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Forms of Ownership of Business

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19 views24 pages

Forms of Ownership of Business

Uploaded by

aish160502
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 PPTX, PDF, TXT or read online on Scribd
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Forms of Ownership of

Business
Three basic forms of business ownership
•Depends on needs & goals

•Sole proprietorship

•Partnership

•Corporation

•Limited Liability Company


Sole proprietorship
• An Indian Citizen

• Sole trader is a person who owns and operates their own


business.

• May or may not employ other people.

• Sole trader is usually a relatively small business with little


capital available for expansion

• Capital comes from one source and that is the owner.

• Sole traders are common businesses.


Advantages of sole proprietorships
• Easy and inexpensive to create.

• Government intervention is minimal.

• Owner makes all business decisions & has control over all aspects
of the business.

• Flexibility in scheduling to meet owner’s needs.

• Easy to establish and run

•Total control

• Flexibility
Advantages of sole proprietorships cont.

• Owner receives all profits.

• Privacy – owner is the only one who knows


details of the business

• Secret ideas, formulas, or recipes

• Ability to act quickly in making decisions – no


approval from others
Advantages of sole proprietorships cont.

• Tax advantages
• Business itself pays no taxes
• Taxes are paid as personal income of owner
which is usually lower than corporate taxes

•Easy to close/dissolve
• Pay employees and creditors
• Sell your equipment
• Notify customers if possible
Disadvantages of sole proprietorships
•Owner has unlimited liability for all debts
• Unlimited liability: The debts of the business may be paid from
the personal assets of the owner.
• If business debt is not paid with business income, bill
collectors can take personal assets (home, car)

• Difficult to raise capital.


• Banks/lenders consider sole proprietorships to be a high-risk
investment
• Needs include paying employees, purchasing equipment &
inventory, & running the business
Disadvantages of sole proprietorships
•Sole proprietorship is limited by his/her skills and
abilities.
•Uncertain life

• You are “it” – illness or injury that prevents you from working
may cause you to close / lose business
• Bankruptcy will dissolve your business

• The death of the owner automatically dissolves the business.

• Long hours of working

• Difficult to avail economies of scale


Partnership
• Partnership is a type of business where 2 or more people
agree to own, run and trade,
• Partnerships require a high degree of trust and are very
common.
• When setting up a business a person has to decide
whether to set up a business on their own or with others.
• How much control they want over the business
• Are they prepared to share the profit
• Raise necessary capital to start up the business by
themselves
Type of Partnership
General Partnership
• Each Partner has a right to take decision
• In case of loss due to the act of one partner, the
assets of both the partners can be attached.

Partnership at will
• No time limit for dissolving

Particular Partnerships
• Created for a specific purpose
Limited Liability Partnership
• Corporate form of Organisation
• Liability is limited to each partner according to the
agreed contribution to the business
• Personal Property can not be attached to pay debts
• Governed under Limited Liability Partnership act
2008
Type of Partners
Active or Working Partner
• Actively participates in running the business
• As per the agreement, he can either draw a salary of higher
profits than his contribution

Dormant or Sleeping Partner


• Not involved in daily management
• Can be consulted while taking major decisions
• Generally high investment
Nominal Partner
• Lends his name to take advantage of reputation
• Does not have real interest
• Does not have right to profit
Advantages of partnerships
Fairly easy & inexpensive to start
• May pay attorney if you develop a partnership agreement
Combined resources
• Team with partners with different skills, experience, contacts, &
capital
• Sharing responsibilities makes business run more efficiently &
smoothly
• Increase the amount of capital to run the business. Lenders may
be more willing to lend or extend credit
Decreased Competition
• Combining like businesses will decrease or eliminate competition
Reduced expenses
• When two or more businesses combine, expenses are no longer being
duplicated Ex. promotion, office space, supplies, utilities

Business losses are shared by all partners.


• Each partner pays income tax on her/his individual share of the profit
• Privacy: Only tax authorities need to be told how much partners are
earning and profit of the business
Disadvantages of partnerships

Unlimited liability
• Each owner in a general partnership has unlimited liability.

• Each partner can lose personal assets to pay business debt

Limited Capital
• Although partners may bring more capital to the business than
sole proprietors, it is still limited to what each can contribute
• Some lenders may still be reluctant to lend large amounts
Difficulty in ending
• Withdrawing can be complicated if there is no written partnership agreement

• By law profits must be divided equally if no agreement

Partnerships may lead to disagreements.


• May disagree on business goals, finances, responsibilities, & division of profits

• Can affect the efficiency of the business, morale of employees, & success or
failure of the venture
• Developing a detailed partnership agreement often helps resolve the conflict
Uncertain life/Transferability
• Unless specified in a detailed partnership agreement,
bankruptcy, death & the withdrawal or admittance of a new
partner dissolves the partnership
• Remaining partners may start a new partnership if they have
the money to buy the former partner’s share
Partnership:
• Deed of Partnership – is the legal contract, which sets out following:

•who the partners are


•capital brought into business by each partner
• What is the type of business
• How profits should be shared
• How many votes each partner has in any partnership meeting
• What happens if there is a withdrawal of a partner from the business
Company

• One person conceives business


• Secures the approval of more members to form a company
• Drafts a Memorandum of Association –Name, Head Office, Aims,
Amount of share capital, Value of shares and Limited Liability
• Drafts – Article of Association – Rules and Regulations
• Registers with Registrar of Companies
• Raise Capital – shares, debentures, bonds
Private Limited Company
• Two members can form the Company.
•Maximum – 50 Members
•Transfer of shares is restricted
•Shares can be transferred only after the approval of other
shareholders
•Minimum Paid up capital – 1 Lakh
•Prohibits entry of public
• Only two directors are required to form the company
•No Independent directors are required
•Must use ‘Private’ in the name
Public Limited Company
• Governed under Companies Act 2013
• Minimum - Seven members can form the Company.
• Maximum – Unlimited
• Large financial resources
• Minimum Paid up capital – 5 Lakhs
• Company is owned by shareholders
• Shares are listed and traded at stock exchange
• Transfer of shares is not restricted
• Capital can be raised from the public
• Liability of Directors is limited
Public Limited Company

• Company has permanent existence


• Legally controlled
• A great amount of information has to be made public
• Interest of shareholders is limited.
• Working Directors rule
•Easy to transfer ownership by selling shares
• It can be converted into Private limited company
• Public share holding can be bought back.
• The company is delisted
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