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Entrepreneurship and Business Practice UNIT IV: Main Types of Businesses

1. Sole Proprietorship/Trader a. 1 owner of business b. Makes all decisions c. Decisions made quickly d. Less ideas re decision making i. Level of experience dictates the quality of decisions e. f. g. h. i. Limited resources Business is the same as the owner Less disputes Assumes all risks: Unlimited liability No set time to work/ flexible wking hours i. Many do more or less wk depending on demands j. No set vacations k. Business dies along with the owner l. Gets all PROFITS and losses 2. Partnership a. 2 to 20 persons b. Limited liability if it is a LLP i. Individuals assume own risk c. Business is different from the individuals d. Decision making is slower e. More disputes f. Many ideas may cause conflict/confusion

g. Sleeping partners possible


h. Need clear rules: partnership agreement i. Profits and losses shared depending on agreements j. If one partner dies, business is dissolved and has to be renegotiated i. Dissolution A limited liability partnership (LLP) : i. a partnership in which some or all partners (depending on the jurisdiction) have limited liability. ii. exhibits elements of partnerships and corporations.

iii. One partner is not responsible or liable for another partner's misconduct or negligence. a. Different from unlimited partnership. b. Some partners have a form of limited liability like that of the shareholders of a company. c. In some countries, a LLP must also have a minimum of one "general partner" with unlimited liability. d. Unlike corporate investors, partners have the authority to deal with the business directly. In contrast, corporate shareholders have to choose a board of directors under the regulations of various state charters. The board organizes itself (also under the laws of the various state charters) and appoints corporate officers who then have as "corporate" individuals the lawful responsibility to manage the company in the corporation's best interest. e. Contains a different level of tax accountability from that of a corporation. f. Limited liability partnerships are different from limited partnerships in a number of countries, consenting to all LLP partners having limited liability, whereas a limited partnership can require at least one unlimited partner and allow others to presume the responsibility of a passive and limited liability investor. Therefore, in these countries the LLP is more suited for businesses where all shareholders wish to take an lively role in management. g. There is great misunderstanding between LLPs as constituted in the U.S. and that initiated in the UK in 2001 and adopted elsewhere **Do research on this** Source: Notes as discussed in class March 2012

3. Company/corporation
a. Separate legal existence: i. A company has a distinct legal entity independent of its members. It can own property, make contracts and file suits in its own name. Shareholders are not the joint owners of the company's property. ii. A shareholder cannot be held liable for the acts of the company. Similarly, members of the company are not its agents. iii. There can be contracts between a company and its members. A creditor of the company is not a creditor of its members. iv. The separate legal entity of a company was recognized in the famous case of Salomon, v. Salomon and Co. Ltd. The facts of the case were as follows: v. Salomon formed a company which acquired his own shoe business. He took all the shares except six shares which he distributed among his wife, daughter and four sons. vi. Salomon also purchased some debentures of the company which gave him a charge over its assets. At the time of winding up, the company's assets were not sufficient enough to pay its debts. vii. The creditors of the company (other than Salomon) argued that their debts should be cleared before paying Salomon for his debentures because Salomon and the company was one and the same person. viii. The Court decided that after incorporation, Salomon and Co. had an identity separate from Salomon even though he owned virtually all the shares in the company.

b. Perpetual succession: ix. Perpetual succession means continued existence. A company is a creation of the law and only the law can bring an end to its existence. Its life does not depend on the life of its members. 2

x. The death, insolvency or lunacy of members does not affect the life of a company. It continues to exits even if all its members die. Members may come and go but the company goes on until it is wound up. c. Limited liability: xi. As a company has a separate legal entity, its members cannot be held liable for the debts of the company. The liability of every member is limited to the nominal value of the shares bought by him or to the amount of guarantee given by him. xii. For instance, if a member has 50 shares of Rs. 10 each, his liability is limited to Rs 500. Even if the assets of the company are insufficient to satisfy fully the claims of the creditors, no member can be called to pay anything more than what is due from him. xiii. However, if the members of the company so desire, they may form a company with unlimited liability. d. Transferability of shares: xiv. The capital of a company is divided into parts. Each part is called a share. These shares are generally transferable. xv. A shareholder is free to withdraw his membership from the company by transferring his shares. However, in actual practice some restrictions are placed on the transfer of shares. e. Common seal: i. Being an artificial entity, a company cannot act and sign itself but through human beings. All the acts of the company are authorised by its common seal. ii. The name of the company is engraved on its common seal which is affixed to all important documents as a token of the Company's approval. iii. The common seal is the official signature of the company. Any document which does not bear the common seal of the company is not binding on the company. f. Separation of ownership and control: i. Elected representatives called directors mange the company on belf of its members who have no right to participate directly in the day-to-day management of a company. ii. Therefore, the ownership of a company is distributed among the shareholders while management is vested in the board of directors. The management of a company is delegated and centralised. g. Voluntary association: i. A joint stock company is a voluntary association of certain persons formed to carry out a particular purpose in common. Members of a company can join it and leave it at their own free will. h. Artificial legal person: i. A company is an artificial person created by law. It exists only in contemplation of law. It is competent to enter into contracts and to own property in its own name. But it does not take birth like a natural person and it has no physical body of a natural human being. i. Corporate finance: i. The share capital of a company is generally divided into a large number of shares of small value. These shares are purchased by a large number of people from different walks of life. j. Statutory regulation and control: i. Government exercises control through company law over the management of joint stock companies. A company is required to comply with several legal formalities and to file several documents with the Registrar of Companies. Adapted from