Types of Organization
1) Sole Proprietorship
2) Partnership
1. SOLE PROPRIETORSHIP
It is the form of business organization in which an individual
introduces his own capital, uses his own skills and intelligence in the
management of its affairs and is solely responsible for the result of
its operations. He may run the business alone or obtain assistance of
employees. It is the easiest to form and is also the simplest in
organization. The sole proprietor may borrow or use other people‘s money
in doing his business.
The individual proprietor is the supreme judge of all matters pertaining
to his business, subject only to the general laws of the land and to
such special legislation a may effect his particular business.
ADVANTAGES OF SOLE PROPRIETORSHIP
1. EASY TO START
The formation of sole proprietorship is quite easy than partnership and
joint stock company. There are no legal formalities for the starting
this business, like agreement, memorandum of association, or articles of
associations.
2. EASY TO DISSOLVE
It is easy to dissolve because the sole trader is not required to take
permission for the dissolution either from share holder in the general
meeting as in the case of joint stock companies or consult all the
partners in the case of partnership.
3. FREEDOM OF ACTION
A sole trader has maximum freedom to take decision at his own end. His
decision is final he may expand his business by adding new products or
can discontinue old ones. He can wind up his business or he can change
his business place from one place to another.
4. FREEDOM OF GOVERNMENT CONTROL
He is free from government control to a great extent than any other form
of organization. A sole trader is not required to send his periodical
balance sheet to the government.
5. OWNERS OF ALL PROFIT
No other organization permits to retain cent percent profit they earn.
But in sole proprietorship the sole trader is the master of his business
and is entitled to retain the entire profit of the business.
6. LOW TAXES
He has to pay minimum income tax and other taxes than in partnership and
Joint Stock Company. In this manner he saves much out of his profit.
7. SECRECY
Secrecy is base of a business and it should not be disclosed. Success of
business depends upon secrecy. A sole trader can maintain secrets of
his business but it is not possible to keep secret in partnership or
Joint Stock Company.
8. LOW COST ORGANIZATION
A sole trader is not required to pay registration fees as paid by stock company and legal fees in the formation of partnership.
9. FULL CONTROL
He has got full control over his planning. Nobody is there to interfere in his business.
10. IMMEDIATE ACTION AND QIUCK DECISION
In business it becomes very essential to take decision on particular
times and for that purpose immediate action is required. Sole trader can
take immediate action and decision but in partnership and joint stock
companies actions cannot be taken without permission of owners and
meetings should be called for this purpose. In this way business cannot
take proper advantage of time.
11. FLEXIBILITY OF ORGANIZATION
If any change is business is called of the sole proprietor has a right
to bring about the change. A good number of giant sized concerns fall on
account of their inability to change their policies promptly with a
change in situation.
12. SOCIAL DIS-LIABILITIES
From the social point of view
i) Continuity of individual proprietorship ensures that too much wealth does not get concentrated in a few hands.
ii) The unlimited liability ensures sufficient responsibilities to the society.
iii) It brings into full play the qualities of self confidence, diligence and tact among business people.
iv) The growing number of sole proprietorships firms contributes to the commercial development of the country.
13. PERSONAL INCENTIVES
A man in business for him has everything lose if his efforts are not
successful to earn profits. This fact makes him willing to devote
maximum time, thought and energy to the successful prosecution of the
activities of business ha has organized.
14. CREDIT WORTHINESS
Sole proprietor’s liabilities are unlimited as the creditor can even
recover his amount from the personal belongings of the trader. Therefore
this fact makes a sole proprietor credit worthy.
DISADVANTAGES OF SOLE PROPRIETORSHIP
The sole proprietorship has some disadvantages which are as follows:
1. LIMITED FINANCE
The sole proprietorship can face financial problems. He can depend only
his own resources. It is neither safe nor easy for him to borrow large
amount of money from banks or other financial institutions.
2. DIFFICULTIES IN MANAGEMENT
Each individual has particular attitude or ability in particular
respects. Modern business is full of complications airing especially
from the changing nature of market and the various laws that are being
enacted. An individual may not be expert in all matters. Therefore
sometimes his decision may be unbalances and would lend to the failure
of the business.
