Business & society

Common forms of business on

the basis of ownership
Week-4

1
 Start of Business

Selection of Form of Ownership

Sole Proprietorship Partnership Company Cooperative societies

No legal Governed by Governed by

formality, so its Partnership Act, Companies Act,
formation is easy 1932 2017

Registration is Registration is
optional mandatory

Procedure:
Unregistered Registered 1) Promotion stage
firm firm 2) Incorporation stage
3) Subscription stage
No procedure Procedure: 4) Commencement
1) Submission stage
of application
to registrar
2) Certification

Figure 6.1: Entrepreneurial Activities & Forms of Ownership

2
Sole-proprietorship
• Single owner business
Pros/Advantage Cons/Disadvantages
∙ Easy to set-up ∙ Unlimited liability
∙ Less capital required ∙ No separate legal entity
∙ The owner has complete control ∙ May face intense competition by large
∙ The owner is not answerable to anyone firms
(autonomy) ∙ No specialization or division of labour, as a
∙ The owner keeps all profit burden is on the shoulders of the owner
∙ Able to choose the way of working ∙ Difficult to arrange capital
∙ A close personal relationship with internal ∙ Long hours necessary to make a business
and external stakeholders can be profitable
maintained ∙ Business is dependent upon one’s
∙ Business can be based on the knowledge, Knowledge, skills & abilities (KSAs)
skills, and abilities of the owner (KSAs) ∙ Business life depends upon owners’ health
3
Partnership
According to section 4 of the Partnership Act 1932,
• “Partnership is the relation between persons who have agreed to
share the profits of a business carried on by all or any of them acting
for all”.
Partnership act considers partnership, partner, firm, or firm name while
explaining the concept of partnership.
• Persons who have entered into a partnership with one another are
called individually “partners” and collectively “a firm”, and the name
under which their business is carried on is called the “firm name”
(Section-4)
4
Features of Partnership
• The partnership only exists when there is an agreement (Sec-5)
• For instance, a businesswoman marries a person, the husband by his status
could not be considered a partner
• Mode of determining the existence of partnership (Sec-6)
• Merely receiving profits, or payments from the business does not make one a
partner of the business. For instance, a minor may receive profits for
investment in a partnership made by his father, but that minor can not claim
rights of partner.
• Partnership at will (Sec-7)
• If there is no stipulated time mentioned in the partnership
contract/agreement, then the partnership would be considered at will
5
Features of Partnership
• Particular Partnership (Sec-8)
• A partnership established for a particular adventure is called a particular
partnership
• Number of partners
• A partnership should have at least two partners, while the maximum number
of partners may not exceed 20. According to the Companies Act 2017, if the
number of partners increases by 20 the firm should register as a company
[Part. IV, Sec.1]

6
Pros & cons of Partnership
Pros/Advantage Cons/Disadvantages
∙ Easy to set-up ∙ Unlimited liability
∙ Minimum legal formalities ∙ No separate legal entity
∙ Synergistic effects ∙ Risk of dissolution
∙ Greater financial resources ∙ Possibility of disagreement
∙ Higher credit standing ∙ Lack of public confidence
∙ Flexibility ∙ Possibility of fraud
∙ Risk sharing ∙ May face intense competition by large
∙ Better decisions firms
∙ Spirit of cooperation ∙ Business is dependent upon partner
∙ A close personal relationship with Knowledge, skills & abilities (KSAs) of its
internal and external stakeholders can partners
be maintained
∙ Easy dissolution

7
Types of partnerships
• Unlimited/conventional partnership - It’s the conventional form of partnership where the
liability of the partners is unlimited and their personal property can be utilized to settle
the debts.
• Limited partnership - It’s a special form of partnership where the liability of one or more
partners is limited (up to the amount invested in the business). Such a form of a partner is
called special partners. This form of partnership has been introduced in Pakistan through
the Limited Liability Partnership Act of 2017.
• Particular partnership [Sec. 8 & 42(b)] - A firm that is established for a specific adventure
or undertaking is called a particular partnership. The completion of undertaking leads to
the dissolution of such a firm.
• Partnership at will (Sec. 7) - When the duration of partnership is not specified in the
partnership agreement, then the firm may be dissolved by partners at their will. Such
firms are called partnership at will.
• Partnership for a specific period [Sec. 17(b)] - A partnership firm may be established for a
specific period. But at the end of duration partners may willfully continue their business.

