Lecture 3

BUSINESS ORGANIZATION & SOLE PROPRIETORSHIP

Business organization is an act of grouping activities into effective cooperation to obtain the
objective of the business.

In the words of L. H. Haney

“It is more or less independent complex of land, labour and capital, organized and
directed for productive purposes but entrepreneurial ability.”

SCOPE OF BUSINESS ORGANIZATION

The scope of business organization can be defined as under:

Scope of Business Organization

Sole Partnership Joint Co‐operative Combination

Proprietorship Stock Societies
Company

1. SOLE PROPRIETORSHIP

According to D.W.T. Stafford

“It is the simplest form of business organization, which is owned and controlled by
one man”

Sole proprietorship is the oldest form of business organization which is owned and
controlled by one person. In this business, one man invests his capital himself. He is all in all
in doing his business. He enjoys the whole of the profit. The features of sole proprietorship
are:

 Easy Formation
 Unlimited Liability
 Ownership
 Profit
 Management
 Easy Dissolution
2. PARTNERSHIP

According to 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.”

Partnership means a lawful business owned by two or more persons. The profit of
the business shared by the partners in agreed ratio. The liability of each partner is
unlimited. Small and medium size business activities are performed under this organization.
It has the following features:

 Legal Entity
 Profit and Loss Distribution
 Unlimited Liability
 Transfer of Rights
 Management
 Number of Partners

3. JOINT STOCK COMPANY

According to S. E. Thomas

“A company is an incorporated association of persons formed usually for the pursuit

of some commercial purposes”

A joint stock company is a voluntary association of persons created by law. It has a

separate legal entity apart from its members. It can sue and be sued in its name. In the
joint stock company, the work of organization begins before its incorporation by promoters
and it continues after incorporation. The joint stock company has the following feature:

 Creation of Law
 Separate Legal Entity
 Limited Liability
 Transferability of shares
 Number of Members
 Common Seal

4. COOPERATIVE SOCIETIES

According to Herrik

“Cooperation is an action of persons voluntarily united for utilizing reciprocally their

own forces, resources or both under mutual management for their common profit or
loss.”
Cooperative Societies are formed for the help of poor people. It is formed by economically
weak persons of the society. In this form of organization, all members enjoy equal rights of
ownership. The features of cooperative society are as under:‐

 Easy Formation
 Protection of Mutual Interest
 Limited Liability
 Equal Distribution of Wealth
 Equal Rights

5. COMBINATION

According to J. L. Hanson

“Combination is the association, temporary or permanent, of two or more firms.”

Business combinations are formed when several business concern undertaking units
are combined to carry on business together for achieving the economic benefits. The
combination among the firms may be temporary or permanent. The salient features of
business combination are:

 Economy in Production
 Effective Management
 Division of Labour
 Destructive Competition

IMPORTANCE OF BUSINESS ORGANIZATION

The following points elaborate the role of business organizations:

1. Distribution

Another benefit of business organization is that it solves the problems of marketing and
distribution like buying, selling, transporting, storage and grading, etc.

2. Feedback

An organization makes possible to take decisions about production after getting the
feedback from markets.

3. Finance Management

It also guides the businessman that how he should meet his financial needs which is very
beneficial for making progress in business.
4. Fixing of Responsibilities

It also fixes the responsibilities of each individual. It introduces the scheme of internal
check. In this way chances of errors and frauds are reduced.

5. Minimum Cost

It helps in attaining the goals and objectives of minimum cost in the business.

6. Minimum Wastage

It reduces the wastage of raw material and other expenditures. In this way the rate of profit
is increased.

7. Product Growth

Business organization is very useful for the product growth. It increases the efficiency of
labor.

8. Quick Decision

Business organization makes it easy to take quick decisions.

9. Recognition Problems

Business organization makes it easy to recognize the problems in business and their
solutions.

10. Reduces the Cost

Business organization is useful in reducing the cost of production as it helps in the efficient
use of factors of production.

