Chapter-02

Forms of Business Ownership

 To discuss the advantages and disadvantages of sole proprietorships.

2.1 What types of business is right for you?

Each form of business ownership has advantages and disadvantages. If you are planning to go into business,
you need to review these pros and cons and determine which form of ownership meets yours need, style,
and talents. A person thinking about owning a business should examine the following factors:

 Capital requirement- the amount of funds necessary to finance the operation.

 Risk- the amount of personal property a person is willing to lose by starting the business.

 Control- The amount of authority the owner exercises.

 Time requirement- The time needed to operate the business and provide guidance to the
employees.

 Tax Liability- What taxes a business must pay to various governments on earnings of the business.

2.2 Forms of Business Ownership

There are different forms of business ownership, each with its own structure, features, legal requirements,
and suitability depending on the size, purpose, and nature of the business. Different forms of business
ownership are as follow:

a) Sole Proprietorship
The business that is owned and controlled by a single person or individual is known as sole proprietorship
or single proprietorship business. This is the oldest and most common form of private business ownership
in the world. A single owner is the absolute possessor of the business. The capital (money) needed to start
and operate the business is normally provided by the owner through personal wealth or borrowed money.
It is not legally separate from the owner, who bears unlimited liability (personal assets are at risk) for all
debts and obligations of the business.

In the words of Gloss & Baker, “A sole proprietorship is a business owned by one person and operated for
his profit”.

1|Page
B .O. Wheeler defines sole proprietorship as “The forms of business ownership which is owned and
controlled by a single individual”.

Advantages of Sole Proprietorship

The sole proprietorship form of business is the simplest and common in our country. It has the following
advantages:

 Ease of Formation: Any person or individual can easily open a proprietorship business. The sole
proprietorship is the easiest and least expensive form of business to create. Normally once a sole
proprietor has decided on a product or service to sell, he or she is in business. Legal requirements are
minimal.
 Retains all profit: As the sole owner, a proprietor is entitled to retain all profits. The profits of the
business flow directly to the owner.
 Freedom in Decision Making: A proprietor is free to take any decision on his/her own. As the owner
and the boss, the sole proprietor enjoys freedom and flexibility in decision making. The decisions can
be made promptly, without consulting others.
 Personal Satisfaction: Sole proprietors can enjoy the satisfaction that comes from personal
achievement. Entrepreneurs who form sole proprietorships are highly motivated to achieve, desire
independence, and place success or failure solely within their abilities.
 Ease of Dissolution: A sole proprietor can be ended as easily as it was. No legal formalities should be
maintained. In case of continued losses or business failure or bankruptcy, business needs to be closed.
This termination is very easier in case of proprietorship than that of partnership firms or companies.
 Tax Advantage: Sole proprietorships are not taxed as a business. The income of the business becomes
the income of the owner and is taxed as personal income. A sole proprietorship business enjoys the
minimum tax burden as compared to other forms of organizations.
 Sole or Individual Authority: This means that there is only one single man in this business, which
manages and control the total system of the sole trade business. He can put as much money he can in
the business because he has complete control over his business.
 Direct Relations with Customers: It means that the relation of a sole proprietorship is seen as a very
bigger factor than its customers because he knows his customer’s tastes and preferences very well and
also deals them very well.
 Creation of Employment Facilities: It means a sole proprietor owns a specific business and helps to
create the employment opportunities for the public in our society or community. Through this facility,
a sole proprietor can expand his business, as well as some people’s source of income.
 Secrecy: Owner is the only decision maker and confidential information is limited to him or her.

