MBA 4011 Entrepreneurship and Small Business Mgt

Module 5: Form of Business Ownership.

Forms of Business Ownership: Business ownership means having the control over a business
enterprise and being able to dictate its functioning and operations.
" Individual or entity who owns a business entity in an attempt to profit from the successful operations
of the company. Generally has decision making abilities and first right to profit "
There are three ways in which business ownership may be acquired- initiating a business, purchasing a
company that is already existing and franchising.
Types of ownerships are:

Sole Proprietorships
Partnerships
Corporation
Other Types

1. Sole Proprietorships: A sole proprietorship is a business that is owned (and usually operated) by
one person. That person controls and manages the business.A sole proprietorship, also known as the
sole trader or simply a proprietorship, is a type of business entity that is owned and run by one
individual or one legal person and in which there is no legal distinction between the owner and the
business. The owner is in direct control of all elements and is legally accountable for the finances of
such business and this may include debts, loans, loss etc. It is the simplest form of business ownership
and the easiest to start. There are more than 22 million sole proprietorships in the United States. Its
main features are : Ease of formation is its most important feature because it is not required to go through elaborate
legal formalities. No agreement is to be made and registration of the firm is also not essential.
However, the owner may be required to obtain a license specific to the line of business from the
local administration.
The capital required by the organisation is supplied wholly by the owner himself and he
depends largely on his own savings and profits of his business.
Owner has a complete control over all the aspects of his business and it is he who takes all the
decisions though he may engage the services of a few others to carry out the day-to-day
activities.
Owner alone enjoys the benefits or profits of the business and he alone bears the losses.
The firm has no legal existence separate from its owner.
The liability of the proprietor is unlimited i.e. it extends beyond the capital invested in the firm.
Lack of continuity i.e. the existence of a sole proprietorship business is dependent on the life of
the proprietor and illness, death etc. of the owner brings an end to the business. The continuity
of business operation is therefore uncertain.
Advantages of Sole Proprietorships
Ease of Start-Up and Closure. No contracts, agreements, or other legal documents are
required to start or end a sole proprietorship, and there are no minimum capital
requirements.
Department Of Management Studies
BIT Mesra, Jaipur Campus

By: Santosh kumar , santk@live.com

MBA 4011 Entrepreneurship and Small Business Mgt

Module 5: Form of Business Ownership.

Pride of Ownership. The amount of time and hard work that the owner invests in a sole
proprietorship is substantial, and the owner deserves a great deal of credit for assuming the
risks and solving the problems associated with operating sole proprietorships.
Retention of All Profits. All profits earned by a sole proprietorship become the personal
earnings of its owner. Thus, the owner has a strong incentive to succeed.
Flexibility of Being Your Own Boss. The sole owner of a business is completely free to
make decisions about the firms operations. A sole proprietor can switch from retailing to
wholesaling, move a shops location, open a new store, or close an old one.
Less accounting hassle :
No Special Taxes. The sole proprietorships profits are taxed as personal income of the
owner. Thus, a sole proprietorship does not pay the special state and federal income taxes
that corporations pay.
Better transparency: As all bank accounts has been handled by propriter only.
Privacy Information about sole traders is kept private, unlike that of limited companies
which is necessarily made public after registration with Companies House.
Specialist Often a small business, sole traders can offer a more personal service with local
roots and ties. This can be more appealing to potential customers in the local community.
Disadvantages of Sole Proprietorships
Unlimited Liability. Unlimited liability is a legal concept that holds a business owner
personally liable for all the debts of the business. If the business fails, the sole proprietors
personal property including savings and other assets can be seized to pay creditors.
Lack of Continuity. Legally, the sole proprietor is the business. If the owner retires, dies, or is
declared legally incompetent, the business essentially ceases to exist.
Lack of Money. Banks, suppliers, and other lenders are usually unwilling to lend large sums
to sole proprietorships. The limited ability to borrow can prevent a sole proprietorship from
growing.
Limited Management Skills. The sole proprietor often is the sole managerin addition to
being the sole salesperson, buyer, accountant, and, on occasion, janitor. The business can
suffer in the areas in which the owner is less knowledgeable.
Difficulty in Hiring Employees. The sole proprietor may find it hard to attract and keep
competent help. Potential employees may feel that there is no room for advancement in a firm
whose owner assumes all managerial responsibilities.
Beyond the Sole Proprietorship. The major disadvantage of a sole proprietorship is the
limited amount that one person can do in a workday.
Reverse economies of scale sole traders will be unable to take advantage of economies of
scale in the same way as limited companies and larger corporations, who can afford to buy in
bulk. This might mean that they have to charge higher prices for their products or services in
order to cover the costs.
2. Partnerships
_The Partnership Act defines a partnership as a voluntary association of two or more persons to act as
co-owners of a business for profit.
"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.
Persons who have entered into partnership with one another are called individually, "partners" and
collectively "a firm", and the name under which their business is carried on is called the "firm-name".
There are approximately 3 million partnerships in the United States. The main features are.
Department Of Management Studies
BIT Mesra, Jaipur Campus

