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Chapter 2: Forms of Business - Proprietorship, Partnership and Corporations:

I. Sole proprietorship:
I.A. Basics:
1. These are business organizations owned and operated by a single individual.
2. He enjoys all the profits.
3. He is responsible for all losses.
4. He has "unlimited liability" over his business debts.
5. He owns all assets and also all debts.

I.B. Advantages of sole proprietorship:

1. It's a small business set up like a "mom and pop store."
2. These businesses are easy to open, and need a little capital to start.
3. There is almost no government regulation (like licensing rules) and hence no red tape.

I.C. Disadvantages of sole proprietorship:

1. One man show.
2. In real life it is difficult to find a single person with all the attributes of a successful
businessman.
3. To run a successful business you need a person with sound technical knowledge, good
people skills, good accounting skills, good marketing skills and financial resources. He
also has to be an excellent manager.
4. It is very difficult to find all these qualities in one human being.

I.D. Unlimited liability;

1. It comes with the territory of single handedly owning a business.
2. All losses, business debts are your responsibility to the fullest extent.
3. Unlimited liability means one can lose everything if the business fails.

I.E. Little capital/financial resources:

1. It is difficult to raise business capital in significant amounts for a single individual.

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2. Sole proprietorships) are assumed to be "less credit worthy" by lenders, banks and
financial institutions.
3. Generally these sole proprietorships do not have lots of assets to put as collateral
against a business loan and so are unable to raise huge resources.
4. Sometimes from the accounting viewpoint it is difficult to make a clear separation
between personal and business expenses since both are integrated into one individual.
5. Thus the fear by lenders that funds could easily move between the personal and
business side.
6. Thus lenders ask small businesses to personally guarantee their loans, resulting in the
"unlimited liability".

II. Partnership:
II.A. Basics
1. It is a business owned and run by more than one individual.
2. Here people pool their resources and talents together to run the business.
3. It could be that
4. One partner is an expert in technology
5. One with accounting skills and a head for numbers,
6. One with capital resources
7. One with marketing skills (one who can sell ice to an Eskimo)
8. One with excellent people skills
9. One with good management skills who can optimize all the different business
resources.
10. Each individual by themselves are not the whole business package, but together
when they pool their individual attributes/skills/strengths etc. they form a
powerful team.
11. Partnership business type believes in the age old adage "two heads are stronger
than one" and "there is strength in numbers."

II.B. Advantages: Unity is strength is the basis of partnership.

1. This is the biggest strength/advantage of this type of business structure.
2. Example of partnerships: Law Firms. Accounting Firms, Architectural Partnerships,
Dental Associations.

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II.C. Types of partnership:

1) General partnership:

1. It is the same as simple partnership.

2. It is created by agreement among people (2 or more.)
3. Each partner has unlimited liability.
4. Profits and losses are shared equally among the partners.
5. Each partner is an agent of the partnership firm and can legally represent the firm.
6. They can also make legally binding obligations on behalf of the partnership firm.
7. Each partner has equal rights, powers and obligations to the firm.
8. One cannot become a partner without the consent of all the other partners.

2) Limited liability partnership (LLP):

1. Here some partners have limited liability which is generally to the extent of their
investment in the company.
2. General partners do not have limited liability.
3. LLP is midway between a general partnership (unlimited liability) and a
corporation (limited liability).
4. Limited partners are sometimes just passive investors, with a limited role in the
day to day management /administration of the firm.

3) Equity partnership:

1. An equity partner is someone who has invested partly in the business and is part
owner of the partnership firm.
2. He is entitled to his proportionate share of the profits and / or losses of the
business.

II.D. Advantages of partnership:

1. In partnership you pool all the different kinds of business resources under one
umbrella (the firm), which is its major strength.
2. Partnership firms have good operational flexibility with one partner doing more
than his share when someone else is not able to.
3. Helping each other is the norm since everyone gains from the success of the
business.
4. The partnership firms are generally medium sized businesses, and so their
incorporation into a legal entity is not very cumbersome.
5. They can be formed with relative ease, as compared with a corporation.
6. The partnership business does not pay any kind of business taxes, but the partners
pay taxes on their income from the business.

