Sole proprietorship 1

Forms of Business ownerships

1. FORMS OF BUSINESS ORGANISA--TIONS

2. Introduction to Forms of Business Organizations Professor & Lawyer Puttu Guru Prasad VIVA VVIT

3. Forms of Business Organization One of the first decisions that you will have to make as a business owner is how the business should be structured.

4. All businesses must adopt some 1.Legal Configuration that defines the 2 . R ights and Liabilities of participants in the business’s 3.Ownership, 4. C ontrol, 5.Personal Liability , 6.Life Span , and 7.Financial or Capital S tructure . Forms of Business Organization

5. This decision will have long-term implications, so you may want to consult with a “ Charted A ccountant” and “ Advocate A ttorney” to help you select the form of ownership that is right for you. Forms of Business Organization

6. In case a firm is not registered, it is deprived of many benefits: A partner of an unregistered firm cannot file a suit against the firm or other partners. The firm cannot file a case against the partners. The firm cannot file a case against third parties.

7. In making a choice, you will want to take into account the following: Your vision regarding the size and nature of your business. The level of control you wish to have. The level of “structure ” you are willing to deal with. The business’s vulnerability to lawsuits. Tax implications of the different organizational structures. Expected profit (or loss) of the business. Whether or not you need to re-invest earnings into the business. Your need for access to cash out of the business for yourself. Forms of Business Organization

8. 6 Main Types of Business OWNERSHIPS

9. 2.1 INTRODUCTION If one is planning to start a business or is interested in expanding an existing one, an important decision relates to the choice of the form of organisation. The most appropriate form is determined by weighing the advantages and disadvantages of each type of organisation against one’s own requirements. Various forms of business organizations from which one can choose the right one include: (a) Sole proprietorship, (b) Joint Hindu family business, (c) Partnership, (d) Cooperative societies, and (e) Joint stock company (Public/Private). (f) TRUSTS

10. Sole proprietorship refers to a form of business organization which is owned, managed and controlled by an individual who is the recipient of all profits and bearer of all risks.

11. 2.2 SOLE PROPRIETORSHIP Let us start our discussion with sole proprietorship — the simplest form of business organisation, and then move on to analyzing more complex forms of organizations. Do you often go in the evenings to buy registers, pens, chart papers, etc., from a small neighborhood stationery store? Well, in all probability in the course of your transactions, you have interacted with a sole proprietor. Sole proprietorship is a popular form of business organisation and is the most suitable form for small businesses, especially in their initial years of operation.

12. OPTIONS FOR A SOLE PROPRIETOR

13. Sole proprietorship refers to a form of business organisation which is owned, managed and controlled by an individual who is the recipient of all profits and bearer of all risks. This is evident from the term itself. The word “sole” implies “only”, and “proprietor” refers to “owner”. Hence, a sole proprietor is the one who is the only owner of a business. This form of business is particularly common in areas of personalized services such as beauty parlors , hair saloons and small scale activities like running a retail shop in a locality. 2.2 SOLE PROPRIETORSHIP

14. Features of Sole Proprietorship Salient characteristics of the sole proprietorship form of organisation are as follows: ( i ) Formation and closure: Hardly any legal formalities are required to start a sole proprietary business, though in some cases one may require a license. There is no separate law that governs sole proprietorship. Closure of the business can also be done easily. Thus, there is ease in formation as well as closure of business. (ii) Liability: Sole proprietors have unlimited liability. This implies that the owner is personally responsible for (iii) Sole risk bearer and profit recipient: The risk of failure of business is borne all alone by the sole proprietor. However, if the business is successful, the proprietor enjoys all the benefits. He receives all the business profits which become a direct reward for his risk bearing.

