Prepared by: Kishore Bandhu Shresthaclass 12 Management, Finance Kalika Secondary School, Butwal

CHAPTER 2- BUSINESS ENTITY AND FINANCIAL ENVIRONMENT

FORMS OF BUSINESS ORGANIZATION

Sole Trading Concern or Sole Proprietorship

A sole trading concern is a form of business organization in which an individual invests only his
capital, uses his own skill and intelligence in the management of its affairs and is entitled to all the
profits as also is solely responsible for all the risks of ownership. The owner of sole trading
concern is known as sole trader or proprietor.

Features.
Single ownership: The sole trader is a single owner of the organization. The sole trader owns all
the assets and property of the business. The sole trading concern is often referred as “one man
show”.
Unlimited liability: The liability of the sole trader is unlimited. This means he is alone responsible
for all the risks and debts of the firm.
Minimum government control: Sole trading concern is less affected by government control. This
is because, there are almost no legal formalities are required to start or close down a business.
Business secrecy: The sole trader can maintain complete business secrecy. He needs not to
publish any accounts and reports to anybody. Competitors cannot easily get business secrets and
information of the sole trader’s activities.
Flexibility: Sole trader enjoys maximum flexibility. He can take right decision at the right time
depending upon the situation. At any time, he need not have to consult with anyone because he is
a single owner of his business.
No sharing of profit and losses: There is a direct relationship between efforts and rewards. This
results in best possible efforts on the part of sole trader. Therefore, he can enjoy all the profits of
his business.
Legal status: Legally, the sole trader and his business concern are one and the same in the eyes
of law. The sole trader and his business cannot be separated from each other. So the sole trader
lacks legal status.
Easy to Establish: Sole trading concern can be established very quickly and easily. Anybody who
wants to start a business can do so, whenever, he likes. In Nepal, only nominal legal formality of
registration is necessary.
Easy to Dissolve: Dissolution of sole trading concern equally simple. There are no legal
formalities in this regard. Proprietor can dissolve business whenever he likes to do so.
Effective Control: In this form of business organization proprietor is responsible for all types of
activities. He controls all functions and takes decisions at appropriate time. So, the business is
controlled in an effective way. He controls all functions and takes decisions at appropriate time.
So, the business is controlled in an effective way.
Direct Motivation: The direct relationship between effort and reward serves as a powerful
incentive to the proprietor to manage the concern efficiently. The proprietor being entitled to the
entire profits of the concern tries to maximize profits by utilizing his talents and activities in the best
possible way.
Prepared by: Kishore Bandhu Shresthaclass 12 Management, Finance Kalika Secondary School, Butwal

Personal Supervision: The proprietor is able to supervise every work of the business himself.
This helps to build up a close and cordial relationship with the employees. He can take personal
interest in his customers and he can meet their individual and typical needs easily and adequately.
It ensures effectively and economy in the operation.
Benefit of Unlimited Liability: The proprietor can obtain loan on his personal credit. The liability
being unlimited, the creditors feel secure in extending credit.
Prompt Decision: The owner has full control over his business. So he is able to take decision
promptly without consulting anybody. If more than one person is involved in decision making then
delay is bound to occur.
Secrecy: The proprietor can maintain business secrets. There is no legal regulation regarding the
disclosure of business information. So he can maintain secrecy from his competitors. Secrecy is
very vital for business success.
Flexible: Sole trader enjoys the maximum flexibility in his/her business. If any change in business
is required, he does not have to consult any one and can make the change without delay. No legal
formalities are required for making changes in operations.