11. Secretariat Functions

It also guides the businessman about the best way of performing the secretarial functions.

12. Skilled Salesmen

It is also a benefit of the business organization that it provides the skilled salesmen for
satisfying various needs of the customers.
13. Transportation

It is another benefit is that it guides the businessman that what type of transport he should
utilize to increase the sales volume of the product.

PRE‐REQUISITES OF BUSINESS

Following are the main pre‐requisites of a successful business:

1. Selection

The first and most important decision before starting a new business is its selection. If once
a business is established, it becomes difficult to change it. One should make a detailed
investigation in the selection of business.

2. Feasibility Report

A person should prepare the feasibility report about the business to be started. This report
will provide the facts and figures whether business is profitable or not.

3. Nature of Business

There are various types of business like manufacturing, trading and services. The
businessman should decide that what type of business he would like to start.

4. Demand of Product

The businessman also keeps in view the demand of the product which he wants to sell. If
the demand is inelastic, the chances of success are bright. If the demand of a product is
irregular, seasonal and uncertain, such business should not be started.

5. Size of Business

The Size of business means the scale of business. The size of business depends upon the
demand of commodity in the market and organizational ability of entrepreneur. The
determination of size of business is an important decision of a person.
6. Availability of Capital

Availability of capital is an important factor in the business. Capital is required for the
purchase of land, machines, wages and raw materials. A businessman must decide that how
much capital he can arrange.

7. Business Location

A businessman has to select the place where he wants to start his business. He should select
that place where raw material, cheap labour and transportation facilities are available. He
should also check the location of business competitors.

8. Government Policy

The businessman should also carefully consider the policies of government before starting a
new business. Some areas are declared as ‘tax free zones’ and for some particular
businesses the loan is provided without any interest.

9. Availability of Raw Material

Availability of Raw material is essential to produce the goods at low cost. Sometimes the
raw material is to be imported which may create problem for him. So a businessman must
keep this factor in mind.

10. Availability of Machines

Availability of new machines is also an important factor for a business. A businessman must
see whether these machines are easily available inside the country or not. If these are to be
imported then it may create the problems for him.

11. Availability of Labor

Skilled and efficient labor is essential to run the business in profit. But if efficient and skilled
labor is not available where business is going to be started then it will not be profitable.

12. Means of Transportation

Quick and cheap means of transportation are essential for low cost of production and high
profit rate. A businessman must keep in view this factor.

13. Power Resources

There must be availability of power resources like water, oil, coal and electricity. So
businessman must keep in view this factor.
14. Hiring Employees

A businessman must hire the efficient and competent employees in the business. The
proper training must be given to employees.

15. Product Pricing

A businessman must decide the price of his product. In the beginning the price must be low.
He must keep in view that whether he will cover cost of his product and other expenses
with such price.

FUNCTIONS OF BUSINESS

Following are the main functions of a business:

1. Production

Production of goods and services is the first main function of the business. The production
must be regular. The goods and services must be produced in such a way which can satisfy
human needs.

2. Sales

The sale is another important function of the business. Sales are of two types:

 Cash sales
 Credit sales

The sale must be regular and at reasonable price. It is very difficult job because there is hard

competition in each market.

3. Finance

It is also an important function of the business to secure finance. Finance is required for
establishment and expansion of business. There are two sources of raising funds:

(a) Owner’s Capital

(b) Borrowed Funds
4. Management Function

“To do things efficiently and effectively” is known as management. The functions of

management are:

 Planning
 Organizing
 Leading
 Controlling
 Staffing

The management also provides direction for all subordinates.

5. Innovation

In this era of competition, for the survival of business, innovation is essential. The
businessman must try to find new techniques of production because the business may not
sell present output in future.

6. Accounting

Another function of the business is to maintain its records properly. To record the business
activities is called accounting. With proper accounts, the owner can know the actual
performance of business and chances of fraud are reduced.