15. (iv) Control: The right to run the business and make all decisions lies absolutely with the sole proprietor. He can carry out his plans without any interference from others. (v) No separate entity: In the eyes of the law, no distinction is made between the sole trader and his business, as business does not have an identity separate from the owner. The owner is, therefore, held responsible for all the activities of the business. (vi) Lack of business continuity: Since the owner and business are one and the same entity, death, insanity, imprisonment, physical ailment or bankruptcy of the sole proprietor will have a direct and detrimental effect on the business and may even cause closure of the business. Features of Sole Proprietorship

16. FEATURES Easy formation and closure Lack of business continuity Unlimited liability Absolute control Sole risk bearer and profit recipient No separate entity

17. Merits of Sole Proprietorship Sole proprietorship offers many advantages. ( i ) Quick decision making: A sole proprietor enjoys considerable degree of freedom in making business decisions. Further the decision making is prompt because there is no need to consult others. This may lead to timely capitalization of market opportunities as and when they arise. (ii) Confidentiality of information: Sole decision making authority enables the proprietor to keep all the information related to business operations confidential and maintain secrecy. A sole trader is also not bound by law to publish firm’s accounts. (iii) Direct incentive: A sole proprietor directly reaps the benefits of his/her efforts as he/she is the sole recipient of all the profit. The need to share profits does not arise as he/she is the single owner. This provides maximum incentive to the sole trader to work hard.

18. (iv) Sense of accomplishment: There is a personal satisfaction involved in working for oneself. The knowledge that one is responsible for the success of the business not only contributes to self-satisfaction but also instils in the individual a sense of accomplishment and confidence in one’s abilities. (v) Ease of formation and closure: An important merit of sole proprietorship is the possibility of entering into business with minimal legal formalities. There is no separate law that governs sole proprietorship. As sole proprietorship is the least regulated form of business, it is easy to start and close the business as per the wish of the owner. Merits of Sole Proprietorship

19. MERITS Quick Sense of accomplishment decision making Confidentiality of information Ease of formation and closure Direct incentive

20. Notwithstanding various advantages, the sole proprietorship form of organisation is not free from limitations. Some of the major limitations of sole proprietorship are as follows: ( i ) Limited resources: Resources of a sole proprietor are limited to his/her personal savings and borrowings from others. Banks and other lending institutions may hesitate to extend a long term loan to a sole proprietor. Lack of resources is one of the major reasons why the size of the business rarely grows much and generally remains small. (ii) Limited life of a business concern: In the eyes of the law the proprietorship and the owner are considered one and the same. Death, insolvency or illness of a proprietor affects the business and can lead to its closure. Limitations of Sole Proprietorship

21. Limitations of Sole Proprietorship (iii) Unlimited liability: A major disadvantage of sole proprietorship is that the owner has unlimited liability. If the business fails, the creditors can recover their dues not merely from the business assets, but also from the personal assets of the proprietor. A poor decision or an unfavorable circumstance can create serious financial burden on the owners. That is why a sole proprietor is less inclined to take risks in the form of innovation or expansion.

22. (iii) Unlimited liability : Sole  proprietors have  unlimited liability . The  unlimited liability  means that if you're unable to repay the debts of the business, your creditors can go after whatever you own. So you could lose any of your possessions that would allow them to recover the amount. Reasons behind Unlimited Liability: Owner of Sole Proprietary and his Business, both are same in the eye’s of Law. Sole Proprietary is not all recognized as separate legal entity, that of from the owner. Accounting Equation : Your own Capital + Out side Liability = Assets What ever profits earned by the Sole Proprietary is enjoyed by him, he won’t share his profits with others. The Owner of Sole Proprietary can purchase the Properties and Assets with the profit earned from the business and register the Properties or Assets only on his name, but not on the name of the firm, because law has not recognized the Sole proprietary as a sperate legal entity. So it happens in the Partnership and HUF also, because the Sub-Registrar, register the properties on the persons names and on the artificial legal persons only, not on the name of the Sole Proprietor Firm, or not on the name of the Partnership Firm or not on the name of the HUF Firm. Because of that the creditors can recover their dues not merely from the business assets, but also from the personal assets of the proprietor. This is the logic behind Unlimited Liability. The Company formation is suitable to escape from the Unlimited Liability, because it is recognized as separate legal entity in the eye’s of the law.

