FORMS BUSINESSES

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FORMSBUSINESSES
CHAPTER1
AMAN ULLAH KHAN

• E-mail amanullahkhan11_at_yahoo.com
• MBA-Finance CA-Foundation
• Kardan Institute of Higher Education

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• The word Business includes
• All human legal activities carried on for the
  purpose of profit.
• In other words, business is an activity in
  which various persons regularly produce or
  exchange goods and services for mutual gain or
  profit.

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Types of Business By Ownership

1. Sole proprietorship
2. Partnership
3. Joint Stock company

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SOLE PROPRIETORSHIP Sole proprietorship is a
simple and oldest form of business organization.
It is a small-scale work, as it is owned and
controlled by one person. It is also known as
sole ownership, individual partnership and
single proprietorship.

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CHARACTERISTICS Following are the main
characteristics of sole proprietorship 1.
Capital In sole proprietorship, the capital is
normally provided by the owner himself. However,
if additional capital is required, such capital
can be increased by borrowing. 2. Formation
Dissolution Formation Dissolution of sole
proprietorship business is easy as compared to
other business, because it dos not require any
kind of legal formalities.

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4. Easily Transferable Such type of business can
easily be transferred to another person without
any restriction. 6. Separate Business entity In
sole proprietorship , business has separate
entity for accounting purposes than its owners
than its owners

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12. Unlimited Liability A sole proprietor has
unlimited liability. In case of insolvency of
business, even the personal assets are used by
the owner to pay off the debts and other
liabilities.

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PARTNERSHIP Partnership is the second stage in
the evolution of forms of business organization.
It means the association of two or more persons
to carry on as co-owners, i.e. a business for
profit. According to Mr. Kent A contract of two
or more competent persons to place their money,
efforts, labour and skills, some or all of them,
in a lawful business and to divide the profits
and bear the losses in certain proportion.
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CHARACTERISTICS The main characteristics of
partnership may be narrated as under 1.
Agreement Agreement is necessary for partnership.
Partnership agreement may be written or oral. It
is better that the agreement is in written form
to settle the disputes. 3. Agent In partnership
every partner acts as an agent of another
partner.

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7. Number of Partners In partnership there should
be at least two partners. But in ordinary
business the partners must not exceed 20 and in
case of banking business it should not exceed
10.

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9. Payment of Tax In partnership, every partner
pays the tax on his share of profit, personally
or individually. 10. Profit and Loss
Distribution The distribution of profit and loss
among the partners is done according to their
agreement. 12. Unlimited Liability In partnership
the liability of each partner is unlimited. In
case of loss, the private property of the
partners is also used up to pay the business
debts.

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KINDS OF PARTNERS Partners can be classified into
different kinds, depending upon their extent of
liability, participation in management, share of
profits and other facts.

1. Active Partner A partner who takes active part
in the affairs of business and its management is
called active partner. He contributes his share
in the capital and is liable to pay the
obligations of the firm. 2. Secret Partner A
partner who takes active part in the affairs of
the business but is unknown to the public as a
partner is called secret partner. He is liable to
the creditors of the firm. 3. Sleeping Partner A
partner who only contributes in the capital but
does not take part in the management of the
business is known as sleeping partner. He is
liable to pay the obligations of the firm.
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4. Senior Partner A partner who invests a large
portion of capital in the business is called
senior partner. He has a prominent position in
the firm due to his experience, skill, energy,
age and other facts. 5. Junior Partner A person
who has a small investment in the firm and has a
limited experience of business is called junior
partner. 6. Major Partner A major partner is a
person who is over 18 years of age. A person is
allowed to make contract when he has attained the
age of majority. 7. Minor Partner A person who is
minor cannot enter into a valid contract.
However, he can become a partner with the consent
of all other partners. A minor can share profits
of a business but not the losses.
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9. Limited Partner A partner whose liabilities
are limited to his share in business is called
limited partner. He cannot take active part in
the management of the firm. 10. Unlimited
Partner A partner whose liabilities are unlimited
is known as unlimited partner. He and his
personal property both are liable to clear the
debts of the firm.
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Types of Partnership

• General Partnership
• 2) Limited Partnership
• 3) Limited Liability Partnership

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General Partnership

• In a general partnership, each partner has right
  and responsibilities similar to those of a sole
  proprietor.
• Unlimited personal liability

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Limited Partnership

• A limited partnership has one or more general
  partners and one or more limited partners.
• The limited partners are basically passive
  partners.