3. LIMITED SPAN OF SUPERVISION
A sole proprietor however qualified and clever will find it hard to
supervise the work of his sub ordinate beyond a certain limit e.g. in
ease of large general store owned by single person, it will be difficult
for the owner to keep an eye on all the departments and employee and to
ensure that the customers are treated nicely. The problems will be more
acute if store has its branches in other places.
4. LIMITATION ON SIZE
Because of limitation of finance, managerial skills and span of
supervision a sole proprietor has to manger the size of the business up
to a certain limit. This deprives the firm of the opportunity of reaping
the economic of large scale production.
5. UNLIMITED LIABILITY
He has great risks. It is true that he receives all the profits of the
business but likewise he has to face the entire losses. Not only the
assets of the business but also his private assets will be used to pay
off the firm’s debts and losses. Unlimited liability also discourages
the expansion of business.
6. LACK OF CONTINUITY
Any personal problem or illness which is affecting the sole proprietor
has direct effect on his business. It ends with the retirement, death or
bankrupt of the owner. If the business is rendering useful services to
the society the closure of such a business will be social loss.
Similarly with the death of the proprietor, the business may pass on to
his successors who may not possess the same degree of self-reliance,
ability and intelligence.
7. EASE OF FORMATION
The very ease and cheapness of entering business as a proprietor may be
disadvantages. Many people go into business with too little capital and
training and are dashed by the competition of the business. As a result a
number of business failures are proprietorships.
SUITABILITY OF SOLE PROPRIETORSHIP
One man control over the business would be most efficient and
profitable. If only that one man has the capability of managing
everything indefinitely. Unfortunately such a person does not exist.
This form of organization is therefore suitable for the following cases.
a) Where the capital required is small and risk is not heavy since
merchandise and services of one kind are sold. E.g. magazine and
newspaper stand, bakeries teashops, rental libraries etc.
b) Where quickness in decision is needed i.e. Bullion dealers, share brokers etc.
c) Where services are sold and customer requires personnel attention egg. Patient, lawyers, dentist, cobblers, accountant.
d) Where special regard has to be shown to the tastes of the customers egg. Tailoring, restaurant, managing etc.
e) Where market is limited eg. Retail trade.
Thus sole proprietorship has its own scope of activities and continuous
to exist in spite of development of bigger organizations like
partnership and joint stock companies.
2. PARTNERSHIP
It is rare that person combines in himself all that is essential to
make him successful businessman. Beside to reap the economies of large
scale operation sole proprietor may fail to cope up with demands of
expansion. He may possess adequate capital but he may be handicapped by
the lack of experience. Skills and managerial ability. Or it may be the
other way round. Therefore a combination of two or more or more persons,
some having capital and others having skill or experience proves to be
beneficial.
According to section 4 of the Indian partnership Act of 1932,
partnership is defined as “the relating between persons, who having
agreed to share profits of a business carried on by all or any one of
them acting for all”
The above definition reveals that:
1. An agreement between partners is necessary.
2. The agreement must be in regard to the sharing of the profit of the business.
3. The business must be carried by all or any one of them acting for all.
The individual who constitute the partnership are called partners and
they collectively form the firm. The name in which there business is
carried on is called the firm name.
FEATURES OR ELEMENTS OR CHARACTERISTICS OF PARTNERSHIP
Partnership is the result of contract between two or more person who
has agreed to carry out on a business with the object of earning profit.
The followings are the main features of partnership.
1. AGREEMENT
The most important element without which partnership cannot be formed is
the agreement between the partners. It is immaterial whether the
agreement is written or oral but its existence is essential. Besides,
the agreement must be done in carrying the business and sharing of
profit.
2. NUMBERS OF PARTNERS
There must be an association of two or more person to constitute a
partnership. The maximum number of partners is 10 for banking business
and 20 for general business.
3. BUSINESS PURPOSE
The main idea of partnership is to do business and distribute the share
of profit earn during the course of business among the partners. The aim
of business must be earring of money.
4. SHARING OF PROFIT
The partners carry out business with the view to earn profit which is
distributed among them in agreed ratio. In similar way, if there is a
loss all partners are going to bear it.