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7. Partnerships are relatively easy to start since there is no long legal paperwork or
bureaucracy to go through.
8. A willingness to collaborate and trust among a group of people is a good starting
point to get a partnership type business rolling.
9. A written legal partnership agreement is not required by law to start a partnership,
but a good idea.
10. Death or departure of a partner generally does not result in the dissolution of the
partnership.

II.E. Disadvantages of partnership:

1. Partners have unlimited liability for all business related debts and obligations.
2. Thus partners could lose their personal belongings due to business losses.
3. The exception here belongs to a limited partner and passive investors, whose
liability is limited to the extent agreed upon by the law.
4. Since there is an implied "joint authority" in a partnership (among full partners),
the obligation entered upon by one partner becomes the legal obligation of every
partner of the firm.
5. Thus one partner can legally bind everyone else in the partnership.
6. This becomes troublesome if there is a conflict (personal or professional) among
some partners.
7. Practical evidence and real life experience is rife with cases where this has led to
the demise of a partnership.
8. Again if partners create problems, one partner may have to sue another partner
who is not paying his share of the liabilities.
9. In some cases the death or departure of a partner could result in the dissolution of
the partnership.
10. This though does not happen often.

III. Corporations:
III.A. Basics:
1. It is a company which is a legal entity in the eyes of the law.
2. The corporation itself can be sued since it is a legal entity, just like an
individual.
3. The corporation’s liabilities are distinct and separate from her members.
4. Corporations are created through legal registration.
5. Members and shareholders have limited liability, in the sense of losing
their entire investment, but not more.
6. Corporations are immortal and do not die out with the death of the
originators.
7. Corporations die when they are liquidated or dissolved due to insolvency
or bankruptcy or buyout by others.

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8. Corporations can be convicted of criminal offenses as fraud.

9. Corporations can own property.
10. They can enter into legally binding contracts.
11. They have to pay taxes.
12. On dissolution or death of the corporation, the creditors are first paid off
from the corporate assets.
13. Then shareholders and employees come next in the payment queue.
14. The people running the corporation (Board of Directors, BOD) are hired
employees who are separate from the corporation.
15. The BOD's are generally elected by shareholders.
16. Corporations are formed through the "articles of incorporation" which
spells out the features and characteristics of the corporation.
17. Corporations are either incorporated (INC) or limited (Ltd.) 18.
Corporations have to publish their financial statements annually.
19. Corporations can be "for profit" or "not for profit." 20. They
can be closed corporation or publicly traded corporation.

III.B. Advantages:
1. Corporation provides owners with personal asset protection.
2. Investors are more likely to invest in a corporation due to its limited
liability protection.
3. The shareholders of the company are not personally liable for the debts,
obligations and liabilities of the corporation.
4. Shareholders are only liable to the extent of their investment in the
company.
5. Corporate form of business has a lot of credibility in the eyes of the
customer’s suppliers and lenders who do business with them.
6. Corporations are more professional in structure and functioning, as
compared to other forms of business.
7. People feel more at ease in dealing with a corporation.
8. A major advantage of corporations over other forms of business is the
ability to raise capital.
9. Corporations can issue stock and raise capital from the market place
10. They can finance their company's R & D, production and expansion plans
with that.
11. Corporations can easily transfer ownership.
12. Ownership in a corporation can be sold or simply transferred by renaming
the company's stock certificate to another shareholder.

III.C. Disadvantages:
1. Corporate profits are taxed twice.

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2. Once as corporate tax when the company makes the profit, and then again
when the profits are distributed among shareholders as income.
3. Another disadvantage is the rigid formalities and the extreme paperwork
involved.
4. Corporations have to hold at least one meeting each year.
5. They have to keep extensively detailed minutes of each meeting.
6. They have to keep the voting records of the company's shareholders.
7. They have to file annual reports with the state.
8. They have to keep financial statements of everything they do.
9. These requirements are costly in terms of both time and money.

Assignments
1. Explain the different kinds of Partnerships
2. Write in about 200 words about each of the following w.r.t Basic Ideas, Risks, Profits,
Liabilities, Taxation, Responsibilities etc. about each of the following
a. Sole Proprietorship
b. Partnerships
c. Private Limited Companies
3. Would you like to establish your Architectural Firm as a Proprietor or as a Partner? If
as a partner then how many partners? Give adequate reasons for the same/
4. Are Private Limited Companies allowed to practice Architecture? Give Reasons for
your answer.

Chapter 2 Forms of Business