23. Liability:- An obligation to pay money to another party Legally Legal Liability : His legal liability covers all his possessions. The Creditors can collect his personal property. CREDOTOR: - A person to whom money is owed by a debtor; someone to whom an obligation exists legally. DEBITOR:- A person who owes a creditor; someone who has the obligation of paying a debt legally.

24. Limited liability means the business owners' liability for debts is restricted to the amount they put into the business. With unlimited liability, the business owner is personally responsible for any loss the business makes.

25. (iv) Limited managerial ability: The owner has to assume the responsibility of varied managerial tasks such as purchasing, selling, financing, etc. It is rare to find an individual who excels in all these areas. Thus decision making may not be balanced in all the cases. Also, due to limited resources, sole proprietor may not be able to employ and retain talented and ambitious employees. Though sole proprietorship suffers from various shortcomings, many entrepreneurs opt for this form of organisation because of its inherent advantages. It requires less amount of capital. It is best suited for businesses which are carried out on a small scale and where customers demand personalized services. Limitations of Sole Proprietorship

26. LIMITATIONS Unlimited liability Limited life of a business concern Limited Resources Limited managerial skills

27. Recapitulation or Summary of the Topic Sole Proprietorship

28. In making a choice, you will want to take into account the following: Your vision regarding the size and nature of your business. The level of control you wish to have. The level of “structure ” you are willing to deal with. The business’s vulnerability to lawsuits. Tax implications of the different organizational structures. Expected profit (or loss) of the business. Whether or not you need to re-invest earnings into the business. Your need for access to cash out of the business for yourself. Forms of Business Organization

29. Sole proprietorship refers to a form of business organization which is owned, managed and controlled by an individual who is the recipient of all profits and bearer of all risks.

30. FEATURES Easy formation and closure Lack of business continuity Unlimited liability Absolute control Sole risk bearer and profit recipient No separate entity

31. MERITS Quick Sense of accomplishment decision making Confidentiality of information Ease of formation and closure Direct incentive

32. Liability:- An obligation to pay money to another party Legally Legal Liability : His legal liability covers all his possessions. The Creditors can collect his personal property. CREDOTOR: - A person to whom money is owed by a debtor; someone to whom an obligation exists legally. DEBITOR:- A person who owes a creditor; someone who has the obligation of paying a debt legally.

33. Limited liability means the business owners' liability for debts is restricted to the amount they put into the business. With unlimited liability, the business owner is personally responsible for any loss the business makes.

34. LIMITATIONS Unlimited liability Limited life of a business concern Limited Resources Limited managerial skills

35. Important Topics from Chapter 1, Foundation of Business and History of Trade and Commerce 1.1 Introduction, 1.7.2 Auxiliaries To Trade, 1.2 Concept of Business, 1.8 Objectives of Business, 1.3 Characteristics of Business Activities, 1.8.1 Multiple Objectives of Business, 1.4 Comparison of Business, Profession And Employment, 1.8.2 Business Risks, Pure & Speculative, Human Errors 1.5 Classification Of Business Activities, 1.9 Nature of Business Risks, 1.6 Industry 1.9.1 Causes of Business Risks, 1.7 Commerce, 1.7.1 Trade, 1.9.2 Starting A Business — Basic Factors

36. Professor & Lawyer   Puttu Guru Prasad B.Com., M.Com., M.Phil., M.B.A., PGDFTM., AP.SET., M.Phil., DRMS., L.L.B., ICFAI TMF., DIRM., L.L.M., Pre PhD (PhD)from JNTUK.,  “Diploma in Psychology from YALE University” MHRDI’s IIC Ambassador NSS Certified Program Officer, (A.U) Senior Faculty for Business Studies, Economics, Accounts Head, Board of Administration & Management Science, Bhagavad Gita & CLAT Program Coordinator,  Commerce Department, VIVA-VVIT, Nambur,  My Blog:  puttuguru.blogspot.in   My Web Site:  https://gurublogs.wixsite.com/guru 93 94 96 98 98 ,  9885 96 36 36, 807 444 9539,

37. Professor & Lawyer   Puttu Guru Prasad