Monday, 5 June 2017

Forms of Business Organizations - Sole Proprietorship Concern and Partnership Firm


What is a Sole Trading Concern/Sole Proprietorship Firm?

Sole Trading Concern is an informal type of Business Organization which is owned, managed and controlled by an individual

Features of Sole Trading Concern are –
-Minimum Government Regulations (Doesn't require any registration)
-Liability of the owner is unlimited
-Freedom in the selection of business. Hardly any restriction on type of a business that a sole trader can do
-Highest Secrecy- Sole trader doesn't have to share his financial or any other business secrets to anyone
-Single Ownership and Management
-Direct Contacts with the customers and employees
-Suitable for small businesses
-No sharing of profits and risks

Merits of Sole Trading Concern are:
-Easy Formation (Doesn't require registration)
-The benefit of Secrecy. No sharing of business secrets with any outsider and no legal compulsion to publish accounts
-Direct Motivation (More efforts means More profits). No sharing of profits with anyone
-Quick Decisions can be made as sole trader doesn't have to consult anyone before taking any decision
-Flexibility In Operations. Sole trader can keep on changing his plans quickly as per business environment
-Limited Government Control. No specific law to govern operation of sole trading concern

Limitations of Sole Trading Concern are:
-Limited Managerial Ability (Only One Owner can't manage a very big business)
-Limited Amount of Capital. (Owner is the only one who invests in the business and so cannot invest beyond a certain point)
-Unlimited Liability of the owner
-Not Suitable for large scale operations which require a lot of capital and more managerial abilities
-No Perpetual Existence (Sole Proprietorship may come to an end in case of death or insolvency of the owner)

What is a Partnership Firm?

Partnership firm is a form of business organization which has more than one owners. It is owned and managed by more than one person. All the owners share profits and losses and their liability is unlimited. The owners are called as partners

The features of Partnership are:
1. The partnership comes into existence only if there is an Agreement between the owners (Partners). Agreement can be oral or in written form
2. Registration of the Firm is not mandatory except in the state of Maharashtra
3. Lawful Business - Partnership firm can do any business which is lawful in nature
4. Membership- Minimum 2 partners are required. Maximum can be 20 except in case of a banking business where max no can be 10 only)
5. Sharing of Profits and Losses- There has to be sharing of profits and losses though it may not necessarily be equal
6. Unlimited Liability- Liability of all the partners is unlimited except in case of a minor partner
7. Management- The business may be managed by on or few or all the partners based on their mutual understanding
8. Dissolution- Death, Insolvency or Insanity of any partner will lead to dissolution of the firm
9. Relationship Between Partners is that of a principal as well as agent

Types of the Partners –
-Active Partner: One who actively participates in day to day management of the business
-Sleeping: One who doesn't participate in day to day running of the business
-Nominal Partner: One who just lends his name to the firm. He neither contributes the capital nor takes part in day to day management of the business
-Minor: One who is less than 18 years old
-Partner in Profits only: One who shares only profits but not the losses
-Partner By Estoppel: One who is not an actual partner but presents himself to the be the partner of the firm. He is liable to the person who suffers any loss by doing a business with the firm based on assumption that he is actual partner of the firm

Merits of Partnership are:
- More Manpower as compared to Sole Proprietorship Concern
-More Financial Resources  as compared to Sole Proprietorship Concern
-Ease of Formation as registration is not compulsory except in the state of Maharashtra
-Easy Dissolution as there are not many legal formalities involved in closing the business
-Division of Risk as there are more than one owners
-Better Decision Making as decisions are taken jointly

Limitations of Partnership are:
- Unlimited Liabilities of the owners
- No Separate Legal Status (The owners and the business are one and te same in eyes of law)
- Limited Resources as compared to other forms of business organizations like a Private Limited Company or a Public Limited Company
- Disputes among the Partners may lead to loss of the goodwill or closure of the business
-The risk of Implied Authority: Bad Decision taken by one partner may result in loss to all the partners






For more detailed explanation visit-
Merits and Demerits of a Partnership Firm

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