8
Types of partners
• Active partner – The partner who actively engages in affairs of business and is
known to the general public as a partner. It’s also called managing or working
partner.
• Silent partner – A partner who does not participate in the management of the
business but is publically known as the partner.
• Secret partner – is one who is active in business affairs but is not known to the
public as a partner
• Sleeping partner – A partner who neither participates in management nor is
publically known as a partner of the firm
• Limited partner – a partner who has limited liability. Such partners cannot
participate in business affairs.
• Nominal partner – a partner who allows using his name as a partner, but neither
invests capital nor takes an active part in business affairs

9
Types of partners
• Partner by Estoppel– one who is not a partner of the firm, but
represents himself as a partner to a third party, and that party gives
credit to the firm on behalf of that partner.
• Partner in profits – one who has a share in profits only and does not
bear losses. Such partners, like limited partners, cannot participate in
business affairs.
• Minor partner – Section 30 of the partnership act allows entering
minor as a partner for the benefit of the firm with the consent of all
the partners. His right to property and profits is agreed upon by
partners. Minor’s share is liable for acts of firm, but the minor is not
personally liable.

10
Duties of partners
• General duties of partners (Sec. 9) – According to the Partnership Act, 1932 partners are
bound to carry out businesses with the purpose of common advantage.
• Indemnification of losses caused by fraud [Sec. 10 & 13(f)] – If a partner causes a loss due
to his fraudulent activity or willful neglect, he/she is bound to indemnify that loss.
• Rights and duties among the partners (Sec. 11) – The rights and duties among the
partners may be determined by the agreement. The agreement may be expressed or
implied by the course of dealing.
• Application of the property of the firm (Sec. 15) – The property of the business should
only be used for business.
• Personal profits earned by partners [Sec. 16 (a, b)] – If a partner uses the firm property
for personal purpose or establishes a business that competes with the firm the partner is
liable to pay the amount of use of property or profits made by the competing business.
• Partner as an agent of the firm (Sec. 18) – A partner as agent of the firm for business
activities.
• Partner’s authority in an emergency (Sec. 21) – A partner has the authority to act in an
emergency to protect the firm from loss.
11
Rights of partners
• Conduct of business – participate in management (Sec. 12) – Every partner has equal right to participate in the
management of business
• Conduct of business – inspect books of accounts (Sec. 12) – Every partner has equal rights to inspect books of
accounts of a business
• Conduct of business – Expression of opinion (Sec. 12) – Every partner has equal rights to express his opinion in
the affairs of a business
• Conduct of business – settlement of differences (Sec. 12) – Every partner has equal rights to differ and the
difference would be resolved by the majority of the partners
• Conduct of business – the value of opinion (Sec. 12) – Every partner can express his opinion and differ, but
changes like a business can only be done with the consent of all the partners.
• Right to receive remuneration [Sec. 13 (a)] – A partner is not entitled to received remuneration for services
rendered in the management affairs of a business
• Right to have equal right in profit and loss [Sec. 13 (b)] – Every partner has equal rights on the profit and duties
in case of losses in business
• Right to receive interest on capital and advances [Sec. 13 (c & d)] – Every partner has the right to be paid
interest on capital and advances made to the firm
• Right to be indemnified [Sec. 13 (e)] – Every partner has the right to be indemnified for any payment made or
liabilities incurred by him in the conduct of business processes.
12
Liabilities of partners
• Liability for personal profits earned by partner (Sec. 16) – Every profit earned with, any
partner, with the name of the firm should be paid back to the firm.
• Liability for an act of a partner (Sec. 25) – Every partner is liable, jointly with all the other
partners and also severally, for all acts of the firm done while he is a partner
• Liability for wrongful acts (Sec. 26) – When one partner, while working for the firm,
causes any loss or damage to the third party both the partner and firm, and liable for such
loss/damage.
• Holding out [Sec. 28 (1)] – Anyone who by words spoken or written or by conduct
represents himself, or knowingly permits himself to be represented, to be a partner in a
firm, is liable as a partner in that firm.
• Liability of incoming partner [Sec. 31(2)] – Any person is not liable for anything before his
introduction as a partner of the firm.
• Liability of outgoing/retiring partner [Sec. 32(2)] – A retiring partner may be discharged
from liability to a third party by agreement with that party and newly reconstituted firm.
• Liability of deceased partner (Sec. 35) – A deceased partner is not liable for anything after
his death.
13
Registration of partnership firm
• Registration of a partnership firm is optional, as it’s up to the will of
partners to decide on the registration of the firm.
• Effects of non-registration
• No suit between partners and firm [Sec. 69(1)] – a partner of an unregistered
firm can neither sue any partner or firm
• No suit between a firm and third party [Sec. 69(2)] – an unregistered firm
cannot sue any third party, and a partner has to prove that he is a partner of a
registered firm to sue.
• No claim is set-off [Sec. 69(3)] – an unregistered firm cannot set off any claim
• An unregistered firm, on the other hand, can be sued by its partners
or third party.