7. Marketing

According to Harry Henser

“Marketing involves the design of the products acceptable by the consumers and the
conduct of those activities which facilitate the transfer of ownership between seller
and buyer.”

Through marketing, goods are moved from producers to consumers. It is an

important function of the business. This function includes buying, selling, transportation,
product designing and storage, etc. The concept of marketing mix is very important in
marketing. It includes four Ps:

 Product
 Price
 Place
 Promotion
8. Quality Improvement

Quality of product must be improved to increase the sale. If quality of product is poor then
business may suffer a loss.

9. Motivation

Motivation is very essential for increasing the efficiency of employees. Motivation

encourages the employees to give their best performance.

10. Research

Research is also an important function of any business. Research is a search for new
knowledge. By research, business becomes able to produce improved and new goods. The
research is of two types:

 Basic Research
 Applied Research

11. Public Relation

It is very important function to make friendly relations with public, in this way sales volume
is increased.

SOLE PROPRIETORSHIP
Sole Proprietorship and its Characteristics

Sole proprietorship is a simple and oldest form of business organization. Its formation does
not require any complicated legal provision like registration etc. It is a small ‐scale work, as
it is owned and controlled by one person, and operated for his profit. It is also known as
“sole ownership”, “individual partnership” and “single proprietorship”.

DEFINITION

Following are some important definition of sole proprietorship:

1. According to D.W.T. Staffod

“It is the simplest form of business organization, which is owned and controlled
by one man.”
2. According to G. Baker

“Sole proprietorship is a business operated by one person to earn profit.”

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. Easy Dissolution

The sole proprietorship can be easily dissolved, as there are no legal formalities involved in
it.

3. Easily Transferable

Such type of business can easily be transferred to another person without any restriction.

4. Freedom of Action

In sole proprietorship, single owner is the sole master of the business; therefore, he has full
freedom to take action or decision.

5. Formation

Formation of sole proprietorship business is easy as compared to other business, because it

dos not require any kind of legal formality like registration etc.

6. Legal Entity

In sole proprietorship, the business has no separate legal entity apart from the sole traders.

7. Legal Restriction

There are no legal restrictions for sole traders to set up the business. But there may be legal
restrictions for setting up a particular type of business.

8. Limited Life

The continuity of sole proprietorship is based on good health, or life or death of the sole
owner.
9. Management

In sole proprietorship, the control of management of the business lies with the sole owner.

10. Ownership

The ownership of business in sole proprietorship is owned by one person.

11. Profit

The single owner bears full risk of business, therefore, he gets total benefit of the business
as well as total loss.

12. Size

The size of business is usually small. The limited ability and capital do not allow the
expansion of business.

13. Success of Business

The success and goodwill of the sole proprietorship is totally dependent upon the ability of
the sole owner.

14. Secrecy

A sole proprietorship can easily maintain the secrecy of his business.

15. 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.

ADVANTAGES OF SOLE PROPRIETORSHIP

Following are the advantages of sole proprietorship:

1. Contacted with the Customers

In sole proprietorship a businessman has direct contact with the customer and keeps in
mind the like and dislikes of the public while producing his products.

2. Direct Relationship with Workers

In sole proprietorship a businessman has direct relationship with workers. He can better
understand their problems and then tries to solve them.
3. Easy Formation

Its formation is very easy because there are not legal restrictions required like registration
etc.

4. Easy Dissolution

Its dissolution is very simple because there are no legal restrictions required for its
dissolution and it can be dissolved at any time.

5. Easy Transfer of Ownership

A sole proprietorship can easily be transferred to other persons because of no legal

restriction involved.

6. Entire Profit

Sole proprietorship is the only form of business organization where the owner enjoys 100%
profit.

7. Entire Control

In sole proprietorship the entire control of the business is in the hands of one person. He
can do whatever he likes.

8. Flexibility

There is great flexibility in sole proprietorship. Business policies can easily be changed
according to the market conditions and demand of people.