2|Page
Disadvantages of Sole Proprietorship

Sole proprietorship business also suffers from some disadvantages, which are as follows:

 Unlimited Liability: One of the most serious disadvantages of a sole proprietorship is unlimited
liability. This refers to the owner’s personal responsibility for any debts or damages incurred by the
operation of a business. If the business does not have enough money to pay its bills, the proprietor has
to pay them from his personal assets.
 Limited Funds for Expansion: A sole proprietorship’s financing consists of what the owner can
contribute and borrow. Borrowing ability depends on the value of the proprietor’s business and personal
assets. In addition, lenders may be somewhat reluctant to risk their funds on an unproved operation
whose success depends on one person.
 Lack of Business and Management skills: By its nature a sole proprietorship places the demands for
business and management skills on one person- the owner. One person can hardly be an expert in such
broad and diverse fields as finance, accounting, marketing, production and law. As a result, managing
a sole proprietorship is often difficult, and success may be impeded by the owner’s limitations.
 Increased Stress and Pressure: As a sole proprietor, one will have to be accountable for any and all
of decisions made in his/her business. This could mean more stress and less time available for his/her
family and personal life.
 Unavailability of Counseling: Large Corporation have shareholders and board members who gather
and consult before making big decisions. On the other hand, sole proprietors don’t have access to these
kinds of resources.

b) Partnership Business

A partnership is a business owned and run by two or more persons who shares profits, losses, and
responsibilities. It is governed by a partnership agreement and can be either registered or unregistered.

When two or more persons develop a contractual relationship between or among them for doing certain
type of business, it is called a partnership business. A partnership is a form of business where two or more
people share ownership, as well as the responsibility for managing the business and the income or losses
the business generates. The person carrying on such a business is known as ''Partner". The relation that
exists among them is known as "Partnership".

According to Indian Partnership Act of 1932, "Partnership is the relation between persons who have
agreed to share profits of a business carried on by all or any of them acting for all".

According to American Partnership Act, "Partnership is an association of two or more persons to carry
on as co-owners of a business for profit".

3|Page
Some information about Partnership Business:

 There must be an agreement or contract

 Motive is to earn and share profit

 Profits are shared as per agreement

Advantages of Partnership Business

Partnership business has certain advantages over and above proprietorship business. These advantages are
as follows:

 Ease of Formation: Like proprietorship, partnerships are easy to form, manage and run. They are less
strictly regulated than companies, in terms of the laws governing the formation and because the partners
have the only say in the way the business is run. They are far more flexible in terms of management, as
long as all the partners can agree.
 Pooling of Knowledge and Skills: In a partnership two or more persons can pool their knowledge and
skills and operate more effectively than one person might. Different persons possess different skill and
expertise. For example, one partner can provide management expertise while another provides
marketing skills.
 Availability of funds: By pooling their financial resources, partners have more money available for
meeting the financial needs of their business. These combined assets often give a general partnership a
better credit rating than that of a sole proprietorship.
 Shared Responsibility: Partners can share the responsibility of the running of the business. This will
allow them to make the most of their abilities. Rather than splitting the management and taking an equal
share of each business task, they might well split the work according to their skills.
 Ability to Attract and Retain Employees: Sole-proprietorship often have trouble attracting and
retaining superior employees because there are few opportunities for advancement. A partnership can
overcome this, however, because valuable employees can be made modern partners in the firm.
 Decision Making: Partners share the decision making and can help each other out when they need to.
More, partners mean more brains that can be picked for business ideas and for the solving of problems
that the business encounters.
 Risk Sharing: Sharing of risk is another important advantage of partnership business. A partnership
firm is frequently made up of a large number of people. Because the members agree to split earnings
and losses equally, the risk is shared by all.
 Tax Advantage: As with a sole proprietorship, the profit from a partnership venture is not taxed as a
business. Any profits become personal income of the partners and are taxed as personal income.
Partnership business pays less income tax and do not pay tax on their profits.

4|Page
Disadvantages of Partnership Business
Sole proprietorship business also suffers from some disadvantages, which are as follows:

 Unlimited Liability: Each partner is personally liable for the financial obligations for the firm. If one
partner incurs liabilities in the name of the partnership that exceed the wealth of the business and his or
her personal wealth, the other partner assets might be used to pay off the debts.
 Future Selling Complications: As circumstances change in the future, partner may wish to sell the
business. This could present difficulties if one of the partners isn’t interested in selling.
 Potential Conflict between Partners: Partners sometimes have scant knowledge of each other’s
characteristics before they begin business. But a host of issues can surface that may make working with
a partner difficult. For example- conflicts can arise from differences of opinion or from unequal effort
put into the business. One partner may not pull his or her own weight. Relationships can sour.
 Difficulty in Dissolving the Business: Once the partnership is formed, a partner cannot withdraw from
the business by selling his or her partnership investment without the other partner’s consent. If a partner
decides that forming a partnership was a mistake that partnership interest would have to be sold
someone who was acceptable to all partners.

