession refers to a

vocation which a person adopts after

getting specialized training. The
services of professional people are
highly specialized like doctors,
engineers etc
Employment: It is an agreement of a

person with the organization to provide

services on an agreed salary.
Partnerships
 Partnership

A business formed by two or more people

is called a partnership.
Characteristics:
At least two people to form (upper limit is
as per the law land)
The relationship among partners is
contractual , should be in written.
Common organizational interest
 Capital Contribution

The owners of the partnership can

contribute upon their mutual consent. If

there is no written agreement between
the partners about the profit sharing
then according to the partnership act the
profit shall be distributed among the
partners as per their capital contribution.
Joint Stock Companies
Joint Stock Companies

Joint stock company is a voluntary association

formed by people to carry on a certain business for
profit. People contribute their capital in the form of
shares in the company. Company work in its own
name under a common seal.
 Characteristics

Voluntary Association

Artificial Person created by Law

Limited Liability

Separation of Ownership from Management

Transferability of Shares

Common Seal
Voluntary Association

A company is a voluntary association of

persons joining hands with a common
motive. For the formation of a private
company, there must be at least two
member and maximum number is fifty. In a
public company, minimum number of
members is seven and there is no
restriction over its maximum number.
Artificial Person

A company is called an artificial person

because it does not take birth like a
natural person but it comes into existence
through the law. It has some features like a
natural person. For example it has a name,
it owns assets, it can sue or can be sued in
its own name and it has nationality.
Limited Liability

This is the most important characteristics

of the company. The liability of each
shareholder is limited up to the value of
share purchased by him. In case of loss
to the company, a shareholder cannot be
called upon to pay more than the value
of the share held by him
Owner and Management
Separate
The shareholders who are the owners of the
company, are large in number. They are
scattered all over the country. They cant be
present so they select a board of directors for
running the business. The ownership and
management are thus in two different hands.
Transferable Shares

The shares of a company are transferable. The

shareholders of the company have full freedom
to transfer or sell shares to anyone.
Common Seal

Since the company is an artificial person created

by law, it therefore cannot sign documents for
itself. The law has provided the use of seal with
the name of the company. This seal has the effect
of a signature of a real person.