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Chapter 2

The document discusses various forms of business ownership including sole proprietorships, partnerships, limited partnerships, corporations, limited liability companies, private/public limited companies, cooperatives, and not-for-profit corporations. It outlines key factors to consider such as control, liability, taxes, and ease of formation. For each type, the document summarizes advantages like ease of setup, capital raising ability, and taxation, as well as disadvantages such as liability, regulations, and decision making challenges. It also briefly defines mergers and acquisitions.

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ali gohar
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50 views3 pages

Chapter 2

The document discusses various forms of business ownership including sole proprietorships, partnerships, limited partnerships, corporations, limited liability companies, private/public limited companies, cooperatives, and not-for-profit corporations. It outlines key factors to consider such as control, liability, taxes, and ease of formation. For each type, the document summarizes advantages like ease of setup, capital raising ability, and taxation, as well as disadvantages such as liability, regulations, and decision making challenges. It also briefly defines mergers and acquisitions.

Uploaded by

ali gohar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Chapter 2 : Selecting a Form of Business Ownership:

Factors to Consider in choosing the appropriate legal form for your business:

• What are you willing to do to set up and operate your business?


• How much control do you want?
• Do you want to share profits with others?
• Do you want to avoid special taxes on your business?
• Do you have all the skills needed to run the business?
• What are your financing needs?
• How much liability exposure are you willing to accept?

Form of Business Ownership:


Sole Proprietorship: A sole proprietorship is a business owned by only one person. The most
common form of ownership and it is easiest and cheapest type of business to form.
You can use your own name as the name of your business, you just need a license to get started, and
once you’re in business, you’re subject to few government regulations.
Number of partners:
Minimum of 2 with a maximum of 20.

Advantages:
• Easy and inexpensive to form; few government regulations
• The owner of a sole proprietorship keeps all the profits
• Complete control over your business
• Don’t have to pay any special taxes (only income tax /self-employed tax)

Disadvantages

• Lack of skill needed to run the business


• Limited resources (must rely on your own resources)
• Unlimited liability (Personal assets will be seized in settlement of the claims)
• Not appropriate for high risk businesses

Partnership:
A partnership is a business owned jointly by two or more people.

Setting up a partnership is more complex than setting up a sole proprietorship, but it’s still relatively
easy and inexpensive and the cost varies according to size and complexity.
The Partnership Agreement:

A Partnership Agreement is an agreement between two or more individuals who would like to
manage and operate a business together to make a profit, the agreement might provide such details
as the following:

• Contributions to be made by each partner


• Division of partnership income (or loss)
• Partner responsibilities
• Conditions under which a partner can sell an interest in the company
• Conditions for dissolving the partnership
• Conditions for settling disputes

Advantages:

• Easy to establish (few government regulations)


• Easy to raise capital
• Don’t have to pay any special taxes (only income tax)
• Brings a diverse group of people together to share managerial responsibilities

Disadvantages:

• Unlimited liability for business debts on the part of the owners


• All partners are liable for the actions of other partners
• Shared decision making can result in disagreements.
• Profits must be shared
• Difficulty of transferring ownership

Limited Partnership:
In limited partnership most of the partners have limited liability, limited partners contribute in
capital, but liability confined to that amount of capital however there must be at least one general
partner in partnership who runs the business and is responsible for all business liabilities

Corporation:
A business created as a distinct legal entity composed of one or more individuals or entities that
(entity) is responsible for its own debts.

Ownership and Stock:


Corporations are owned by shareholders who invest money in the business by buying shares of
stock, the shareholders elect a board of directors, a group of people (primarily from outside the
corporation) who are legally responsible for governing the corporation. The board oversees the
major policies and decisions made by the corporation, sets goals and holds management
accountable for achieving them, and hires and evaluates the top executive, generally called the CEO
(chief executive officer). The board also approves the distribution of income to shareholders in the
form of cash payments called dividends

Advantages:
• Limited liability; personal assets cannot be seized in settlement of claims
• Easy to raise capital (IPOs, selling stocks)
• Ownership (represented by shares of stock) can be readily transferred
• life of the corporation is not limited, it exists beyond the lives of its owners
• Corporations have specialised management and are able to attract skilled and talented
employees.

Disadvantages:
• Agency Problem; The goals of corporate managers, who don’t necessarily own stock, and
shareholders, who don’t necessarily work for the company, can differ.
• Costly to set up and subject to strict government regulations
• Double taxation; Corporations pay taxes on income generated and shareholders also pay tax
on cash dividend they receive.

Other Types of Business Ownership:


limited liability company: A limited liability company is a corporate structure that combines best
aspect of partnership (single taxation) and corporation (members of the company are not personally
liable for the company's debts or liabilities)

Private Limited company; when all its shares are in private hands
Public limited company; when company shares are open to everyone/available in market

Cooperative:
A business owned and controlled by those who use its services. Individuals and firms who belong to
the cooperative join to market products, purchase supplies, and provide services for its members.
Examples: Karachi Co-operative Housing Societies Union (KCHSU), Sohrab cycles

Not-For-Profit Corporation:
An organization formed to serve some public purpose rather than for financial gain. It enjoys
favourable tax treatment
Examples
Edhi Foundation
Chhipa Welfare Association

Mergers and Acquisitions:


Merger: The combination of two companies to form a new company
Merger of METRO Cash & Carry Pakistan and Makro-Habib Pakistan

An acquisition: The purchase of one company by another with no new company being formed
Telenor Pakistan acquired Tameer Bank

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