Sole Proprietorships. Quick Decision and Prompt Action – Nobody interferes in the affairs of the sole proprietary organisation. Personal Incentive and Direct Supervision: There is no divorce between ownership and management. Thus, businesses like a wholesale trade, professional services, mercantile houses and small manufacturing units can be successfully organized as partnership firms. However, more formal system prevails on it compared to proprietor concerns. (v) Every LLP must have at least two partners. Further a person is not allowed to become member and or nominee of more than two OPCs. The global on-demand digital content streaming market involves frequent changes in technologies and consumer preferences. Unlimited Liability – In the eyes of law, the proprietor and the business are one and the same. v. No Sharing of Profit and Loss – The sole proprietor enjoys the profits and losses alone. The bureaucratic habit of the company officials is to shirk troublesome initiatives because they get no direct benefit from it and often retards growth. Chief Justice John Marshall of U.S.A defined a company in the famous Dartmouth College case as “an artificial being, invisible, intangible and existing only in contemplation of law; being the mere creature of law it possesses only those properties which the charter of its creation confers upon it, either expressly or as incidental to its very existence; and the most important of which are immortality and individuality. Arbitration for settlement of disputes among the partners. Any change in its members does not affect its existence, rights and liabilities. A joint stock company is an incorporated and voluntary association of individuals with a distinctive name, perpetual succession, limited liability and common seal, and usually having a joint capital divided into transferable shares of a fixed value. A corporation is ‘an artificial being, invisible, intangible, and existing only in contemplation of the law’. Further, the company shall inform the Registrar about every contract entered into by the company and recorded in the minutes of the meeting of its Board of Directors within a period of fifteen days of the date of approval by the Board. 0000010179 00000 n Most production and distribution activities are carried out by millions of people in different parts of the country by constituting various kinds of organizations. Share Your PDF File In a partnership, the … LLP Act, 2008), the provisions of Indian Partnership Act, 1932 are not applicable to an LLP and it is regulated by the contractual agreement between the partners. Many failures occur because owners lack the skills, knowledge, and experience in areas that are vital to business success. Most production and distribution activities are carried out by millions of people in different parts of the country by constituting various kinds of organizations. However, the … These include sole proprietorships, general and limited partnerships, limited liability corporations (LLCs), S corporations, and C corporations. Keeping in view the impending and ever growing needs of funds for a new as well as growing startup, usually the first preference for establishing a startup is given to a company form of business. (i) OPC will enable small entrepreneurs and professionals, e.g., chartered accountants, lawyers, doctors, etc. Partnership firm thus grew out of the limitations of one man business. Just because of limited liability, corporations have proved to be the most effective form of ownership for accumulating large amount of capital. Partners with complementary skills may be chosen to avail of the benefits of specialisation. On account of its stable nature, a company is best suited for such types of business which require long periods of time to mature and develop. Partnership is free from statutory control by the Government except the general law of the land. becomes the members of the company. In short, this is a simple one person firm where, one can use his brand name, apply for payment gateways and be able to issue invoice on his brand name to customers. Has a minimum paid-up share capital of five lakh rupees or such higher paid-up capital, as may be prescribed –. It must be signed by all the partners and should be properly stamped. Unlimited Liability – Partners in partnership firm suffer from the problem of unlimited liability. Partnership form of business organisation in India is governed by the Indian Partnership Act 1932. No organization design or method of management is perfect. Therefore, the entrepreneur has sufficient incentive to work hard. However, many proprietors have already put all they have in their businesses and have used their personal resources as collateral on existing loans, making it difficult to borrow additional funds. can successfully run under this form of business organization. Unlimited Liability – The liability of sole proprietor is unlimited. Corporations are subjected to more legal, reporting, and financial requirements than other forms of ownership. The foregoing description reveals that partnership form of organisation is appropriate for medium-sized business that requires limited capital, pooling of skills and judgment and moderate risks, like small scale industries, wholesale and retail trade, and small service concerns like transport agencies, real estate brokers, professional firms like chartered accountants, doctor’s clinics or nursing homes, attorneys, etc. Every partner is the principal as well as the agent of the firm. Nobody shares the profits of business. Where quick decisions are very important, e.g., share brokers, bullion dealers, etc. Keen Interest – Since partners share the profit and bear the losses, they take keen interest in the affairs of the business. Legal and tax considerations enter into selecting a business structure. This form was introduced in the world by U.S