CHAPTER 3- TYPES OF ORGANIZATION

by • 15/08/2011 • 1st year Principal Of CommerceComments (0)691

Q1- Explain sole proprietorship form of business ownership. What are its merits and demerits?

SOLE PROPRIETORSHIP

It is the business which is owned by a single owner who is also referred to as sole proprietorship. It enjoys many benefits which other ownership cannot. Secrecy and ownership of full profit are some of its chief characteristics. However, it inherently suffers some setbacks embodying uncertain life, limited capital, and difficulty in operations.

ADVANTAGES OF SOLE PROPRIETORSHIP

Following are the advantages of sole proprietorship.

1.   Ownership Of All Profits:

A sole proprietorship has only a single owner and hence it has no concept of distribution of profit, and is wholly owned by him. On the other hand in company and partnership profits are distributed among owners.

2.   Ease Of formation:

It is quite easy to form a business as sole proprietorship. It formation does not require any permission from the government. It does not incur any expenditure as it required in the formation of partnership and company.

3.   Ease Of Dissolution:

It is quite easy to dissolve sole proprietorship. No much time or cost is required in bringing it to an end. But is quite difficult to dissolve company. Its dissolution involves much time and money.

4.   Tax Savings:

Sole proprietorship enjoys the advantage of saving various type of taxes. In this form of business income tax on owner is imposed only once, and there is no income tax on the form of business. But in the case of company the income is imposed twice. First on the company’s profit and then on the dividend of the shareholders.

5.   Personal Interest:

In this form of business the owner takes personal interest and offers maximum of his services and energy for the growth of his business. But in the company the work is not carried out that energetically because the whole operation of business is executed by the employees, who are not seriously interested in its development.

6.   Minimum Legal Constraints:

The company and the partnership have to follow many laws, rules, regulations from which the sole proprietorship is exempted.

7.   Secrecy:

Secrecy is an important element of any business, which can easily be maintained here. But in the company secrecy of business and accounts cannot be maintained here because all these affairs have to be printed so that they can be distributed to all shareholders, bankers and stock exchange.

8.   Low Cost:

The information of sole proprietorship doesn’t involve any formation cost. On the other hand, the formation of a company involves heavy expenditure.

DISADVANTAGES OF SOLE PROPRIETORSHIP

Following are the disadvantages of sole proprietorship.

1.   Unlimited Liability:

It is one of the major disadvantage of this form of business organization. If the asset of this business are insufficient to discharge its liability the proprietor will have to resort to his personal property to make up any deficiency in meting his business obligations.

2.   Difficulties In Management:

Since the form of business organization cannot afford the costly services of highly qualified personnel its management is in the hands of low or non qualified personnel. This fact causes difficulties in running the business smoothly.

3.   Limited Size:

The business usually doest not grow to a high level because of limited amount of capital and non availability of highly qualified personnel.

4.   Lack Of Opportunities For Employees:

Sole proprietorship does not offer career opportunities to its employees because of its limitation on size. But the partnership and company offer such opportunities.

5.   Uncertain Life:

The life of business depends on the efficiency or life of the single owner. If the owner is inefficient or dies the business will come to an end. But the company will not close down is its owner dies.

Q3- Describe suitability of sole proprietorship.

SUITABILITY OF SOLE PROPRIETORSHIP

One man control over the business would be most efficient and profitable. If only that one man has the capability of managing everything indefinitely. Unfortunately such a person does not exist. This form of organization is therefore suitable for the following cases.

a) Where the capital required is small and risk is not heavy since merchandise and services of one kind are sold. E.g. magazine and newspaper stand, bakeries teashops, rental libraries etc.

b) Where quickness in decision is needed i.e. Bullion dealers, share brokers etc.

c) Where services are sold and customer requires personnel attention egg. Patient, lawyers, dentist, cobblers, accountant.

d) Where special regard has to be shown to the tastes of the customers egg. Tailoring, restaurant, managing etc.

e) Where market is limited eg. Retail trade.

Thus sole proprietorship has its own scope of activities and continuous to exist in spite of development of bigger organizations like partnership and joint stock companies.

Q3- Define partnership. Elucidate its advantage and disadvantage.

 

PARTNERSHIP:

 

“Partnership is an association of two or more persons to carry on as co owners a business for profit”.

It is a business ownership, which must have at least two partners. The maximum number is 20 but in the case of banking it is only 10. Sole proprietorship, partnership is the commonest form of ownership in the business world.

ADVANTAGES OF PARTNERSHIP

 

The partnership business enjoys the following advantages.

1.   Larger Capital:

In partnership capital of the business may be greater than the sole proprietorship. Capital can be increased any time by increasing the number of partners. But in sole proprietorship the capital is limited to only one man’s contribution.

2.   High Credit Standing:

Assuming equal size, the partnership enjoys the highest credit standing of all three types of business ownerships (sole proprietorship, partnership, and company). If the assets of the business are insufficient to pay off debts, the personal property of partners can be utilized.

3.   Combined Judgment And Skills:

It is a common belief that two heads are better than one, and it is true especially in partnership where partners have different skills, experiences, abilities and qualifications.

4.   Retention Of Valuable Employees:

Partnership has more than one co owners. If is has Chef de Vote or key and valuable employee, and if there is a risk that he may leave the job, he may be offered to join the firm as a co owner. In this way important emloyees can be retained.