By: Santosh kumar , santk@live.com

MBA 4011 Entrepreneurship and Small Business Mgt

Module 5: Form of Business Ownership.

liability is joint and unlimited.

Registration not compulsory.
Active partners take part in day-to-day operations of the business, in addition to investing in it.
Active partners are entitled to a share of the enterprise's profits.
Sleeping partners invest in the business and are entitled to a share of its profits, but do not
participate in day-to-day operations.
Types of Partners
General Partners. A general partner is a person who assumes full or shared responsibility for
operating a business.

General partners are active in day-to-day business operations, and each partner can enter into
contracts on behalf of all the others. He or she assumes unlimited liability for all debts,
including debts incurred by any other general partner without his or her knowledge or
consent.

A general partnership is a business co-owned by two or more general partners who are liable
for everything the business does.

To avoid future liability, a general partner who withdraws from the partnership must give
notice to creditors, customers, and suppliers.
Limited Partners . A limited partner is a person who contributes capital to a business but who
has no management responsibility or liability for losses beyond his or her investment in the
partnership.
A limited partnership is a business co-owned by one or more general partners who manage
the business and limited partners who invest money in it. Special rules apply to limited
partnerships intended to protect customers and creditors who deal with them.
A master limited partnership (MLP) is a business partnership that is owned and managed
like a corporation but taxed like a partnership. Units of ownership in MLPs can be sold to
investors to raise capital and are often traded on organized security exchanges.(doesnt
exist in India)
What is the difference between a general partnership and a limited partnership?
Usually, when you hear the term "partnership," it refers to a general partnership -- that is, one where all
partners participate to some extent in the day-to-day management of the business. Limited partnerships
are very different from general partnerships, and are usually set up by companies that invest money in
other businesses or real estate.
While limited partnerships have at least one general partner who controls the company's day-to-day
operations and is personally liable for business debts, they also have passive partners called limited
partners. Limited partners contribute capital to the business (investment money) but have minimal
control over daily business decisions or operations.
In return for giving up management power, a limited partner's personal liability is capped at the amount
of his or her investment. In other words, the limited partner's investment can go toward paying off any
partnership debts, but the investor's personal assets cannot be touched -- this is called "limited liability."
However, a limited partner who starts tinkering with the management of the business can quickly lose
limited liability status.
Doing business as a limited partnership can be at least as costly and complicated as doing business as a
corporation. For instance, complex securities laws often apply to the sale of limited partnership
interests. Consult a lawyer with experience in setting up limited partnerships if you're interested in
creating this type of business.
Department Of Management Studies
BIT Mesra, Jaipur Campus

By: Santosh kumar , santk@live.com

MBA 4011 Entrepreneurship and Small Business Mgt

Module 5: Form of Business Ownership.