in 1990s in the wake up of fall of real estate and energy prices in Texas. We also address how access to skilled labor may be affected by rising restrictions to immigration. Where personal attention to individual tastes and fashions of customers is required, e.g., beauty parlour, tailoring shops, lawyers, painters, etc. A company is subject to elaborate statutory regulations in its day-to-day operations. In fact sole proprietor is the supreme judge of all matters pertaining to his business subject only to the general laws of the land and to such special legislation as may affect his particular business. Therefore, sole proprietorship is suitable in the following cases: i. As per the Companies Act, if nothing is mentioned in the incorporation document, it would be assumed the sole shareholder shall also be the sole director in the one person company and which shall be practically the case in most OPCs being incorporated. 0000006754 00000 n The persons who form a partnership are individually known as partners and collectively a firm or partnership. (iii) The line of business involves great uncertainty or heavy risk, e.g., shipping and airline concerns. (v) An OPC may be managed by the owner or his representative. However, the remuneration to partners must be authorized by the LLP agreement and it cannot exceed the limit prescribed under the agreement. The registration of a partnership firm is not compulsory. 0000008962 00000 n The major disadvantage of a sole proprietorship is the unlimited liability of the owner, which means that the sole proprietor is personally liable for all of the business’s debts. A partnership firm lacks the confidence of public because it is not subject to detailed rules and regulations. The agreement can be altered and new partners can be admitted whenever necessary. Such a person can be both a shareholder as well as the director, while enjoying the benefits of limited liability. This form of organization is quite popular in our country. In an LLP, one partner is not responsible or liable for another partner’s misconduct or negligence, as it was the case in case of original form of partnership firms. v. Sharing of Risks – The losses of the firm are shared by all the partners equally or as per the agreed ratio as decided in the partnership agreement. 0000005437 00000 n ix. Before publishing your Articles on this site, please read the following pages: 1. ii. Potential marketing implications among employees include higher morale and greater commitment to a company when sales are favorable and the company has a good reputation. In addition to being easy to begin, the sole proprietorship is generally the least expensive form of ownership to establish. (vii) Quick decisions can be taken due to complete control by the owner. Marketing implications also apply to the overall health of a business since greater customer satisfaction and increased sales lead to higher production and more profit. Lack of publicity of its affairs undermines public confidence in the firm. A company and its management have to function well within the law. Business activities like construction, providing legal services, accounting and financial services etc. Forms to use. If one of the partners dies, the continuation of the business gets ridden with complications. Limited Liability of shareholders – The business is viewed as a separate legal entity. Registration of the firm is not essential and the partnership agreement need not essentially be in writing. The partnership itself is not subject to general taxation. No exposure to personal assets of the partners except in case of fraud. v. LLP has more flexibility and lesser compliance requirements as compared to a company. Any change in the above particulars must be communicated to the Registrar of Firms within a reasonable period of time so that necessary alterations may be made in the Register of Firms. Illness, death or insolvency of the proprietor can lead to closure of the business. Lack of a central authority may affect the efficiency of the firm. TOS4. This clause shall be very much in vogue since the business of the One Person Company may use many assets of the owner and may pay compensation for that. The general perception of sole proprietorships is that they are a small and insignificant part of the national as well as global economy. But it is desirable that all terms and conditions of partnership are put in writing so as to avoid any misunderstanding and disputes among the partners. Similarly, the business can be wound up any time if the proprietor so decides. 0000004674 00000 n Which organizational form is most appropriate can be influenced by tax issues, legal issues, financial concerns, and personal concerns. Exit strategy – due to transferability of shares and being widely recognizable in the public domain, a public company magnifies its chances of easily seeking future suitors for the company. viii. Especially for professionals like chartered accountants/ company secretaries and advocates, it has become much easier to be formed as an LLP. The firm is considered to be registered when the entry is made. v. Maintenance of Business Secrets – The business secrets are known only to the proprietor. He is not required to disclose any information to others unless and until he himself so decides. It serves as a conduit for the profit or losses it earns or incurs; it is generally not as effective as the corporate form of ownership, which can raise capital by selling shares of ownership to outside investors. Finally it can be concluded that no particular form of business is perfect for organizing a startup. Unlike the old Companies act 1956, where minimum two directors and shareholders were required to form a private limited company. 