5.   Personal Interest:

The business and its success depends upon the enthusiastic involvement of the co owner. Partners are very keen in running their business. The business gets prosperous from their personal interest and efforts.

6.   Definite Legal Status:

Partnership is one of the oldest form os business ownership and therefore it has clear cut answers about the legal acts, rights, duties, liabilities of partners. Therefore, partnership problems can be clearly and definitely solved in the light of partnership law.

7.   Tax Saving:

Partnership allows for tax saving. Since the profit is divided among partners the taxable income of the firm is reduced resulting in low income tax.

DISADVANTAGES OF PARTNERSHIP

 

 

1.  Unlimited Liability:

This is a serious disadvantage in which the personal property of the partners is very much at stake if the business assets are not enough in the full settlements of the debts. That is, if the assets fall short in the payment of the firm’s debts, the unpaid balance will be recovered from the personal property of the partners in accordance with their profit sharing ratios.

2.   Divided Control And Management:

Management and control is divided among various partners owing to which many                            administrative problems are created. Divided control causes delayed decision. Duties and responsibilities are difficult to fix. Accountability is weak

3.   Lack Of Continuity:

Partnership lacks in continuity. It has a limited life. It comes to an end in the following situations some of which are very common.

a-   Death of a partner

b-   Admission of a partner

c-   Retirement of a partner

d-   Bankruptcy of a partner

e-   Insanity

4.   Lack Of Transferability:

Partnership has a frozen investment. Whatever once invested in the business cannot be withdrawn. If a partner withdraws his share the partnership will stand dissolve.

5.   Disagreement Among The Partners:

The greater the number of partners, the higher are the chances of disagreement among them. The partnership business is at loss from the possibility of the disagreement among the partners.

Q4-Describe usual points of Partnership agreement. Also describe rules applicable in the absence of an agreement.

Partnership Agreement:

Partnership agreement is a written or oral mutual consent to run a business as co-owner for profit. Partnership agreement is also known as articles of partnership.

Contents Of The Agreement / The Common Provisions Of A Partnership Contract

1.   The name of the firm

2.   The place of the business

3.   Nature of business

4.   The names and addresses of partners

5.   The amount of investment by each partner

6.   The length of a life of partnership

7.   The profit sharing ratio of partners

8.   Extent of withdrawals by each partner

9.   Procedure of admission of a new partner

10. A provision of salaries to partners

11. A provision of dissolution of the firm

12. Determination of an accounting year and a fiscal year

13. Rights, duties and liabilities of partners

14. The name of the banker

15. The signing authority of the check

16. A provision of the retirement of a partner

17. Determination of goodwill

18. A provision of bonus to partners

19. A provision of the method of the settlement of disputes

20. A provision for minor partner

21. Interest on capital

22. Interest on loan

23. Loan from partners

24. Loan to partners

25. Method of inventory valuation

26.Depreciation Method

RULES APPLICABLE IN THE ABSENCE OF AN AGREEMENT

In the absence of any agreement, the following rules are applicable. These rules are contained in Section 12 to 17 of the Indian Partnership Act as adopted in Pakistan.

1. Every partner has a right to take part in the conduct of the business.

2. In case of any difference arising out in ordinary matter connected with the business, the decision may be taken by a majority of the partners.

3. No change can be made in the nature of the business without the consent of all the partners.

4. Partners have right to see, inspect and copy any of the books of the firm. No remuneration is allowed to any partner.

5. All the partners will share equality in the profits and contribute equally to the losses.

6. Six percent interest is to be paid on the loan advanced by any partner.

7. The partnership firm must indemnify a partner in respect of payment made by the partner to the third party and also any liability incurred by any partner in the ordinary and proper conduct of the business.

8. A partner must indemnify the firm for any loss caused to the firm by his willful neglect in the conduct of the business of the firm.

9. All the property of the firm is to be held and used by the partners exclusively for the purposes of the business. In case a partner carries out any business competing with that of the firm, all profits made by him in that business should be paid to the firm.

Q5- Explain in detail conditions of dissolution of partnership.

CONDITIONS OF DISSOLUTION OF PARTNERSHIP

Following are the conditions of dissolution of partnership.

  • Admission Of Partner:

If a new partner is admitted to the firm, the old partnership will have to be dissolved, and a new agreement is drawn up to continue the business anew.

  • Retirement Of A Partner:

In the case of retirement of a partner the partnership stands dissolve. The firm will not be dissolved if the remaining partners agree to continue their business.

  • Insolvency Of A Partner:

If a partner in a firm is adjudged bankrupt by the court of law, the partnership will turn dissolved. However, the remaining partner may decide to continue the business i.e. the firm.

  • Insanity Of Partner:

If a partner gets mad or insane the partnership stands dissolved.

  • A Convict Partner:

When a partner is convicted of crime i.e. he is declared to be guilty by the court of law, the partnership will get dissolved.

  • Expiry Of Period:

If the partnership was formed for a definite period of time it would break up after the expiry of that term.

  • Death Of A Partner:

The death of a partner brings the partnership to the dissolution unless there is an agreement to the contrary.

  • Conclusion Of Venture:

Partnership may be formed to undertake a particular venture or project. Once the project is complete the partnership stands dissolved. Such partnership is also referred to as joint venture.

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