Page 19 - DMGT405_FINANCIAL%20MANAGEMENT

Unit 1: Introduction to Financial Management

Notes
Table 1.1: Strengths and Weaknesses of the Common Forms of Business Organizations

Sole Proprietorship Partnership Company
Strengths Owners receive all Can raise more funds Owner’s liability is limited to
profits and incur all than sole proprietorship. the extent paid on their
losses. shares.
Low organizational Borrowing powers Can achieve large size via
costs enhanced by more sale of shares.
owners.
Income is included and More available Owners hip (share) is readily
taxed on owners manpower and transferable.
personal tax return. managerial skill.
Independence Income included and Long life of the firm.
mixed on individual
partner’s tax return.
Secrecy Can have professional
managers.
Ease of dissolution Has better access to
financing.
Receives some tax
advantage.
Owner has unlimited Owners have unlimited Taxes generally higher,
liability towards debt liability and may have to because corporate income is
of the firm cover debts of other taxed and dividends paid to
partners. owners are also axed (the
latter has been exempted at
the hands of the shareholders
in India).
Weaknesses Limited fund raising Partnership is dissolved More expensive to organize
power limits growth when partner dies. than other forms of business.
Proprietor must be Difficult to liquidate or Subject to greater control by
jack-of-all trades. transfer partnership. regulating authorities.
Lacks secrecy since the
Difficult to give
employees long-run shareholders must receive
career opportunities. financial reports at periodic
intervals.
Lacks continuity when
proprietor dies or
unable to operate.

Self Assessment

Fill in the Blanks:
13. In the area of financing, funds are procured from …………..sources as well as ………………
sources.

14. The three most common forms of business organization are sole proprietorship,
partnership and the……………….
15. The …………….method of cash management is considered a better method of managing
liquid resources of the firm.
16. The dividend and bonus policies framed have a direct bearing on the…………………...

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