9. Honesty

The sole master of the business performs his functions honesty and effitively to make the
business successful.

10. Independence

It is an independent form of business organization and there is no interference of any other

person.

11. Personal Satisfaction

As all the Business activities are accomplished under the supervision of sole owner, so he
feels personal satisfaction that the business is running smoothly.
12. Prime Credit Standing

A sole proprietor can borrow money more easily because of unlimited liability.

13. Quick Decisions

Sole proprietor can make quick decisions for the development and welfare of his business
and in this way can save his time.

14. Personal Interest

A sole proprietor takes keen intere4st in the affairs of business because he alone is
responsible for profit and loss.

15. Saving in Interest on Borrowed Capital

Sometimes, a sole proprietor borrows money to increase his capital, from his relatives,
without interest.

16. Saving in Legal Expenses

As there are no legal restrictions for the formation of sole proprietorship so it helps in
increasing savings as legal expenses are reduced.

17. Saving in Management Expenses

The owner of the business himself performs most of the functions so it r educes the
management expenses.

18. Saving in Taxes

The tax rates are very low on sole proprietorship because it is imposed on the income of
single person.

19. Secrecy

It is an important factor for the development of business. A sole trader can easily maintain
the secrecy about the techniques of production and profit.

20. Social Benefits

It is helpful in solving many social problems like unemployment etc.

DISADVANTAGES OF SOLE PROPRIETORSHIP

The disadvantages of sole proprietorship can be narrated as under:

1. Continuity

The continuity of sole proprietorship depends upon the health and life of the owner. In case
of death of the owner the business no longer continues.

2. Chances of Fraud

In sole proprietorship, proper records are not maintained. This increases the chances of
errors and frauds for dishonest workers.

3. Expansion Difficulty

In sole proprietorship, it is very difficult to expand the business because of the limited life of
proprietor and limited capital.

4. Lack of Advertisement

As the sources of single person are limited so he cannot bear the expense of advertisement,
which is also a major disadvantage.

5. Lack of Capital

Generally, one‐man resources are limited, so due to financial problems he cannot expand
his business.

6. Lack of Inspection and Audit

In sole proprietorship there is lack of inspection and audit, which increases the chances of
fraud and illegal operations.

7. Lack of Innovation

Due to fear of suffering from loss, a sole proprietor does not use new methods of
production. So, there is no invention or innovation.

8. Lack of Public Confidence

The public shows less confidence in this type of business organization because there is no
legal registration to control and wind up the business.
9. Lack of Skilled Persons

One person cannot hire the services of qualified and skilled persons because he has limited
resources. It is also a great disadvantage.

10. Management Difficulty

One person cannot perform all types of duties effectively. If he is a good accountant, he
may not be a good administrator. Due to this, business suffers a loss.

11. Much Strain on Health

In this type of business organization there is much strain on the health of the businessman
because he alone handles all sorts of activities.

12. Not Durable

This type of business organization is not durable because its existence depends upon the life
of sole proprietor.

13. Permanent Existence

In this type of business there is a need of permanent existence of a businessman. In case of

absence from business for few days may become the cause of loss.

14. Risk of Careless Drawings

In sole proprietorship, owner himself is a boss. There is no question to his decisions or

actions. So, there is a risk of careless drawings by him.

15. Risk of Loss

In case of sole proprietorship a single person bears all the losses, whereas in the case of
partnership or Joint Stock Company all the partners or members bear the loss.

16. Unlimited Liability

In sole proprietorship there is unlimited liability. It means, in case of loss personal property
of the owner can be sold to satisfy the claimants. It is a great disadvantage.
CONCLUSION

From the above‐mentioned detail, we come to the point that despite the above
disadvantages, sole proprietorship is an important form of business organization. This is
due to the fact that its formation is very easy and due to unlimited liability the owner takes
great care and interest in the business, because in case of loss, he is personally responsible.
As he enjoys entire profit, this factor also encourages him to work with great efficiency
which promotes his business.

