When is company form of business suitable?
Answers
Sole Proprietorship
The sole proprietorship is the simplest business form under which one can operate a business. The sole proprietorship is not a legal entity. It simply refers to a person who owns the business and is personally responsible for its debts. The sole proprietorship is a popular business form due to its simplicity, ease of setup.
The advantages of a sole proprietorship include:
Sole proprietorship is easy and inexpensive to create.
Owners may freely mix business or personal assets.
Lower start-up cost.
Autonomy of business decision and control of profits.
The disadvantages of a sole proprietorship may include:
Owners has unlimited liability.
Business cannot be transferred / sold.
Raising capital is hard.
Lack of professionalism
Lack of financial controls.
The death of the owner resolves the business unless
Following are the main steps to start a sole proprietorship business:
Finalize a business name.
Print basic business stationary i.e. letterheads, visiting cards etc.
Prepare business stamp (a common rubber stamp will do).
Open a bank account in the name of sole proprietor business.
Apply for National Tax Number (NTN) certificate.
Registration of Firm/Partnership in Pakistan:
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. The persons who constitute this organization are individually termed as partners and collectively known as firm; and the name under which their business is conducted is called “The Firm Name”.
In ordinary business the number of partners should not exceed 20, but in case of banking business it must nor exceed 10. This type of business organization is very popular in Pakistan.
DEFINITION
According to Section 4 of Partnership Act, 1932
“Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.”
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 commerce or business and to divide the profits and bear the
losses in certain proportion.”
CHARACTERISTICS
The main characteristics of partnership may be narrated as under:
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.
Audit: If partnership is not registered, it has no legal entity. So there is no restriction for the audit of accounts.
Agent: In partnership every partner acts as an agent of another partner.
Business: Partnership is a business unit and a business is always for profit. It must not include club or
charitable trusts, set up for welfare.
Cooperation: In partnership mutual cooperation and mutual confidence is an important factor. Partnership
cannot take place with cooperation.
Dissolution: Partnership is a temporary form of business. It is dissolved if a partner leaves, dies or declared bankrupt.
Legal Entity: If partnership is not registered, it has no legal entity. Moreover, partnership has no separate legal entity from its members and vice versa.
Management: In partnership all the partners can take part or participate in the activities of business management. Sometimes, only a few persons are allowed to manage the business affairs.
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.
Object: Only that business is considered as partnership, which is established to earn profit.
Partnership Act:In Pakistan, all partnership businesses are running under Partnership Act, 1932.
Payment of Tax:In partnership, every partner pays the tax on his share of profit, personally or individually.
Profit and Loss Distribution: The distribution of profit and loss among the partners is done according to their agreement.
Registration: Many problems are created in case of unregistered firm. So, to avoid these problems partnership firm must be registered.
Relationship: Partnership business can be carried on by all partners or any of them can do the business for all.
Share in Capital: According to the agreement, every partner contributes his share of capital. Some partners provide only skills and ability to become a partner of business and earn profit.
Transfer of Rights: In partnership no partner can transfer his shares or rights to another person, without the consent of all partners.
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.