5. CAPITAL
The partners provide capital from there own pockets but they can also
borrow money at their own risk. One can become partner of a firm even
without contributing any money towards the business. In that case, his
time, energy and intelligence will be regarded as capital for which he
will take a share of profit. If the partners devote the maximum amount
of his time in business he would also be paid a salary.
6. MUTUAL TRUST, CONFIDENCE AND UTMOST FAITH
All the partners must trust each other. They work in closed cooperation
to make the enterprise a success. The partnership agreement is made on
utmost trust and faith. The partners must disclose every information and
must present true accounts to one another.
7. PRESENCE OF AGENCY
The other most important element of partnership is the presence of
agency between partners. Each partner is liable for the act of other
partner. It may possible that one partner transact whole business on
behalf of other partner with their consents.
8. BUSINESS IN WIDER SENSE
The term business is very wide and it includes every kind of trade.
Profession and occupation. Thus the partnership is not confined to a
particular kind of trade or profession. Thus partnership has no
limitation of duration and it may be formed for a single transation.
9. UNLIMITED LIABILITIES
Every partner has unlimited liabilities toward the firm’s debt. The
creditors can recover debt from the personnel property of the partners.
10. NO SEPARATE LEGAL ENTITY
Generally partnership has no legal status as entity. The assets are used and liabilities are owned by the partners collectively.
11. EFFECTS OF PARTNER’S DEATH
Unless the partnership agreement provides otherwise the death of partner automatically dissolve the partnership business.
12. RESTRICTION ON RETIREMENT OF PARTNERS
The partner cannot retire without the consent of the co-partners.
The partnership organization has following types of partners.
TYPES OF PARTNERSHIP
1. ACTIVE OR WORKING PARTNER
These are those members of partnership who contribute to the capital of
the firm and taken the active part in the conduct and administration of
the business. He is considered as agent of the firm by other partners.
2. DORMANT OR SLEEPING PARTNER
They contribute to the capital of the firm but do not take any part in
management. Their names dose not appears any where as partners but in
reality they are partners. They also share profit. They are liable to
the third parties on behalf of the firm. He has every right to inspect
and copy the books of accounts.
3. NOMINAL PARTNER
He is the one who neither contribute any capital t the firm nor takes
any active part in conduct and administration of the business he only
lends the use of his name to the firm. He is not entitled to share the
profit. He is liable for all acts of firm.
4. QUASI PARTNER
A quasi partner is a retired partner who has left his capitols with the
firm as loans. He gets interest on his loan at the rate varying with the
profit of the firm.
5. LIMITED PARTNER
The liability of the limited partner is limited to the extend of his
investment in the business. Such a partner is not allowed to take part
in the management of the firm. In case of falier he cannot lose anything
from his private property.
6. MINOR PARTNER
With the consent of all partners a minor person can be admitted to the
benefits of the firms only. Such a partner cannot be held liable for the
firm’s debts.
7. SELF STYLED PARTNER
Any person who calls himself by his gesture and posture or conduct or by
his words of mouth or by written expression to be the partner of the
firm is know as self styled partner.
8. SALARIED PARTNER
Generally in professions, it is not seen that some person is admitted as
a partner who invested his capital in the business nor has interest in
goodwill of the firm such a partner is remunerated in different way.
ADVANTAGES OF PARTNERSHIP
1. LARGE AMOUNT OF CAPITAL
In sole proprietary ship the amount of capital is limited to personal
fortune and credit of one individual. In a partnership the capital can
easily be raised according to requirements by bringing additional
workers.
2. COMBINED JUDGEMENTS AND MANAGERIAL SKILLS
In partnership business there are more than one owner, it is therefore
possible to combine the abilities and knowledge of every partner to the
best interest of the business. With combine decision and judgment
business is greatly benefited and more profit is possibly earned.
3. PERSONAL INTEREST
Since each general partner is responsible not only for his acts but also
for the acts of his partners, he shall devote his personal attention
and interest to the activities of the firm and this will enable a firm
to attain maximum efficiency.
