Forms of Business

SOLE PROPRIETORSHIP

Definition
“The proprietorship is that form of business organization which is owned, managed and
controlled by a single individual who receives all the profits and risks all his property in the
success or failure of the enterprise.”

Example of Sole Trader ship

Following business are the general examples of sole proprietorship:

1. Retailer
2. Painters
3. Restaurant
4. Tourist guide
5. Barber
6. Beauty parlor
7. Doctor
8. Petrol pumps.

Merits of Sole Proprietorship

The following are the advantages of sole proprietorship:
1. Easy formation:
It is very easy to form a sole proprietorship. No legal formalities like registration are required to
start it. A lawful business can be started at any time. If a license is necessary to do any particular
business, it may be obtained from the concerned department.
2. Minimum legal restrictions:
There is no special law to govern the working of sole proprietorship. The government
generally does not interfere in the activities of sole proprietor.
3. Sole authority:
The sole proprietor has full authority to manage his business as he likes. He prepares the
plan, invests his money, supervises the business and enjoys the profit. He is the king of his
business.
4. Sole claim on profit:
The sole trader receives full profits of the business. No one other than sole trader can claim
the profits of the business. He also bears the full risks of loss.
5. Freedom of action:
In matters of business dealing, the sole trader can take his own decisions. He is not bound
to consult anybody. This type of freedom of action promotes initiative and self-reliance.
6. Quick decision:
One-man business is best to take quick decisions. As there is no need to consult any other
person, so the sole trader can take prompt decisions on all important issues. This enables a sole
trader to avail business opportunities. This is not possible in a partnership or in a company where
consultation is must to take any decision.
 7. Secrecy:
Secrecy is very important for the success of a small business. A sole trader is in a position to
maintain secrecy. As there is no legal obligation to supply ant information regarding his business
to any one, so he can maintain secrecy in all matters.
8. Easy dissolution:
The dissolution of sole proprietorship is very easy. The owner can sell his business to any person
if he wants to do so. There is no complicated procedure for the dissolution of sole-trader ship.
9. Inexpensive management:
The sole trader is the owner, manager and controller of the business. There is no nee dot employ
qualified and experienced persons for supervision of business. He can personally look after all
the affairs of his business. In this way, he can reduce the management cost. The minimum
management expenses increase the profit.

Disadvantage/Demerits of Sole Proprietorship

There are certain serious disadvantages which a sole trader has to face in operating this form of
business. These disadvantages in brief, are as follows:
1. Unlimited liability:
The liability of sole trader is unlimited. Not only his business property, but also his personal
property is liable to pay his business debts. The creditors have the right to recover their amount
of loan from the business and personal assets of the owner.
2. Limited managerial ability:
The managerial ability of sole trader is limited. While running business many problems arise and
it may not be possible for one person to solve them. Again, sole trader may not be an expert in
performing every function like purchasing, selling, accounting and making correspondence. He
may be expert in accountsbut not in purchases.
3. Limited capital:
In this form of organization only one person is responsible for the supply of capital. The trader
provides capital from his personal sources. He cannot invest further after a certain limit.
4. Limited expansion:
A successful business grows in size. But limited managerial ability and limited capital resources
of sole trader do not allow the expansion of the sole trading business beyond a certain limit.
5. Uncertain duration:
A sole trading business suffers from uncertain future. Any uncertain events happening in the
personal life of the sole trader will disturb the smooth running of his business. The business
comes to an end on the disability, insolvency or death of the sole trader.
6. Chances of wrong decision:
The sole trader takes all the decisions. He is all in all. His decisions are based on individual
judgment and skill. There is nobody to assist him in taking important decision that’s why his
decisions can be wrong.
7. Loss in absence:
A sole proprietorship has to suffer from the absence of proprietor. The business in his absence
comes to a standstill.
 8. Unsuitable for a developing business:
When a business grows in size, this form of organization cannot meet the needs of expanding
business.

PARTNERSHIP

Definition
Partnership as such is an agreement between two or more persons to carry on business with profit
motive, carried on by all or any one of them acting for all.

FEATURES OF PARTNERSHIP

The essential features and characteristics of a partnership are:

1. Agreement: The partnership arises out of an agreement between two or more persons.

2. Profit and Loss Sharing:There is an agreement among the partners to share the profits
earned and losses incurred in partnership business.
3. Lawful business: The business to be carried on by a partnership must always be lawful.

4. Membership: There must be at least two persons to form a partnership. The maximum
number is 20. But in case of banking business the maximum is 10 members.

5. Unlimited liability: The liability of every partner is unlimited, joint and several.
6. Principal-agent relationship: Every partner is an agent of the firm. He can act on behalf of
the firm. He is responsible for his own acts and also for the acts done on behalf of the other
partners.
7. Collective management: The firm and the partners are one. When a contract is made in the
name of the firm all the partners are responsible for it individually and collectively.

8. 8. Non-transferability of shares: A partner cannot transfer his share of interest to others

without the consent of the other partners.

ADVANTAGES OF PARTNERSHIP

The following are the advantages of partnership business:

1.Easy to form: A partnership firm can be formed without any legal formalities and expenses.
Even if the firm is to be registered, the expenses are not much compared to company form of
organization.
2. Access to more capital: A firm consists of more than one person. Therefore it can secure
more capital from combined resources.
3. Skill and talent: Talented persons may be taken as partners. More skill and talent will be
available.
4. Borrowing capacity: The creditors will lend Loans not only on the basis of the firm’s assets
but also based on the personal properties of the partners. So the borrowing capacity of a firm is
more.
5. Expansion of business: Due to the availability of sufficient finance and skill the business can
be expanded very easily.

