Introduction to Business

KINDS / FORMS OF BUSINESS

There are mainly three kinds of businesses.

1. Sole Trader Ship (Proprietorship)

2. Partnership (Firm)
3. Joint Stock Company (Company)

1. Sole Trader Ship / Sole proprietorship

Sole proprietorship means the business of one person. In this business only a single person invests his
capital and efforts. He is solely responsible for all losses and enjoysthe whole profit.

This type of business is very easy to start. There are no legal formalities to start this type of business. A
person can think it in morning and start it in evening.

This type of business is suitable for small scale activities.

2. Partnership
When two or more person run a legal business for earning profit, it is called partnership.

It is owned and managed by at least two (2) and maximum twenty (20) members. All the partners can
take part in the conduct of business or any one of them can run the business for all of them.

The profit or loss is shared among the member according to agreed ratio. In absence of agreement profit
or loss is shared equally among all the members.

This type of business is common and suitable for small and medium scale activities.

3. Joint Stock Company

It is a type of business which is started by at least seven (7) members and there is no limit on maximum
number of member.

Company has a separate legal entity. It means it can buy and sell with its own name. Owner‟s personal
property will not be liable to pay company debts. Owner‟s liability is limited up to their investment.

There are so many legal formalities to start Joint Stock Company. Maximum capital of the company is
registered. Company is managed by a board of directors elected by members. This type of business is
suitable for large scale activities.
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SOLE PROPRIETORSHIP / ONE MAN CONTROL

Sole proprietorship means the business of one person. In this business only a single person invests his
capital and efforts. He is solely responsible for all losses and enjoysthe whole profit.

ACCORDING TO STAFFORD
It is the simplest form of the business, which is owned and controlled by one man.

ADVANTAGES / WHY IT IS BEST

1. Business Freedom
Sole trader enjoys the business freedom. He is not bound to take suggestions from others and no one
is allowed to make interference in his business.

2. Direct Relation
As this business is on small scale, so it is possible for sole trader to make direct relations with
customers and workers. In this way, he becomes able to know the taste of customers and problems of
workers.

3. Easy Formation
It can be easily established. No legal formalities are required to be fulfilled forstarting this type
of business. A person may think to start such business in morning and he can start it in evening.

4. Easy Transfer
This business can be easily transferred to any other person without any restriction.

5. Easy Dissolution
Sole proprietorship can be easily dissolved. No formalities are required to be fulfilled for the
dissolution of this business.

6. Entire Profit
The owner of this type of business enjoys all profit himself but in partnership and in Joint stock
company profit is distributed among the members.

7. Entire Control
The owner has entire control on this type of business. He can do what he likes. He is not bound to
take suggestions from others.

8. Flexibility
There is a great flexibility in sole proprietorship. Sole proprietor can easily change his business
according to market conditions.

9. Goodwill
Sole trader can easily raise the goodwill of business by running its business according to the
customer‟s satisfaction.

10. Honesty
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Sole trader is solely responsible for all losses. So he runs his business with honesty and hardworking.

11. Low Taxes

As the business is on small scale, so sole trader has to pay low taxes to government, but Joint Stock
Company is taxed twice.

12. Less chances of fraud

There are less chances of fraud in sole trader ship because no other person is involved in business
matter except sole trader.

13. Personal interest

In this type of business, the proprietor takes keen interest and tries to know the taste, fashion and
habits of customers because he knows that if there will be any loss, he will be responsible himself.

14. Secrecy
Secrecy is the base of success of business. As there is only one owner in this business, so there is no
chance of leakage of secrecy.

15. Social benefits

Sole trader ship is very beneficial for the society because it provides daily necessities of life at homes.

DISADVANTAGES /WHY IT IS NOT BEST

1. Continuity
The continuity of sole proprietorship depends upon the health and life of the owner. Incase of death
of the owner the business no longer continues.

2. Unlimited Liability
The liability of owner is unlimited. Therefore, in case of insolvency of firm, theprivate property of
owner may be sold.

3. Difficulties in Credit
Bank and other financial institutions hesitate to advance the loan to sole traderbecause his financial
position is not strong.

4. Less Growth
It is not possible for one man to increase his business volume due to unlimitedliability and lack of
capital.

5. Lack of Skilled Persons

Sole trader can not hire the services of skilled workers due to limited capital. But theJoint Stock
Companies enjoy the services of skilled persons.

6. Lack of Advertisement
Sole trader can not bear the high expenses of advertisement while advertisement playsvery
important role for increasing the sale of product.
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7. Lack of Public Confidence

The public shows less confidence in this type of business because there is no legalregistration to
control and wind up the business.

8. Lack of Technology
New methods of production and technology are very important for the success ofbusiness but it is
difficult for sole trader to install new machinery and adopt new methods due to lack of capital.

9. Management Problem
One man cannot perform all types of management and business activities effectively.He may be
expert in purchasing but not in accounting.