Main Features or Characteristics of Partnership

"Partnership is the relation between persons who have agreed to share profit of business carried on by all or any
of them acting for all."
`Partnership is a mean of bringing together the persons who can contribute capital, skill for the expansion of
business. In the ordinary business number of partners shall exceed than twenty. In case of banking business they
may not exceed than ten. This type of business organization is very popular in our country.
MAIN CHARACTERISTICS OR FEATURES OF PARTNERSHIP
1. Agreement :-
Without agreement partnership can not be formed. The agreement may be written or oral. But it must be written on
settle the disputes.
2. Registration :-
It is not necessary that a partnership may be registered. But in case of registered firm many problems can be
created.
3. Number of Partners :-
In a partnership there should be at last two partners. In ordinary business the partners must not exceed the twenty.
In case of banking not more ten.
4. Profit and Loss Distribution :-
The basic aim of partnership is to earn profit. This profit is distributed among the partners according their
agreement. In case of loss also all the partners share in it.
5. Business :-
The object of the partnership it to carry on the business. It may be production or trading. It should be according the
laws of the state.
6. Unlimited Liability :-
The liability of the partner is not limited to his invested amount. In case of loss the private property of the partner
also used to pay the business obligations.
7. Share in Capital :-
According to the agreement every partner contributes his share. It is not necessary all the partners should contribute
equally. Some people provide only skill and ability to become a partner.
8. Management :-
All the partners can participate actively in the business management. Sometimes only few persons are allowed to
handle the business affairs.
Prepared by: Kishore Bandhu Shresthaclass 12 Management, Finance Kalika Secondary School, Butwal
9. Co-Operation :-
For the successful partnership mutual co-operation and mutual confidence is an important factor.

What is a joint stock company? What are their characteristic features?

A Joint Stock Company is a voluntary association of persons to carry on the business. It is an association of persons
who contribute money which is called capital for some common purpose. These persons are members of the
company. The proportion of capital to which each member is entitled is his share and every member holding such
share is called shareholders and the capital of the company is known as share capital. The Companies Act 1956
defines a joint stock company as an artificial person created by law, having separate legal entity from its owner with
perpetual succession and a common seal. Shareholders of Joint Stock Company have limited liability i.e liability
limited by guarantee or shares. Shares of such company are easily transferable. From the above definition the
following characteristics of a Joint Stock Company can be easily identified:

1. Artificial Person : A Joint Stock Company is an artificial person as it does not possess any physical attributes of a
natural person and it is created by law. Thus it has a legal entity separate from its members.
2. Separate legal Entity : Being an artificial person a company has its own legal entity separate from its members. It
can own assets or property, enters into contracts, sue or can be sued by anyone in the court of law. Its shareholders
cannot be held liable for any conduct of the company.
3. Perpetual Existence : A company once formed continues to exist as long as it is fulfilling all the conditions
prescribed by the law. Its existence is not affected by the death, insolvency or retirement of its members.
4. Limited liability of shareholders : Shareholders of a joint stock company are only liable to the extent of shares
they hold in a company not more than that. Their liability is limited by guarantee or shares held by them.
5. Common Seal : Being an artificial person a joint stock company cannot sign any documents thus this common seal
is the company’s representative while dealing with the outsiders. Any document having common seal and the
signature of the officer is binding on the company.
6. Transferability of Shares : Members of a joint stock company are free to transfer their shares to anyone.
7. Capital : A joint stock company can raise large amount of capital by issuing its shares.
8. Management : A joint stock company has a democratic management which is managed by the elected
representatives of shareholders, known as directors of the company.
9. Membership : To form a private limited company minimum number of members prescribed in the companies Act
is 2 and the maximum number is 50. But in the case of public limited company the minimum limit is 7 and no limit on
/ of members.
10. Formation : Generally a company is formed with the initiative of group of members who are also known as
promoters but it comes into existence after completing all the formalities prescribed in Companies Act

MAIN DOCUMENTS OF COMPANY

Memorandum of Association
The memorandum of association is the most essential document needed in the steps in forming a company.
This document is essentially known as the “constitution of the company” and contains details regarding the
name, objectives, registered office/properties, liabilities, and company members. As per the formation of
company notes, this document also dictates a firm’s relationship with the outside world. The memorandum
of association includes:

 The name of company

 The objective of Company
 The registered office
 The Authorized capital of company
Prepared by: Kishore Bandhu Shresthaclass 12 Management, Finance Kalika Secondary School, Butwal
Articles of Association

The articles of association is a document that is complementary to the memorandum of association. This
document details how the director and management will work in a company. The framing of this document
is one of the most significant steps in forming a company as it details how the capital will be divided, the
procedure for holding meetings, the rights of the shareholders, and everything else about the working of the
management. Rules and Regulations, Terms and Conditions, What to do, what not to do, Legal process are
written there.

Prospectus

The prospectus is filed with the registrar of companies after the directors have signed it. It is essentially a
document inviting the public to purchase or subscribe to the shares of this company It is used when company
issues securities on primary market. So, this document is useful for IPO. This document uses by Public
company neither Private Company.