0000011375 00000 n ix. This choice affects a number of managerial and financial issues, including the amount of taxes the entrepreneur would have to pay, whether the entrepreneur may be personally sued for unpaid business bills, and whether the venture will die automatically with the demise of the entrepreneur. 3. iii. No Separation of Ownership and Management – The owner himself/herself manages the business as per his/her own skill and intelligence. These are activities including revenue, costs, tax deductions, tax credits and so on with respect to the time that they occurred. Where the operation is simple and does not require skilled management. As defined by the uniform Partnership Act, a partnership is a ‘voluntary association of two or more persons to carry on as co-owners a business for profit’. iv. (iv) The owner of an OPC shall be liable only to the extent of its capital. ‘Partnership’ is an association of two or more persons who pool their financial and managerial resources and agree to carry on a business, and share its profit. Combined abilities and judgment result in more efficient management of the business. Sole Proprietorship. c. There is lack of business secrecy as an LLP has to file the prescribed documents with the Registrar. But it is not always possible to replace a partner enjoying trust and confidence of all. Therefore, registration of a partnership is desirable. vii. Ownership of a business can be easily transferred in an OPC by transferring shares. The sole proprietorship, as its name implies, is a business owned and managed by a single individual. Service type firms offer professional skills, expertise, advice, and other similar products.Examples of service businesses are: salons, repair shops, schools, banks, accounting firms, and law firms. By the time an owner decides to seek help in addressing those problems, it may be too late to save the company. ii. It has to submit periodical reports. Persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of members; and. There is greater scope for expansion or growth of business. ii. As per the Companies Amendment Act, OPC should have minimum of one director and maximum of fifteen directors on the board of the company. Private Company 7. If the proprietor dies, retires, or becomes incapacitated, the business automatically terminates. Further, the nominee director cannot claim any ownership of the company while serving as a nominee director. Although, there is no specific mention, a HUF represented by its Karta and a Minor can also be partner in LLP. 6. Audit and publication of accounts is obligatory. v. Possibility of Conflicts – At times there is a strong possibility of conflict among partners due to divergent views and interest. xvi. An overview of the four basic legal forms of organization: Sole Proprietorship; Partnerships; Corporations and Limited Liability Company follows. Incentive for hard work and efficiency is low. 2. The Act also provides for conversion of existing partnership firm, private limited Company and unlisted public Company into an LLP by registering the entity with the Registrar of Companies (ROC). Personal contact with employees and customers is not possible. Thus, the risk is limited and known. Often a partner is required to sell his interest to the remaining partners. The partnership agreement should articulate the nature of each partner’s contribution and proportional share of the profits. One of the most attractive features of a sole proprietorship is that it is fast and simple to begin. Even if the original agreement contains such a requirement and clearly delineates how the value of each partner’s ownership will be determined, there is no guarantee that the other partners will have the financial resources to buy the seller’s interest. 0000050281 00000 n In fact a huge establishment is needed to maintain the records and accounts and the same will be verified by independent auditors. iv. Partners share in the profits and losses of the firm and there is motivation to improve the efficiency of the business. Additionally, learn about the advantages and disadvantages of each form of business organisation. b. Foreign Direct Investment is permitted under the automatic route in LLPs, operating in sectors/ activities where 100% FDI is allowed through the automatic route and there are no FDI-linked performance conditions. The duties, powers and obligations of all the partners. 0000006776 00000 n (ii) The procedure for forming the OPC is very simple. Mode of valuation of goodwill on admission, retirement or death of a partner. However once a business is well established in the industry, then riding on the prestige and credibility of the business, at a later stage, a business can unravel the option of being formed as a public company. Sole Proprietorship: Being a separate legal entity, it is unaffected by the death or any other form of departure of any member and continues to be in existence irrespective of the changes in ownership. In OPC, only a person is required to form a company. Corporations are supposed to maintain detailed accounts for every transaction. Hence, the provisions concerning OPC require a re-look and redrafting. 