PARTNERSHIP
Partnership and its Characteristics

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

1. 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.”

2. 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.”
 Structural Diagram:

Association

Profit & Loss PARTNERSHIP Money, Labour

And Other Skills

Lawful Business

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.

2. Audit

If partnership is not registered, it has no legal entity. So there is no restriction for the audit
of accounts.

3. Agent

In partnership every partner acts as an agent of another partner.

4. 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.

5. Cooperation

In partnership mutual cooperation and mutual confidence is an important factor.

Partnership cannot take place with cooperation.

6. Dissolution

Partnership is a temporary form of business. It is dissolved if a partner leaves, dies or

declared bankrupt.
7. 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.

8. 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.

9. 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.

10. Object

Only that business is considered as partnership, which is established to earn profit.

11. Partnership Act

In Pakistan, all partnership businesses are running under Partnership Act, 1932.

12. Payment of Tax

In partnership, every partner pays the tax on his share of profit, personally or individually.

13. Profit and Loss Distribution

The distribution of profit and loss among the partners is done according to their agreement.

14. Registration

Many problems are created in case of unregistered firm. So, to avoid these problems
partnership firm must be registered.

15. Relationship

Partnership business can be carried on by all partners or any of them can do the business
for all.

16. 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.
17. Transfer of Rights

In partnership no partner can transfer his shares or rights to another person, without the
consent of all partners.

18. 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.

ADVANTAGES OF PARTNERSHIP

Following are the advantages of partnership:

1. Simplicity in Formation

This type of business of organization can be formed easily without any complex legal
formalities. Two or more persons can start the business at any time. Its registration is also
very easy.

2. Simplicity in Dissolution

Partnership Business can be dissolved at any time because of no legal restrictions. Its
dissolution is easy as compared to Joint Stock Company.

3. Sufficient Capital

Partnership can collect more capital in the business by the joint efforts of the partners as
compared to sole proprietorship.

4. Skilled Workers

As there is sufficient capital so a firm is in a better position to hire the services of qualified
and skilled workers.

5. Sense of Responsibility

As there is unlimited liability in case of partnership, so every partner performs his duty
honestly.

6. Satisfaction of Partners

In this type of business organization each partner is satisfied with the business because he
can take part in the management of the business.
7. Secrecy

In partnership it is not compulsory to publish the accounts. So, the business secrecy
remains within partners. This factor is very helpful for successful operation of the business.

8. Social Benefit

Two or more partners with their resources can build a strong business. This factor is very
helpful in solving social problems like unemployment.

9. Expansion of Business

In this type of business organization, it is very easy to expand business volume by admitting
new partners and can borrow money easily.

10. Flexibility

It is flexible business and partners can change their business policies with the mutual
consultation at any time.

11. Tax Facility

Every partner pays tax individually. So, a firm is in a better position as compared to Joint
Stock Company.

12. Public Factor

Public shows more confidence in partnership as compared to sole proprietorship. If a firm is

registered, people feel no risk in creating relations with such business.

13. Prime Credit Standing

The liabilities of partners are unlimited, so the banks and other financial institutions provide
them credit easily.

14. Minority Protection

In partnership all policy matters are decided with consent of each partner. This gives
protection to minority partners.

15. Moral Promotion

Partnership is the best business for small investors. It promotes moral courage of partners.
16. Distribution of Work

There is distribution of work among the partners according to their ability and experience.
This increases the efficiency of a firm.

17. Combined Abilities

Every partner possesses different ability, which helps in running the business effectively,
when combined together.

18. Absence of Fraud

In partnership each partner can look after the business activities. He can check the
accounts. So, there is no risk of fraud.
 Lecture 4
PARTNERSHIP

DISADVANTAGES OF PARTNERSHIP

The disadvantages of partnership are enumerated one by one as under:

1. Unlimited Liability

It is the main disadvantage of partnership. It means in case of loss, personal property of the
partners can be sold to pay off the firm’s debts.