The Partnership Agreement. Articles of partnership are an agreement listing and explaining the
terms of the partnership. When entering into a partnership agreement, partners would be wise to let a
neutral third party assist.
Before starting a partnership business, all the partners have to draw up a legal document called a
Partnership Deed of Agreement. It usually contains the following information:
There are many parts that should be included in any articles of partnership. These are:
Names of included parties - includes all names of people participating in this contract
Commencement of partnership- includes when the partnership should begin. The date of the
contract is assumed as this date, if none is given.
Duration of partnership - includes how long the partnership should last. It is automatically
assumed that the death of one of the contracting parties breaks the contract, unless otherwise
stated.
Business to be done - includes exactly what will be done in this partnership. This section should
be very particular to avoid confusion and loopholes.
Name of firm - includes the name of the business entity.
Initial investments - includes how much each partner will invest immediately or by installments.
Division of profits and losses - includes what percentages of profits and losses each partner will
receive. If it is not a limited partnership, then there is unlimited liability (each partner is
responsible for all partners' debts, including their own).
Ending of the business - includes what happens when the business winds down. Usually this
includes three parts:
1) All assets are turned into cash and divided among the members in a certain proportion;
2) one partner may purchase the others' shares at their value;
3) all property is divided among the members in their proper proportions.
Date of writing - includes simply the date that the contract was written.
Advantages of Partnerships
Ease of Start-Up. Partnerships are relatively easy to form. As with sole proprietorships, legal
requirements are often limited to registering the name of the business and purchasing licenses
or permits.
Availability of Capital and Credit. Because partners can pool their funds, a partnership
usually has more capital available than does a sole proprietorship. This, coupled with the
general partners unlimited liability, can form the basis for a better credit rating.
Personal Interest. General partners are very concerned with the operation of the firm, perhaps
even more so than sole proprietors; they are responsible for the actions of all other general
partners, as well as for their own.
Combined Business Skills and Knowledge. Partners often have complementary skills. The
weakness of one partner in a certain area may be offset by another partners strength in that
area.
Retention of Profits. As in a sole proprietorship, all profits belong to the owners of the
partnership.
No Special Taxes. Like a sole proprietor, each partner is taxed only on his or her share of the
profits.
Disadvantages of Partnerships
_Unlimited Liability. Each general partner is legally and personally responsible for the debts and
actions of any other partner, even if that partner did not incur those debts or do anything
wrong. Limited partners, however, risk only their original investment.
_Management Disagreements. Most of the problems that develop in a partnership involve one
partner doing something that disturbs the other partner(s). When partners disagree about
Department Of Management Studies
BIT Mesra, Jaipur Campus

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MBA 4011 Entrepreneurship and Small Business Mgt

Module 5: Form of Business Ownership.
decisions, policies, or ethics, distrust may build to the point where it is impossible to operate
the business successfully.
_Lack of Continuity. A partnership is terminated if any one of the general partners dies,
withdraws, or is declared legally incompetent.
_Frozen Investment. It is easy to invest money in a partnership, but it is sometimes quite difficult
to get it out.
_ Tax Liability . whole tax liability will be bear by Partners only.
Procedure for Registration of a Partnership Firm
The law relating to a partnership firm is contained in the Indian Partnership Act, 1932. Under
Section 58 of the Act, a firm may be registered at any time by filing an application with the
Registrar of Firms of the area in which any place of business of the firm is situated or proposed to
be situated.
Application shall contain:* name of the firm ( unique)
* place or principal place of business
* names of any other places where the firm carries on business.
* date on which each partner joined the firm
* name in full and permanent address of partners.
* duration of the firm
Application shall be signed and verified by all the partners or their duly authorized agents.
Application shall be accompanied by prescribed fee as well as the following documents:
* certified true copy of the Partnership deed entered into.
* ownership proof of the principal place of business
*Under Section 59 of the Act, when the Registrar of Firms is satisfied that the provisions of
section 58 have been duly complied with, he shall record an entry of the statement in
the Register of Firms and issue a Certificate of Registration.
Penalty for furnishing false particulars (Section 70): Any person who signs any statement,
amending statement, notice or intimation under this Chapter containing any particular which he knows
to be false or does not believe to be true or containing particulars which he knows to be incomplete or
does not believe to be complete, shall be punishable with imprisonment which may extend to three
months, or with a fine or with both.
Any alterations, subsequent to Registration shall be notified to the registrar:Change in firm name and principal place of business (Section 60) shall require sending of a new
application form along with the prescribed fee, duly signed and verified by all the partners.
* Change relating to opening and closing of branches. (Section 61)
* Change in the name and permanent address of any partner (Section 62)
Accordingly, the various forms prescribed under the Indian Partnership Act, 1932, for the alterations in
the registered partnership firm are:a. Form No. II :- For change of principle place of business & change in the name of the firm.
b. Form No. III :- For change of the other then principle place of business.
c. Form No. IV :- For change of name of the partners & permanent address of the partners.
d. Form No. V :- For change of constitution of forms & addition or retirement of partner.
e. Form No.VI :- For dissolution of the firm
Department Of Management Studies
BIT Mesra, Jaipur Campus