0000013013 00000 n Lack of Continuity – The continuity of the business is linked with the life of the proprietor. xi. Two or More Persons – To form a partnership firm at least two persons are required. Many businesses begin as sole proprietorships and graduate to more complex business forms as the business develops. Welcome to EconomicsDiscussion.net! No requirement to hold annual or extra ordinary general meetings. In this business analysis case, Netflix Inc. applies its organizational culture to create and maintain flexibility to adapt to market trends. (vii) A minimum share capital may be prescribed for an OPC. The company organisation has made it possible to accumulate large amounts of capital required for large scale operations. iv. 0000005459 00000 n Any person competent to enter into a contract can start it. Then I will tell you about “Structure of an Organization”. It is important that you choose the right structure for your business as the type of structure you choose will affect how your business is organized, taxed, and handled. In other words, a partnership is an agreement among two or more persons to carry on jointly a lawful business and to share the profits arising there from. This is inherent in a sole proprietorship. Due to the hybrid form of the business, it is required to comply with various rules and regulations and legal formalities. The liability of an LLP and its partners in Limited. xvii. The partnership firm can continue after the death or insolvency of a partner if the remaining partners so desire. Some examples in this sense include solo proprietorship, partnership, limited liability partnership, corporate organization with stock owners, or non profit institutions. These organizations are based on some form of ownership. The vast majority of small businesses start out as sole proprietorships. The property owned by a company could be machinery, building, intangible assets, land, residential property, factory, etc. But in a company conflict may continue between shareholders and board of directors or between shareholders and creditors or between management and workers. Net profits, which are calculated by deducting all allowable expenses from the turnover of sales, shall be taxable at the rate of thirty percent plus education cess. Limited Capital – A partnership firm suffers due to limited personal capacity of partners. What form your business adopts will affect a multitude of factors, many of which will decide your company’s future. Benefits of specialisation and bold management can be secured. It requires an agreement that may be verbal or written. Public company is a separate legal entity incorporated under companies act, allowing the members to transfer their shares, while having a larger number of shareholder base. This discourages expansion of the enterprise. 5. Running a business alone allows an entrepreneur maximum flexibility, but it also generates feeling of isolation that there is no one to turn to for help in solving problems or getting feedback on a new idea. Limited only by the number of shares authorized in its charter the corporation can raise money to begin business and expand as opportunity dictates by selling shares of its stock to investors. The company offers an excellent scope for self-generating growth. 0000074176 00000 n Sole proprietorship or individual entrepreneurship is a business concern owned and operated by one person. Moreover, the directors of a company may manipulate the prices of the company’s shares and debentures on the stock exchange on the basis of inside information and accounting manipulations. There is no scope for difference of opinion and no problem of co-ordination. 1. Choosing a legal form of organization—a sole proprietorship, partnership, or corporation—ranks among an entrepreneur’s most vital decisions. A sole proprietorship is the most common form of business organization. (vi) There must be at least two designated partners and one of them must be a resident in India. Procedure for dissolution of the firm and settlement of accounts. These organizations are based on some form of ownership. He is also not bound to publish his business accounts. Employment of professional managers having managerial skills and little financial stake results in higher efficiency and more adventurous management. A sole proprietorship The most basic type of business organization in which there is only one owner. Date of commencement of the firm’s business and the dates on which each partner joined the firm. A company suffers from the following limitations: It is very difficult and expensive to form a company. Limited Liability Partnership has proved to be a boon for small manufacturing sector as well as for service sector firms. They may collect huge sums of money and, later on, misappropriate the money for their personal benefit. Larger possibility of conflicts between management and owners. Shares of public companies are generally listed on a stock exchange so that people can easily buy and sell them. This chapter focuses on legal forms of business organizations that are widely used in the U.S. It can always keep itself in tune with the needs and aspirations of people through continuous research and development. Giant companies may give rise to monopolies, concentration of economic power in a few hands, interference in the political system, lack of industrial peace, etc. Contractual Relationship – Minors, lunatics and insolvent persons are not eligible to become the partners. In theory the management of a company is supposed to be democratic but in actual practice company becomes an oligarchy (rule by a few). Unlimited Liability – The partners of the firm have unlimited liability. (iv) An OPC has to be incorporated. The way a business is organized influences its ability to reach its goals and objectives. A company enjoys uninterrupted business life. Our mission is to provide an online platform to help students to discuss anything and everything about Economics. 