c) State Enterprise
A state enterprise (or public sector undertaking) is a business owned and operated by the government. It
is created to provide essential services or manage key industries. Examples: Bangladesh Railway.
Features:
o Funded and managed by the central or state government
o Established for public welfare or strategic control

d) Co-operative Society
A co-operative society is a voluntary association of individuals who come together to promote mutual
economic interests. It is registered under the Co-operative Societies Act and follows the principle of “one
member, one vote.” Every member, regardless of how much capital or shares they contribute, has only one
vote in decision-making. Unlike companies (where voting power depends on the number of shares), wealth
or investment size does not give more control. It ensures democratic control—every member has an equal
say in important matters like electing the managing committee or passing resolutions.

Features:
o Each member is treated equally, where members have limited liability
o Democratic management
o Members share benefits and responsibilities
o Service-oriented rather than profit-driven

5|Page
 e) Company

A company is a natural legal entity formed by the association and group of people to work together towards
achieving a common objective. A company (or corporation) is a business organization formed under the
Companies Act. It has a separate legal identity from its owners (shareholders), who enjoy limited
liability. It can be a commercial or an industrial enterprise. A joint stock company is an artificial person
owned by shareholders having limited liability, operates under incorporating Act and sharing profits and
losses as per ownership. It has perpetual existence having separate entity and working on its own name.
Though a company is regarded a legal person, it possesses similar rights and owes similar obligations like
a natural person.

Differences between Public and Private Limited Company

Public Limited Company Private Limited Company

Minimum number of members are 7 and maximum Minimum number of members are 2 and maximum
limited by number of shares. number of members are 50.
Shares are easily transferable. Transfer is not easy rather restricted.

Public are invited to purchase share by issuing Invitation to sale shares of the company is prohibited.
prospectus.

To be a director, the minimum number stated as There is no requirement of purchasing qualifying

Public limited can start business after getting It can start business on getting certificate of
certificate of incorporation and then getting incorporation.
certificate of commencement.
Public limited company can allot shares after Shares of private company limited can be allotted
minimum subscription is raised. without raising minimum subscription.

6|Page
Summary table of five main types of business ownership:
Feature Sole Partnership Company Co-operative State Enterprise
Proprietorship (Corporation) Society
Ownership One individual Two or more Shareholders Members (typically Government
individuals (max consumers, (central or state)
varies by producers, or
country) workers)
Legal Status Not a separate Not a separate Separate legal Separate legal entity Separate legal entity
legal entity legal entity entity
Liability Unlimited Unlimited (can Limited to the Limited liability Limited liability
be limited in amount of
LLPs) shareholding
Formation Easy, minimal Moderate legal Requires Requires Formed by special
legal formalities formalities registration registration under act or government
under Co-operative notification
Companies Act Societies Act
Capital Limited to Pooled by Raised from Raised from Financed by
owner's partners shareholders members and government
resources via shares government
subsidies
Management Owner-managed Managed by Managed by Democratic— Managed by
partners Board of managed by elected government-
Directors committee appointed officials
Profit All profits to Shared among Distributed as Distributed among Usually reinvested
Distribution owner partners dividends to members based on or returned to
shareholders usage/contribution government
Continuity Ends with death May dissolve on Perpetual Continues despite Continues unless
or decision of partner succession changes in dissolved by
owner exit/death unless membership government
otherwise
agreed
Objective Profit-making Profit-making Profit-making Service to members Service to public
and shareholder and economic
value development
Examples Local shop, Law firm, Apple, Reliance Dairy co-op, credit Bangladesh
freelancer medical practice Industries, Tata union Railway, Biman
Group, Infosys, Bangladesh Airlines
Microsoft

7|Page