2. Limited Life of Firm

The life of this type of business organization is very limited. It may come to an end if any
partner dies or new partner enters into business.

3. Limited Capital

No doubt, in partnership, capital, is greater as compared to sole proprietorship, but it is

small as compared to Joint Stock Company. So, a business cannot be expanded on a large
scale.

4. Limited Abilities

As financial resources of partnership are limited as compared to Joint Stock Company, so it

is not possible to engage the services of higher technical and qualified persons. This causes
the failure of business, sooner or later.

5. Limited number of Partners

In partnership, the number of partners is limited, so the resources are also limited. That’s
why business can not expand on large scale.

6. Legal Defects

There are no effective rules and regulations to control the partnership activities. So, it
cannot handle large‐scale production.

7. Lack of Interest

Partners do not take interest in the business activities due to limited share in profit and
limited chances of growth of business.
8. Lack of Public Confidence

As there is no need by law to publish accounts in partnership, so people lose confidence and
avoid dealing and entering into contract with such firm.

9. Lack of Prompt Decision

In partnership all decisions are made by mutual consultation. Sometimes, delay in decisions
becomes the cause of loss.

10. Lack of Secrecy

In case of misunderstandings and disputes among the partners, business secrets can be
revealed.

11. Chances of Dispute among Partners

In partnership there are much chances of dispute among the partners because all the
partners are not of equal mind.

12. Expansion Problem

Partnership business may not be expanded due to limited number of partners, limited
capital and unlimited liability.

13. Frozen Investment

It is easy to invest money in partnership but very difficult to withdraw it.

14. Risk of Loss

There is a risk of loss due to less qualified and less experienced people.

15. Transfer of Rights

In partnership no partner can transfer his share without the consent of all other partners.

CONCLUSION

From the above‐mentioned findings, we come to this point that despite the above
disadvantages, partnership is an important from of business organization. This is because
its formation is very easy and due to unlimited liabilities, partners take great interest in
business, because in case of loss they are personally responsible.
PARTNERS

“The individuals who comprise a partnership are known as partners.”

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 is 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.

4. Silent Partner
A partner who does not take part in the management of business but is known to the public
as partner is called silent partner. He is liable to the creditors of the firm.

5. 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.

6. Sub‐Partner

A partner in a firm can make an agreement with a stranger to share the profits earned by
him from the partnership business. A sub‐partner is not liable for any debt and can not
interfere in the business matters.

7. Junior Partner

A person who has a small investment in the firm and has a limited experience of business is
called junior partner.
8. 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.

9. 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.

10. Nominal Partner

A partner who neither contributes in capital nor does he take part in the management of
the business but allows his name to be used in the business is known as nominal partner.
He is individually and jointly liable for the debts of the firm along with other partners.

11. Deceased Partner

A partner whose life has expired is known as deceased partner. The share of capital and
profit of such partner is paid to his legal heirs in lump sum or in installment.

12. 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.

13. 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.

14. Incoming Partner

A person who is newly admitted in the firm with the consent of all the partners is called
incoming partner. He is not liable for any act of the firm performed before he became the
partner unless he agrees.

15. Retired Partner

A partner who leaves the firm due to certain reasons is known as retired partner or
outgoing partner. He is liable to pay all the obligations and debts of the firm incurred
before his retirement.
16. Partner in Profits only

If a partner is entitled to receive certain share of profits and is not held liable for losses is
known as partner in profits only. He is not allowed to take part in the management of the
business.

17. Quasi Partner

A person, who was the partner of a firm but has now retired from active participation in
business and has left his capital in the business as a loan, receiving interest on it, is known
as quasi partner.