10. Loss in Absence

In this type of business there is a need of permanent existence of a businessman. Incase of absence
from business for few days may become the cause of loss.

11. Difficulties to Face Crises

The sole trader has a limited capacity to face heavy losses or economic crisis. In thetime of heavy
losses, business may come to an end.

12. Less Jobs

There are fewer opportunities of jobs for employees in sole proprietorship due to small level of
business.

13. Wrong Decision

Sole trader take all decisions individually, as a result he may take wrong decisions which may
damage the business. It is said that two heads are always better than one.

14. Lack of inspection

In sole trader ship normally proper books of accounts are not maintained. Due to absence of proper
record inspection is not possible.

15. Entire Loss

In sole trader ship there is only one owner. If there is any loss he will bear it individually. Sometime
loss may be very high due to which business can be closed.
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Partnership
Partnership is a type of business organization in which two or more individuals agree to share profits and
losses of a business carried on by all or any one of them acting for all, as defined under the Partnership Act,
1932.

Nature of Partnership
1. Voluntary Agreement
o A partnership is formed through a mutual agreement between partners.
o This agreement can be oral or written (known as a partnership deed).
2. Number of Partners
o Minimum: 2 partners.
o Maximum:
▪ For general businesses: 20 partners.
▪ For banking businesses: 10 partners.
3. Sharing of Profit and Loss
o Profits and losses are shared among partners as per the partnership agreement.
o If there is no agreement, profits and losses are shared equally.
4. Joint Ownership and Management
o All partners jointly own the business assets.
o Management responsibilities may be shared or assigned to specific partners.
5. Unlimited Liability
o Partners have unlimited liability, meaning their personal assets can be used to meet the
firm's obligations.
6. Mutual Agency
o Each partner acts as an agent of the firm and other partners.
o Decisions or actions of one partner bind the others.
7. No Separate Legal Entity
o A partnership is not a separate legal entity; the business and partners are considered
the same for legal purposes.
8. Continuity
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o A partnership dissolves on the death, insolvency, or retirement of any partner unless

otherwise agreed.

Scope of Partnership
1. Wide Range of Activities
o Partnerships can operate in various fields, such as trade, manufacturing, services, and
banking.
o Ideal for businesses requiring pooled resources and shared decision-making.
2. Flexible Management
o Decision-making is more flexible as partners can tailor management practices based
on mutual consent.
3. Resource Sharing
o Combines financial and human resources of partners.
o Beneficial for medium-sized businesses.
4. Risk Distribution
o Risks are shared among partners, reducing the burden on a single individual.
5. Legal Support
o Partnerships are regulated by the Partnership Act, 1932, which provides a legal
framework for resolving disputes and protecting partners' rights.
6. Global and Local Collaboration
o Partnerships enable collaborations at both local and international levels to expand
operations.
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Classification of Partnership
1. Classification Based on Duration
1. Partnership at Will
o Formed for an indefinite period.
o Can be dissolved by any partner at any time by giving notice to the others.
2. Particular Partnership
o Formed for a specific purpose or project (e.g., constructing a building).
o Dissolves automatically upon the completion of the project or achievement of the
objective.
2. Classification Based on Liability
1. General Partnership
o All partners have unlimited liability.
o They share equal responsibility for managing the business and debts.
2. Limited Partnership
o Includes at least one general partner with unlimited liability and one or more limited
partners with liability restricted to their capital contribution.
o Limited partners do not actively participate in management.
3. Classification Based on the Nature of the Business
1. Trading Partnership
o Engaged in buying and selling goods for profit (e.g., wholesale or retail businesses).
2. Non-Trading Partnership
o Engaged in professional services or charitable activities (e.g., law firms, accounting
firms, or educational institutions).
4. Classification Based on the Legal Status
1. Registered Partnership
o Registered with the relevant government authority under the Partnership Act.
o Provides legal recognition and benefits, such as the right to sue or settle disputes.
2. Unregistered Partnership
o Not registered with the government authority.
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o May face limitations, such as the inability to enforce legal claims in court.
5. Classification Based on Partners' Roles
1. Active or Working Partnership
o Partners actively participate in the management and operations of the business.
2. Sleeping or Dormant Partnership
o Partners contribute capital but do not take part in daily business activities.
3. Nominal Partnership
o Partners lend their name or reputation to the firm without contributing capital or
participating in management.
4. Minor Partnership
o Minors are admitted with limited rights, usually for sharing profits, but they have no
liability for losses.

Advantage and Disadvantage of Partnership

Advantage of Partnership
Partnerships offer many benefits for people working together in a business. Here are the main
advantages explained simply:
1. Easy to Start
• Setting up a partnership is simple.
• You just need an agreement between the partners, which can even be oral (though a written
agreement is better).
2. Shared Responsibility
• Partners share the workload and responsibilities.
• Each partner can focus on the area they are good at, such as management, finance, or
marketing.
3. More Capital
• When multiple people come together, they can pool their money.
• This provides more funds to start and grow the business compared to one person working
alone.
4. Combined Skills and Expertise
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• Each partner brings unique skills, experience, and ideas.