4. HIGH CREDIT STANDING
A partnership has little difficulty in obtaining credit. Especially if
the partners have their personal wealth. If there are several partners
and one of them has several extensive private means, creditors have
little reason to doubt that the debt of partnership will be paid in
fall.
5. EASE OF FORMATION
A partnership business is easy to start with as it is free from all
legal formalities. It does not suffer the legal handicaps. The business
can be easily increased or decreased to the suitable condition.
6. RETAINING OF VALUABLE PERSON/ PROVISION OF NEW BLOOD TO THE BUSINESS
New blood can be infused into the business by admitting new partners.
Then the business can utilize the genius of an enterprising young man.
7. CO-ORDINATED DECISION
The decisions which take place in the partner ship are the coordinated
decision i.e. the decision which are jointly take by all the partners.
8. LIGHTER RISK
Risk is spread here over several persons who are the partners. All the partners pool together their abilities and their income.
9. UNLIMITED LIABILITIES
Each partner has an unlimited liability towards the firm debt. The
creditors can recover the debts from the personal property of the
partners.
10. FLEXIBILITY OF THE ORGANIZATION
A partnership organization is extremely mobile, flexible and elastic. The partners are at ease to carry on any legal business.
DISADVANTAGES OF PARTNERSHIP
1. POSSIBILITY OF DISAGREEMENT BETWEEN THE PARTNERS
Two or more men start out together as close friends or as relatives.
However they may develop difference over a year that will make for
unpleasantness and inability to work together for the best interest of
their firm.
2. UNLIMITED LIABILITIES
The greatest disadvantage is that of unlimited liability of the
partners. At general partners are liable personally for the partnership
debts. Where there are heavy losses the partner having much property
will have to sustain the entire loss.
3. DIVIDED CONTROL/ DELAY IN DECISION MAKING
In the partnership more than one person is involved in every decision
reached. If partner are not active in the operations it may be necessary
to delay the making of an important decision. Therefore divided control
leads to delay in decision.
4. FROZEN OR BLOCK INVESTMENT
For an individual who wishes to invest some money in a business, the
partnership form may prove to be a poor investment from the view point
of liquidity and transferability. It is correct to say that it is easy
to invest money but is difficult to withdraw it, because it would mean
the termination of business
5. LIMITATION ON SIZE
Since maximum number of partners is 20, it might ne possible that at
some time the capital becomes short. If it happens the business has to
be converted into a joint stock company. Therefore a big business cannot
be started even if they get a chance to expand it, because the capital
of 20 people may not be sufficient.
6. NO LEGAL ENTITY
Law does not recognize a partnership as an organization having an entity existence separate from the partners who comprises it.
7. LACK OF SECRECY
Secrecy in business is necessary for its success. It is not possible sometimes in partnership.
PARTNERSHIP DEEDS OR PARTNERSHIP AGREEMENT
It is document in which the term and condition of partnership
agreement are written. Hence contract is said to be the essence of
partnership business. It can be oral or written. The written document of
partnership is known as partnership deeds. Partnership may be formed
and condition of the contract put down in black and white. The partner
is to be free from future confusions and misunderstandings. Good
relation between partners may not continue for a long time.
In future there may be difference of opinion between the partners on
some points. The differences may only be removed if the terms and
conditions are in the document to avoid future disputes and
misunderstanding between partners. A well drawn up partnership deed
usually contains the following forms:
1. Name of the firm
2. The nature and object of the business
3. The duration of the business.
4. The names and address of the partners.
5. The amount of capital of the firm and the amount contributed by each partners.
6. The ratio of sharing of profits and losses of the firm
7. The management of the firm.
8. Salaries if any paid to partners.
9. Interest on partners.
10. The rights and duties of the partners.
11. The valuation and treatment of good will in case of dissolution of the firm.
12. Rules and regulation regarding the admission of new partners and expulsion and retirement of an existing partner.
13. Appointment of an arbitrator to settle disputes if any among the partners.
14. The names of banks where firm accounts will be opened.
15. The names of auditor or who will inspect the books of accounts.
16. The names of partners who will sign the important document.
17. The procedure of the dissolution of the firm and settlement of accounts.
18. Any other clause or clauses necessary for future safety for the conveniences of the partner.
The partnership deeds must be signed by all the partners.