0000067314 00000 n The business structure you choose influences everything from day-to-day operations, to taxes, to how much of your personal assets are at risk. Sole proprietorship form of organization is suitable when the size of the concern is very small, requires little capital, prefers to control by one person, where risk is more and personal attention is required. i. According to Section 4 of the Partnership Act, 1932 partnership is “the relation between persons who have agreed to share the profits of a business carried on by all or anyone of them acting for all”. (iv) Any individual or a body corporate can be a partner in an LLP. The corporation’s existence does not depend on the fate of any single individual. A partnership deed usually contains the following details: ii. vi. The sole proprietor is a person who carries on business exclusively by and for himself. Due to restrictions on seeking public funding, the prospects of growth and expansion are limited to the personal financing capacities of members of a private company. Therefore, he can take on the spot decisions to exploit opportunities from time to time. The LLP gives an entrepreneur the twin benefits of limited liability and a flexible internal structure. Sole Proprietorship 2. (viii) OPC would provide the start-up entrepreneurs and professionals the much needed flexibility in setting up business without losing control. Transferability of shares – the shares of a PLC can be freely transferable. Owners tend to brush aside problems they don’t understand or don’t feel comfortable with in favour of those they can solve more easily. Organizations hav… iii. 0000002158 00000 n vi. They share responsibility equally, make collective decisions on the basis of one person one vote and, in most co-operatives receive equal pay. v. Limited Managerial Expertise – A sole proprietorship form of business organisation always suffers from lack of managerial expertise. The nature and place of business can be changed whenever the partners desire. The partnership form enables the pooling of abilities and judgment of several persons. ‘Sole Proprietorship’ form of business organisation refers to a business enterprise exclusively owned, managed and controlled by a single person with all authority, responsibility and risk. Tax implications of the different organizational structures. Your need for access to cash out of the business for yourself. (iii) A company should operate as a democratic institution with discussion and decision by voting. Benefits of Incorporation The corporate form of organization offers several advantages, including limited liability for shareholders, greater access to financial resources, specialized management, and continuity. Any other clause(s) which may be found necessary in particular kind of business. There is a possibility that unscrupulous promoters may float a company to dupe innocent and ignorant investors. The survival capacity of the partnership firm is higher than that of sole proprietorship. Stability – being a separate legal entity, the existence of a private company is independent of the existence of its members. The time and cost involved in fulfilling legal formalities discourage many people from adopting the company form of ownership. One-man control- The owner has complete control of operations. iii. (d) Uncertain Life – The life of proprietorship depends upon the life of the owner. How would OPC work and what would be the regulatory provisions concerning their formation and functioning has not been made clear. The partnership has a profit of $9,000, so each partner is responsible for $3,000. xii. 0000004652 00000 n iv. iii. This form was primarily created to give flip to small and medium entrepreneurs and professionals who can enjoy the benefits of body corporate while also retaining control over their businesses. Many of the drawbacks of a company are mainly due to the weaknesses of the people who promote and manage companies and not because of the company system as such. Some common kinds of ownership structures are as follows: The simplest way to start up a business on one’s own is to become a sole trader (sometimes known as a sole proprietor). So personal properties of the owner can also be used to meet the business obligations and debts. Secrecy – Business secrets of the firm are only known to the partners. xiv. A number of documents have to be prepared and filed with the Registrar of Companies. Sharing of managerial responsibilities. We identify the effects of Brexit on firms’ transaction costs in cross-border trade within Europe and highlight the importance of EU residency to secure licenses to operate. 4. Flexibility in Operations – It is very easy to effect changes as per the requirements of the business. shareholding, directorship and nominee director. The legal form of the organization results from state statutes and the tax code of the Internal Revenue Service. 1. No financial stake-business at the mercy of the assistant. Each partner’s assets cumulatively lead to a large pool of capital available for the business, which in turn helps to carry out the business on a large scale compared to sole proprietorship. 0000010157 00000 n Their private property cannot be attached to pay the debts of the company. Increases risk and liability of the sole proprietor. No incentive to work hard may be careless and inefficient. If the assets of the firm are insufficient to meet the firm’s liabilities, the personal properties of the partners can also be utilized for this purpose. The partnership form of ownership can significantly increase the pool of capital available to a business. The assignment attempts to explore the different sources of finance and its implicationIt describes how different structures and cultures affect the business performance of the organization. xi. It therefore exhibits elements of partnerships and corporations. Business Organisation, Forms of Business Organisation. Owing to higher degree of transparency and accountability, public companies suffer from slow decision making woes. Names and address of all the partners. ii. An association of individuals competent to contract who agree to carry on a lawful business in common with the object of sharing profit is a partnership. At least one member of every partnership must be a general partner. i. Company form of ownership enables the collection of huge financial resources. Private property of partners is not safe against the risks of business. In case one line of business is not successful, the firm may undertake another line of business to compensate its losses.