1. Wise decisions: In partnership, decisions are taken with the consultation of all the partners.
So naturally the decisions are wiser and more beneficial.

2. Flexibility: Changes in the business can be adopted easily. There are no legal restrictions.

3. Division of risks: All losses and risks of the business are shared by all the partners. So risky
ventures can also be taken up.

Disadvantages of Partnership
The following are the disadvantages of a partnership firm:
1. Division of responsibility: In a partnership the management is divided. As such
responsibilities are also divided. Every partner might try to shift the burden on to the
shoulders of others; finally none takes the responsibility properly.
2. Delay in decisions: Sometimes the partners may not agree with one another in taking
decisions. As a result partners will not be in a position to take quick decisions.
3. Lack of continuity: A partnership gets dissolved on the death, insolvency, insanity or
retirement of any partner. So, there is no guarantee for the continuity of the firm.
4. No transferability of share: In a firm the partner cannot transfer his share of interest to
others without the consent of the other partners.
5. Lack of secrecy: It may not be possible to maintain secrecy in partnership because of the
number of partners.
6. Unlimited liability: The creditors of a firm can recover their loan amounts from the personal
properties of the partners when the firm’s sources are not enough. Therefore the personal
properties of the partners are not safe..
7. Internal conflicts: Differences and disputes among the partners are very common. These
conflicts harm the firm as a whole.
8. Misuse of assets: The partners may use the assets of the firm for their personal purposes.
Misuse of assets is harmful to business interests.
 JOINT STOCK COMPANY

Definition
Thus, a joint stock company is an incorporated association of persons having a separate legal
existence, with a perpetual succession and common seal.

FEATURES OF A JOINT STOCK COMPANY

1. Separate legal existence: A company has a distinct and separate legal entity, independent
of its members. It means that the company can own property, make contracts, and file suits
in its own name. Shareholders are not the joint owners of the company's property. A
shareholder cannot be held liable for the acts of the company. A creditor of the company is
not the creditor of its members.

2. Perpetual succession: Perpetual succession means continuous existence. A company is

creation of the law and only law can bring it to an end. Its life does not depend on the life of
its members. The death, insolvency or lunacy of a member does not affect the life of the
company. It continues to exist even if all its members die. Members may come and go but
the company goes on till it is wound up.

3. Limited liability: As a separate legal entity, its members cannot be held liable for the debts
of the company. The liability of every member is limited to nominal value of the shares
bought by him or the amount of the guarantee given by him

4. Transferability of shares: The capital of a company is divided into parts each part called a
share. These shares are generally transferable. A shareholder is free to withdraw his
membership from the company by transferring his shares.

5. Common seal: Being an artificial entity, a company cannot act and sign itself. Therefore, it
acts through human beings. All the acts of the company are authorized through its common
seal. The common seal is an official signature of the company. This common seal is valid
only if signed by at least two members of the Board of Directors.

MERITS OF A JOINT STOCK COMPANY

1. Large capital resources: A joint stock company has widespread appeal to the investors of
all the types. Its capital is divided into shares of small value so that the people with limited
means can also buy them. A public company can have unlimited number of members in the
form of shareholders. The credit standing of the company is also very high which means that
the banks and other financial institutions shall readily give loans and advances to them.
 Hence, a company can accumulate large financial resources for large-scale enterprises and
projects.

2. Limited liability: The liability of a member of a company is limited to the value of the
shares of the company held by him, if unpaid. Thus, the risk is known and estimated. This
principle encourages the member to invest in a joint stock company. The risk of loss id
divided among am large number of persons.

3. Continuity of existence: A joint stock company enjoys uninterrupted existence over a long
period of time. As a company has separate entity, the death and insolvency of all or one
member cannot threaten its existence.

4. Efficient management: A company can employ highly qualified experts in different areas
of business management. Employment of professional management helps in improving the
efficiency of business transactions. The combined judgement and experience of several
directors facilitate balanced and rational decisions. Centralized management permits unity of
action and continuity of policy.

5. Economies of scale: The company form of business organization provides tremendous

scope for growth and expansion. Large capital and professional management facilitate large
scale operations. Hence, a company can fully secure the advantage of large scale operations,
marketing and finance.

DEMERITS OF A JOINT STOCK COMPANY

1. Legal formalities: Formation of a company is time consuming and expensive process. Too
many legal formalities have to be observed and several legal documents have to be prepared
and filed. Delay in formation may deprive the business of the momentum of an early start.

2. Delay in decisions:

3. Corrupt management: In a company, there is a danger of fraud and misuse of property by

dishonest management. Clever and dishonest promoters may exploit the small and ignorant
investors for their personal gain.

4. Conflict of interests: There is a possibility of conflict between various groups like

shareholders, debenture holders, directors etc. Such conflicts reduce employee morale and
efficiency of operations.
ASSIGNMENT

History of Entrepreneurship: Are entrepreneurs born or made? Can entrepreneurship be taught

and learned? What has history taught us about these questions?

Social Entrepreneurship: Is social entrepreneurship different than for-profit entrepreneurship?

Why or why not?

Entrepreneurial Finance

Informal institutions as a driver of entrepreneurial activity

Law for the Entrepreneur and Manager,

Managing Innovation and Entrepreneurship