RULES APPLICABLE IN THE ABSENCE OF AN AGREEMENT
In the absence of any agreement, the following rules are applicable.
These rules are contained in Section 12 to 17 of the Indian Partnership
Act as adopted in Pakistan.
1. Every partner has a right to take part in the conduct of the business.
2. In case of any difference arising out in ordinary matter connected
with the business, the decision may be taken by a majority of the
partners.
3. No change can be made in the nature of the business without the consent of all the partners.
4. Partners have right to see, inspect and copy any of the books of the firm. No remuneration is allowed to any partner.
5. All the partners will share equality in the profits and contribute equally to the losses.
6. Six percent interest is to be paid on the loan advanced by any partner.
7. The partnership firm must indemnify a partner in respect of payment
made by the partner to the third party and also any liability incurred
by any partner in the ordinary and proper conduct of the business.
8. A partner must indemnify the firm for any loss caused to the firm by
his willful neglect in the conduct of the business of the firm.
9. All the property of the firm is to be held and used by the partners
exclusively for the purposes of the business. In case a partner carries
out any business competing with that of the firm, all profits made by
him in that business should be paid to the firm.
REGISTRATION OF PARTNERSHIP FIRM
The partnership act of 1932 has not made registration of the firm
compulsory in our country. It is quite optional. It depends upon the
willingness of the partners whether the firm has to be registered or
not. If they wish they can register their firm with the registrar pof
the firms by filing with him a statement containing certain information
and depositing requisite registration fees. It is essential that
statement must be signed by all the partners and should contain
following particulars;
1. the name of the firm,
2. The principal place of the business.
3. The names of the other places were firm may carry out its business.
4. The date on which each partner entered into the firm.
5. The names and permanent addresses of all the partners of the firm.
6. the duration of the firm
Now if the registrar is satisfied with the information provided and he
thinks its necessary then he will register the firm. The name of the
firm is then recorded in the register maintained for the purpose in the
office of the registrar. The partnership act does not make the
registration compulsory. However it imposes certain disabilities on the
partners of an unregistered firm. If it is not registered, it will not
be able to enforce its claim against third party against his follow
partners.
DISSOLUTION OR LIQUIDATION
A partnership may be dissolved in any of the following manners.
1. DISSOLUTION BY AGREEMENT
A partnership may be dissolved when the partner is of one opinion to
dissolve the firm, or it may be dissolved according to the contracts
between the partners.
2. DISSOLUTION ON THE HAPPENING OF CERTAIN CONTINGENCIES
a) If a partnership has been formed for a fixed term, then it can be dissolved after the expirer of the term.
b) If the partnership has been formed for carrying on one or more
venture, then it can be dissolved after completion of that venture or
ventures.
c) On the death of partner it may be resolved.
d) By adjudication of a partner as an insolvent by the court of law.
e) A partnership may be dissolved on the insolvency of itself.
3. DISSOLUTION BY NOTICE OF PARTNERSHIP AT-WILL
A partnership at will may be dissolved at any time if any one of the
partners gives notice in writing to all the partners of the firm of his
intention to dissolve the firm.
4. COMPULSORY DISSOLUTION
a) By the adjudication of all the partners or of all but one partners as insolvent.
b) By the happening of an event which makes it illegal or unlawful for the business to be carried on.
5. DISSOLUTION BY THE COURT
If any partner brings a suit in the court, the court may dissolve the firm on any on any of the following grounds.
a) When a partner becomes of unsound mind.
b) When the partner becomes permanently incapable of performing his duties as a partner.
c) When the partner becomes guilty of his misconducts in carrying on business.
d) If partner willfully commits breach of agreements in the matter of
managing the affairs of the firm or his misconducts is such that it is
not possible on the part of other partners to carry on business of the
firm with him.
e) If the partners transfers his entire share to other or his share in the firm have been changed by the court for his debts.
f) Where a partnership cannot be carried on except at a loss.
g) On any other grounds on which the court thinks just and equitable to wind up the business.