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Limited Liability Partnership

• A limited liability partnership is a relatively
  new form of business organization.
• In this type of partnership, each partner has
  unlimited personal liability for his or her own
  professional activities, but not for the actions
  of other partners.
• All of the partners in a limited liability
  partnership may participate in management of the
  firm.

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Practical Questions on Partnership
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The partnership agreement

• A partnership agreement may be oral or
  written, will govern the relationship amongst the
  partners. Important matters to be covered to be
• Name of firm, type of business, and duration
• Capital to introduced by partners
• Distribution of profit amongst partners
• Drawings by partners
• Arrangement of dissolution, or on death or
  retirement of partners
• Setting disputes

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• In the Absence of a Partnership General
  Conditions to be consider
• Profits should be shared as follows
• No partner should receive salary.
• No interest on capital should allowed.
• Profits should be shared equally.
• Where partners advance funds in excess of agreed
  capital amount as loan, they are entitled
  interest on the excess at 5 pa.

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Organizing a Partnership

• On 2/15/08, Smith and Jones form a partnership.
  Smith contributes 80,000 cash. Jones contributes
  land valued at 40,000.

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Dividing Income or Loss
Partners are not employees of the partnership but
are its owners. This means there are no salaries
reported as expense on the income statement.
Profits or losses of the partnership are divided
on some agreed upon ratio.

• Three frequently used methods to divide
  income or loss are allocation on
• Stated ratios.
• Capital balances.
• Services, capital and stated ratios.

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Allocation Based on Stated Ratios
Smith and Jones agree to divide profits or
losses ¾ for Smith and ¼ for Jones. For 2008,
the partnership reported net income of 60,000.
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Allocation Based on Capital Balances
Smiths capital balance, before division of
profits or losses is 80,000 and Joness capital
balance is 40,000. The partnership agreement
calls for income or loss to be allocated based on
the relative capital balances. Net income for
2008 is 60,000.
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Allocation Based on Capital Balances
Smiths capital balance, before division of
profits or losses is 80,000 and Joness capital
balance is 40,000. The partnership agreement
calls for income or loss to be allocated based on
the relative capital balances. Net income for
2008 is 60,000.
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Allocation Based on Services, Capital, and Stated
Ratios

• Smith and Jones have a partnership agreement
  with the following conditions
• Smith receives 15,000 and Jones receives 10,000
  as annual salaries.
• Each partner is allowed an annual interest
  allowance of 5 on the beginning-of-year capital
  balance.
• Any remaining balance of income or loss is
  allocated equally.
• Net income for 2008 is 60,000.

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Allocation Based on Services, Capital, and Stated
Ratios
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Partnership Financial Statements
Assume that during 2008, Smith withdrew 5,000
cash from the partnership and Jones withdrew
1,000.
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Corporation

• A corporation is an artificial person created by
  law to carry on business activities under its own
  name and common seal.
• Following are the main characteristics of a
  corporation.
• 1. A corporation is created by law ,it has its
  legal
• existence apart from its owners. It can
  carry on
• business under its name and can enter into
  contract
• as a person.

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• 2. The capital of the company is divided into
  many
• units of certain value. Each unit is called
  as share.
• These shares are sold in the market and are
• transferable from one person to another.
• 3. The company is not dissolved at the time a
• shareholder dies or transfer his share to
  another
• person. It continues indefinitely or until
  its life is
• terminated on account of legal process.

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• 4. The owners of the company have limited
  liability up to
• the extent of their investment.
• 5. Each shareholder of the company has legal
  right of
• voting according to his holdings.
• 6. The management of the company is an elected
  body.

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Types of Company Private
( 2 50 ) Public company
( 7 unlimited)

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Private limited companyPrivate
limited company must have at least two members
but the maximum number can not exceed from
50.It also prohibits any invitation to the
general public to purchase its shares.If a
person want to enjoy the advantage of limited
liability so he can take part in the private
limited company.
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Public limited companyMust
have 7 members to form it and there is no
restriction to the maximum number of
members.Public limited company must have issue
prospectus to the general public to purchase its
shares Liability of the members is limited to
his shares. The share of public limited company
are freely sold and purchases in the stock
market.
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End Of Chapter