• This helps the business grow faster and solve problems more effectively.
5. Shared Risk
• Losses and risks are shared among the partners, so no one has to bear the burden alone.
6. Flexibility in Operations
• Partners can easily make changes in the business based on mutual agreement.
• There are fewer formalities compared to larger business structures like companies.
7. Better Decision-Making
• With more partners, decisions are made after discussions and ideas from different
perspectives.
• This often leads to better solutions.
8. Tax Benefits
• Partnerships may enjoy lower taxes compared to companies, as the income is taxed as
personal income of the partners.

Disadvantage of Partnership
While partnerships have many advantages, they also come with certain drawbacks. Here are the main
disadvantages explained simply:
1. Unlimited Liability
• Partners are personally responsible for the debts of the business.
• If the business fails, personal assets like savings or property might be used to pay off debts.
2. Shared Profits
• Profits are divided among all partners, even if one partner feels they contributed more than
others.
• This can sometimes cause dissatisfaction.
3. Disagreements Among Partners
• Different opinions and conflicts may arise when making decisions.
• Disputes can delay important actions and harm the business.
4. Lack of Stability
• The partnership may end if a partner dies, retires, or leaves the business.
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• This lack of continuity can disrupt operations.

5. Limited Capital
• Though partnerships bring in more money than sole proprietorships, they still have limited
resources compared to larger business forms like companies.
6. Difficult to Transfer Ownership
• A partner cannot transfer their share to someone else without the agreement of all partners.
• This makes it hard to bring in new partners or change ownership.
7. Risk of Wrong Decisions by One Partner
• One partner's poor decision can affect the entire business, as all partners are responsible for
the actions of each other.
• This is due to the concept of mutual agency in partnerships.
8. No Separate Legal Status
• The business and the partners are treated as one in the eyes of the law.
• This means personal and business liabilities are not separate.
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KINDS OF PARTNERS

(A) ACCORDING TO AGE

1. Minor Partner
Minor partner means a partner whose age is less than 18 years. A minor partner enjoys the profit of
firm but does not bear the losses. He cannot be a full-fledged member. On attaining the age of
majority, he has to choose in 6 months whether hehas to continue as a partner or not.

2. Major Partner
Major partner means a partner whose age is 18 years or more. A major partner enjoys the profit and
bears the losses.

(B) ACCORDING TO EXPERIENCE

3. Senior Partner
Senior partner means a partner who invest a large capital and who has muchexperience. His
share in profit or loss of business is more than other partners.

4. Junior Partner
Junior partner means a partner who invests small capital and who has less experience.His share in
profit or loss is less than other partners.

(C) ACCORDING TO RESPONSIBILITY

5. Limited Partner
Limited partner means a partner whose liability is limited up to his invested capital.He cannot
take part in the management.

6. Unlimited Partner
Unlimited partner means a partner whose liability is unlimited. He can take part in themanagement
of business.

(D) ACCORDNG TO MANAGEMENT

7. Nominal Partner
Nominal partner means a partner who does not invest his capital and does not takepart in the
affairs of business. Just his name is used as a partner. He is liable for all thedebts of firm.

8. Sleeping Partner
A sleeping partner means a partner who does not take part in the management of firm but he invests
his capital and shares in profits & losses.
9. Active Partner
Active partner means a partner who takes active part in the management of firm. He contributes his
capital and has share in profit.
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10. Secret Partner

Secret partner means a partner who takes active part in the management of business but not known
to the public as partner. He invests his capital and also has share in profit or loss.

(E) OTHER PARTNERS

11. Quasi Partner

Quasi partner means a partner who has retired from business but has not withdrawn his capital. His
capital is considered as loan and he receives interest on it.

12. Salaries Partner

A partner who does not invest in business but he has right to receive salary or profit orboth is known
as salaried partner. He is liable for all acts of firm like other partners.

13. Insolvent Partner

A partner who is unable to pay the debts and his share of debts is paid by other partners is known as
insolvent partner.

14. Partner in Profit Only

A partner who has share in profit but has not concern with the losses or liabilities is called a partner
in profit only. He cannot take part in the management.

15. Deceased Partner

A partner who has died but his share of capital and profit is paid to his heirs is known as deceased
partner.

16. Retired Partner

A partner who has retired from business is known as retired partner. He is not liable for those acts
which are incurred after the date of his retirement.

17. New Partner

A new partner means a partner who is admitted in running business with the consentof other
partners. A new partner is not liable for any debts or acts which are incurred before the date of his
admission.

18. Sub Partner

Sub partner means a partner who receives the share of profit from a regular partner of firm. He is not
responsible for any debts of firm.