14
Registration of partnership firm
• Submission of application (Sec. 58)
• Application should be submitted to registrar of partnership (Industries Commerce &
Investment Department, Punjab)
• The application should cover:
• Partnership deed
• Copy of CNIC of all partners
• Copy of CNIC of two witnesses
• Utility bill (as evidence of partnership business)
• Copy of partnership deed attested by notary public
• Certification
• Within 8-10 days of application (if it is complete)
• After registration
• Firm bank account
• Partners NTN
• Firm NTN
• Sales tax registration
• Chamber of Commerce registration (for import export business only)
15
Post registration
• Change in particulars
• Penalty for furnishing false particulars
• Imprisonment of three months, or fine, or both are imposed on the provision of
false particulars to a registrar of firms.
• Partnership deed
• Name of partners
• Addresses of partners
• Location of business (complete address)
• Nature of business
• Capital invested by partners
• Duration, if specified
• The ratio of profit and loss sharing
• Interest on capital and loan, if admissible
• Amount of salary payable to any partner
• Circumstances under which a firm may dissolve
• The methods of solving a dispute, if any
16
 Group Task
• Make a group and assume yourself as partners of the firm!
• Now complete the steps of firm registration, except fee deposit and
submission of documents!
• Follow the given link and prepare all the documents mentioned over
there (https://business.punjab.gov.pk/guides-registration).
• Prepare a report and present in the class!

17
Dissolution of firm
• The dissolution of a partnership between all partners of a firm is called the “dissolution of
the firm” (Sec. 39).
• Dissolution by agreement (Sec. 40) - A firm may be dissolved with the consent of all the
partners or by a contract between the partners.
• Compulsory dissolution (Sec. 41) - A partnership is dissolved by compulsion when (a)
except one all partners are insolvent, and (b) the business carried out by the firm becomes
unlawful.
• Contingent dissolution [Sec. 42 (a-d)] - Subject to contract between the partners a firm is
dissolved:
• on expiry of the fixed term, (b) after completion of adventure or undertaking for which partnership
was formed, (c) by the death of a partner, and (d) if a partner is declared insolvent.
• Dissolution by notice (Sec. 43) - Where the partnership is at will, the firm may be
dissolved by any partner giving notice in writing to all the other partners of his intention
to dissolve the firm. The firm is dissolved as from the date mentioned in the notice as the
date of dissolution or, if no date is so mentioned, as from the date of the communication
of the notice.

18
Dissolution of firm
• Dissolution by court [Sec. 44 (a-g)] - When a partner files a suit, the
court may dissolve the firm on the following grounds:
• a partner has become of unsound mind,
• a partner, other than the one who is suing, has become incapable to perform
his partner’s duties,
• a partner, other than the suing partner, is guilty of misconduct,
• a partner, other than suing partner, willfully commits a breach of agreement,
• a partner, other than suing partner, has transferred his partnership rights to
third party,
• business cannot be carried out due to losses, and (g) any other cause that
can justify the dissolution of a firm.

19
Activity # 6.3
• Visit your nearby market/bazaar and talk to five shopkeepers. Inquire
them for the form of their business ownership (i.e.
sole-proprietorship or partnership) and ask them why they opted for
that ownership structure?

20
Case study
Mr. Ali is a repatriate from England. He spent 20 years over there. But his love
for the country forced him to move back to the roots. So he mustered up all
of his resources and landed back in the country. He is intending to invest in
various businesses in Pakistan where real estate, grocery stores, and
restaurants are the most attractive options in his eyes. He is also curious to
know about the environment and suitable form of ownership for his business
(sole proprietorship or partnership). Based on the case facts answer the
following questions:
Activity # 6.4:
• Considering the pros and cons of both sole proprietorship and partnership,
create a note on the form of ownership you would like to recommend.
• How Mr. Ali can use the macro and micro external environment in making
an investment decision?

21
Concept Test (fill the table to test your understanding)
Difference Sole-Proprietorship Partnership
Law No law Partnership Act, 1932 + LLP Act, 2017
No. of owners 1 2 – 20
Agreement Single owner so no agreement needed Yes (written or oral)

Transfer of Easy because of single ownership Would have to inform other partners
ownership

Liability Unlimited Unlimited or limited

Separate legal No Yes if business is registered

entity
22