18. Partner by Estoppel

A person who holds himself out as a partner of a firm, before a third party or allows other to
do so, though he is not a partner of that firm, is called partner by estoppel or holding out
partner. He is not entitled to any right like other partners of the firm. He is not entitled to
any right like other partners of the firm. He is personally liable to the third party for the
credit given to the firm, on the faith of his representation.

KINDS OF PARTNERSHIP

There are three kinds of partnership which are described as under:

1. Partnership at will
2. Particular partnership
3. Limited partnership

PARTNERSHIP AT WILL

If the partnership is formed for an undefined time, it is called partnership at will. Any
partner can dissolve it at any time by giving the notice.

According to Partnership Act, 1932:

“If no provision is made in the agreement regarding the partnership, it is

called partnership at will.”

Partnership at will may be created under the following circumstances:

1. Indefinite Period

If partnership has been formed for an indefinite period, it is called partnership at will.
2. Existence after Completion of Venture

If partnership has been formed for a particular venture and after completion such venture it
remains continue, it becomes a partnership at will.

3. Existence after Expiry of Period

If partnership has been formed for a definite time period, so after the expiry of this period,
it becomes partnership at will.

PARTICULAR PARTNERSHIP

If the partnership is formed for a particular object of temporary nature, it is called particular
partnership. On completion of a particular venture, it comes to an end. Under this no
regular business is done. For example: Partnership for the construction of a building and
partnership for producing a film.

LIMITED PARTNERSHIP

Limited partnership is that in which liabilities of some partners are limited up to the amount
of their capitals. In this partnership, there is at least one partner who has unlimited liability.

In Pakistan, this type of partnership is not formed. There is a separate partnership act for it.

MAIN FEATUTRES

Main features of partnership are:

1. Limited Partner

There is at least one partner who has limited liability.

2. Unlimited Partner

There is at least one partner who has unlimited liability.

3. Number of Partners

There are at least two partners or maximum 20 in an ordinary business and not more than
10 in banking business.

4. Admission of New Partner

New partners may be admitted in this partnership without the consent of limited partners
but with the consent of unlimited partners.
5. Registration

The registration of this partnership is compulsory by law.

6. Transferability of Shares

Limited partner can transfer his shares to any other person with the consent of all other
partners.

7. Inspection of Books

Limited partner has a right to inspect the books of accounts.

8. Rights of Suggestions

Limited partner has a right to give suggestions to others who manage the business.

9. Participation in Management

A limited partner cannot take part in the management of the business.

10. Withdrawal of Capital

A limited partner cannot withdraw his capital until he remains in partnership business.

11. Separate Legislation

It is enrolled under the Limited Partnership Act, 1907, instead of Partnership Act, 1932.

TERMINATION OF PARTNERSHIP

All forms of partnership under Islamic law may be terminated as:

1. Notice

In all the above forms of partnership each partner has a right to terminate the partnership
by giving notice to other partners.

2. Death

Partnership is also terminated on the death of a partner.

PARTNERSHIP DEED

Partnership deed is a document that contains the terms and conditions of the business.

CONTENTS OF PARTNERSHIP DEED

 Date on which the agreement was made.

 Name of the business
 Nature of the business
 This clause will cover the scope of the business.
 Names, addresses, telephone Numbers and emails of the partners.
 Capital of the business
 If duration is attached with any business that should clearly be mentioned in the
partnership deed.
 Duties of the partners
 Whether any partner is entitled to salary. If yes, how much amount should be given
to him as salary
 Profit distribution ratio
 Whether partners are entitled to withdraw money from the business. If yes,
procedure of withdrawals should also be written in the partnership deed.
 Arbitration
 In case of a conflict, how that conflict would be resolved before going to the
court.

The partner should read the partnership deed carefully, add as much clauses as possible and
never take anything for granted.

RIGHTS OF THE PARTNERS

 Every partner has the right to:

 Participate in all the affairs of the business.

 Get his/her share of profit from the business.
 Leave the partnership according to the terms and conditions of the
partnership deed.
 Claim the salary against his/her services.
 Participate in the management of the business.