Page 17 - DMGT207_MANAGEMENT_OF_FINANCES

Management of Finances

Notes 1.4.2 Forms of Business Organization

The three most common forms of business organization are sole proprietorship, partnership
and the company. Other specialized forms of business organizations also exist. Sole
proprietorship is the most in terms of total receipts and in net profits the corporate form of
business dominates.

Sole Proprietorship

A sole proprietorship is a business owned by one person who runs for his own profit. Majority
of the business firms are sole proprietorships. The typical sole proprietorship is a small business

Example: bakeshop, personal trainer or plumber.
The majority of sole proprietorship are found in the wholesale, retail, service and construction
industries.

Typically, the proprietor along with a few employees runs the business. He raises capital from
personal resources or by borrowing and is responsible for all business decisions. The sole
proprietor has unlimited liability, towards creditors not restricted to the amount originally
invested. The key strengths and weaknesses of sole proprietorship are given in Table 1.3.

Partnership

A partnership firm is a business run by two or more persons for profit. Partnership accounts for
the next majority of business and they are typically larger than sole proprietorship. Finance,
legal and real estate firms often have large number of partners.
Most partnerships are established by a written contract known as 'Deed of Partnership'. In
partnership, all partners have unlimited liability for all the debts of the partnership. The strengths
and weaknesses or partnerships are summarized in Table 1.3.

Did u know? Which is the governing act for partnership in India?
In India, partnership is governed by the Partnership Act, 1932.

Company Form

A company form of business is a legal entity, separated from the owners, with perpetual succession.
Just like an individual, the company can sue and be sued, make and be party to contracts and
acquire property in its own name. The company form of organization is the dominant form of
business organization in terms of receipts and profits. Although, corporations are involved in
all types of business, manufacturing corporation account for the largest portion of corporate
business receipts and net profits. The key strengths and weaknesses of corporate form are
summarized in Table 1.3.
The owners of the company are its shareholders, whose ownership is evidenced by either
common shares or preference shares. Shareholders get a return by receiving dividends i.e.,
periodic distribution of earnings or gains through increase in share price. The owner's liability
is limited to the amount paid on their shares. Shareholder elects the Board of Directors through
vote. The Board of Directors has the ultimate authority in running the organization including
making the general policy.

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