Forms of Business

There are different people and organizations, which provides different services and goods and are engaged in some sort of business, however the nature and volume of their businesses may vary from one another, some operates at national or international level, and on the other hand some businesses are just limited to small areas. In some businesses the manager of business is the owner of the business and in some of them the manager is not the owner. Some businesses are run by single person and some are run by a group of people.

There are three main forms of business arrangements/entities:

• Companies
• Partnerships
• Sole traders

Companies:

Owner vs. Manager:

Companies are business entities, in which the owner of the business are its shareholders/members however the business is managed by board of directors. These directors play a stewardship role, they take care of assets of the company and manage them on behalf of the members of the company.

These directors work as agents of the shareholders, they manage the entity in a way that is most favorable and profitable for the shareholders of the company. They are accountable for working in best interest of the company, this is one of the reasons of issuing financial statements for the period at annual general meeting.

Separate Legal Identity:

Companies have their written constitution, they are treated by law as separate legal personality, meaning companies are “artificial persons” separated from their owners. They have all the rights and liabilities which a natural person have.

Companies can either enter into a contractual agreement with other parties, they can incur debts, companies own their own assets, every debtor of company is liable to the company and not to its directors, and similarly companies are liable to their creditors and not the management. If company breaks any law then it will be liable, although there are certain circumstances in which owners or management may be liable.

Limited Liability:

Owners of the companies have limited liability for the debts of the company, their liability is limited to the amount of their investment in the company. If company is unable to repay its debts then it will go into liquidation and assets of the company will be used to settle unpaid debts.

Companies are run by group of people on behalf of group of people.

Partnership:

Partnership is a relationship between persons, who have agreed to share the profit of the business carried on by all or any of them acting for all. Persons who have agreed to form a partnership are individually called partners and collectively called a firm.

Important Requirements:

There are certain essential elements/requirements which needs to be fulfilled before formation of partnership:

• There must be association of two or more than two people
• Partnership is a contractual agreement between the partners, it may be in written form or oral. Partnership agreement in written form is known as partnership deed. So there must be an agreement
• To constitute a partnership the partners must agree to carry on a business, where there is no business to be done, partnership cannot exist.
• A relationship of mutual agency must be present between the partners.
• Most importantly, there must be a sharing of profit between the partners, it can be done at any ratio, equally or otherwise.

Important Characteristics:

• A firm is dissolved at the death or insolvency of a partner,
• all members of partnership can take part in the management of the firm,
• Unlikely companies, partnerships are not separate legal identities,
• Partners have joint and several liability, the liability of a partner is unlimited,
• A partner cannot transfer his interest without obtaining consent from other partners.

Types of Partnerships:

There are two main types of partnerships:

• Partnership at will: when no provision is made between the partners for the duration or determination of their partnership, then it is called partnership at will. Any partner is free to dissolve the firm at any time
• Particular partnership: when the partnership is created for a particular undertaking or adventure or for a specific period of time, then it is called a particular partnership. If the partnership continues even after the expiry of specific period or after the completion of specific venture, then it becomes partnership at will.

Sole Trader:

Sole proprietorship is the third and simplest form of business, sole trader is a person who runs and manages his own business and the law does not recognize the business, it recognize the person running it. The individual is responsible for all the debts and is the owner of all the assets of the company.

This form of business is usually not too big in volume and operations, unlike companies which provides services at large volume.