By: Santosh kumar , santk@live.com

MBA 4011 Entrepreneurship and Small Business Mgt

Module 5: Form of Business Ownership.
f. Form No. VII :- For minor partner attains the age of majority.
Note: A partner of an unregistered firm cannot file a suit in any court against the firm or other
partners for the enforcement of any right arising from a contract or right conferred by the Partnership
Act unless the firm is registered and the person suing is or has been shown in the Register of Firms as
a partner in the firm.
An unregistered firm or any of its partners cannot claim a set off (i.e. mutual adjustment of debts
owned by the disputant parties to one another) or other proceedings in a dispute with a third party.
Hence, every firm finds it advisable to get itself registered sooner or later.
3. Corporation
A corporation is an artificial being, invisible, intangible, and existing only in contemplation of the
law. Hence, a corporation is an artificial person created by law, with most of the legal rights of a
real person. There are 6 million corporations in the United States. Corporations comprise only about
19 percent of all businesses, but they account for 83 percent of all sales revenues.
Corporate Ownership. The shares of ownership of a corporation are called stock, and those who
own the shares are called stockholders, or sometimes shareholders.
A closed corporation is a corporation whose stock is owned by relatively few people and is not
bought and sold on security exchanges.
An open corporation is a corporation whose stock is sold to the general public and can be
purchased by any individual.
Forming a Corporation. The process of forming a corporation is called incorporation.
Where to Incorporate. A business is allowed to incorporate in any country it chooses. Some
country are more hospitable than others and offer fewer restrictions and other benefits to attract new
firms.
An incorporated business is called a domestic corporation in the country in which it is
incorporated.
In all other country where it does business, it is called a foreign corporation.
A corporation chartered by another government and conducting business in the India is an MNC.
(Incorporation process in shown as flow chart in Fig below):
Corporate Structure
_Board of Directors. The board of directors is the top governing body of a corporation, and directors
are elected by the stockholders and can be chosen from within the corporation or from outside of it. The
major responsibilities of the board of directors are to set company goals and to develop general plans
for meeting those goals.
_Corporate Officers. Corporate officers (the chairman of the board, president, executive vice
presidents, corporate secretary, treasurer, any other top executives) are appointed by the board of
directors. These officers help the board make plans, carry out strategies established by the board, hire
employees, and manage day-to-day business activities.

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BIT Mesra, Jaipur Campus

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MBA 4011 Entrepreneurship and Small Business Mgt

Module 5: Form of Business Ownership.

Advantages of Corporations
Limited Liability. One of the most attractive features of corporate ownership is limited liability. If a
corporation fails, creditors have a claim only on the assets of the corporation, not on the owners
personal assets.
Ease of Raising Capital. The corporation is by far the most effective form of business ownership for
raising capital.
Ease of Transfer of Ownership. Ownership is transferred when shares of stock are sold, and
practically no restrictions apply to the sale and purchase of stock issued by an open corporation.
Perpetual Life. Because a corporation is essentially a legal person, it exists independently of its
owners and survives them.
Specialized Management. Typically, corporations are able to recruit more skilled, knowledgeable, and
talented managers than proprietorships and partnerships.
Disadvantages of Corporations.
Difficulty and Expense of Formation. Forming a corporation can be a relatively complex and costly
process.
Government Regulation and Increased Paperwork. Most government regulation of business is
directed at corporations, which must file many reports on their business operations and finances with
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MBA 4011 Entrepreneurship and Small Business Mgt

Module 5: Form of Business Ownership.
local, state, and federal governments and make periodic reports to their stockholders.
Conflict Within the Corporation. The pressure to increase sales revenue, reduce expenses, and
increase profits often leads to stress and tension for both managers and employees.
Double Taxation. Unlike sole proprietorships and partnerships, corporations must pay a tax on their
profits. Then stockholders must pay a personal income tax on profits received as dividends.
Profit Sharing : profit will share among all stock holders.
Lack of Secrecy - Because open corporations are required to submit detailed reports to government
agencies and to stockholders, they cannot keep their operations confidential.
4. Other Types of Business Ownership
Some entrepreneurs choose other forms of organization to meet their special needs. Among these are
S-corporations, limited-liability companies, Cooperatives , Joint venture , PPP, Syndication,
not-for-profit corporations , Franchise Ownership , Licensing etc
S-Corporations. (doesnt allow in India)If a corporation meets certain requirements, its directors may
apply to the Internal Revenue Service for status as an S-corporation. An S-corporation is a corporation
that is taxed as corporation though it were a partnership. To qualify for this special status, the firm must
meet the following criteria:
_ No more than 100 stockholders are allowed.
_ Stockholders must be individuals, estates, or exempt organizations.
_ There can only be one class of outstanding stock.
_ The firm must be a domestic corporation eligible to file for S-corporation status.
_ There can be no non resident stockholders.
_ All stockholders must agree to the decision to form an S-corporation.
Limited-Liability Partnership. A limited-liability Partnership (LLP) is a form of business
ownership that combines the benefits of a corporation and a partnership while avoiding some of the
restrictions and disadvantages of those forms of ownership. Chief advantages of an LLP include the
following under The Limited Liability Partnership Act 2008 (was published in the official Gazette of
India on January 9, 2009 and has been notified with effect from 31 March 2009):
_ LLP members are taxed like a partnership and thus avoid the double taxation imposed
on most corporations.
_ Like a corporation, an LLP provides limited-liability protection for acts and debts of the
LLP.
_The LLP provides more management flexibility when compared with corporations. An
LLP is generally run by the owners or managers who make all the management
decisions.
_one partner is not responsible or liable for another partner's misconduct or negligence
_Provisions have been made for corporate actions like mergers, amalgamations etc
Not-for-Profit Corporations- A not-for-profit corporation is a corporation organized to provide a
social, educational, religious, or other service rather than to earn a profit. Various charities, museums,
private schools, and colleges are organized in this way, primarily to ensure limited liability. Once
approved by state authorities, not-for-profit corporations must meet specific Internal Revenue Service
guidelines in order to obtain tax-exempt status.
Cooperatives, Joint Ventures, and Syndicates
_ Cooperatives. A cooperative is an association of individuals or firms whose purpose is to
perform some business function for its members. Cooperatives are found in all segments of
our economy, but they are most prevalent in agriculture.
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BIT Mesra, Jaipur Campus

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MBA 4011 Entrepreneurship and Small Business Mgt

Module 5: Form of Business Ownership.
_ Joint Ventures. A joint venture is an agreement between two or more groups to form a
business entity to achieve a specific goal or to operate for a specific period of time. Once the
goal is reached or the period of time has elapsed, the joint venture is dissolved.
_ Public Private Partnership (PPP). A joint venture between Private and Government body to
achieve a specific goal or to operate for a specific period of time. Once the goal is reached
or the period of time has elapsed, the joint venture is dissolved
_Syndicates. A syndicate is a temporary association of individuals or firms organized to
perform a specific task that requires a large amount of capital and is dissolved as soon as its
purpose has been accomplished. Syndicates are most commonly used to underwrite large
insurance policies, loans, and investments.
Franchise Ownership: A franchise is a business system in which private entrepreneurs purchase the
rights to open , Use and run a a firm's successful business model and brand for a prescribed period of
time at a location. The franchising company, or franchisor, signs a contractual agreement with the
franchisee, explaining in detail the companys rules for operating the franchise.
Franchises developed in the mid-nineteenth century. Isaac Singer, the inventor of the sewing
machine, created franchises to distribute his machines more effectively to larger areas. The idea of
franchises spread to the restaurant industry in the 1950s when Ray Kroc, founder of McDonalds, began
selling franchises to spread the fast food chain throughout the U.S. and the world.
Disadvantages and Advantages of franchisor :
Advantage:
Easy to enter new Market:
Access to better talent. Franchising is a great way to find talented people to manage your locations
and give them an incentive to work hard.
Easy expansion capital. Franchising is a good way to obtain expansion capital. Because your
franchisees pay to buy outlets in your chain, you can grow the number of locations without tapping
much of your own capital or needing to request financing from banks or investors.
Minimized growth risk. Franchising can generate high financial returns for relatively little risk. In
franchise, you put relatively little money into adding each location.
Responsibility Sharing:
Disadvantages
Less control over Business. You can't tell franchisees what to do the way you can with employees.
Franchisees are independent businesses. Moreover, they have different goals from yours, which can
easily conflict and even lead to legal trouble.
Innovation challenges. It's a lot harder to innovate with franchising than if you own your own outlets.
With franchising, if you come up with a new idea, you have to negotiate with your franchisees to get
them to accept the new product or whatever innovation you want to introduce, instead of just putting
the new idea in place on your own.
Conflict of interest: Franchisor and Franchisee are two different companies, may have different
goal and ideology create conflict between them.
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Department Of Management Studies

BIT Mesra, Jaipur Campus

By: Santosh kumar , santk@live.com