Forms of Business Organization Features Advantages & Disadvantage

Thu, 12/25/2014 - 06:18 -- Umar Farooq

Business means the state of being busy. In technical words it is the commercial and industrial activities i.e. the production and distribution of good and services to people and earn profit.  The business activities are usually divided into commerce and industry.

In terms of the legal structure for business, following are the four forms of business organizations:

Sole Proprietorship

The firm owned by an individual forms a sole proprietorship. A person who enters into business on his own account, manages that business and is solely responsible for providing the capital and making the critical decisions is known as the sole proprietor. His reward is the profit that the business makes and the satisfaction of being his own boss, but in return, he must accept the risk of loss if the business fails. Examples are small farmers, hairdressers, grocers, butchers, consultants, craftsmen and mechanics.

Characteristics of Individual Ownership

  1. Owned by signal individual
  2. Being a small in size it is easy and manage and control
  3. The owner is unlimited liability
  4. As per the legal status the owner and the business are considered as one.
  5. No legal formalities in setup a business and easy to dissolve it.

Advantages of Sole Proprietor

  1. It is the easiest and least expensive form of business organization
  2. Personal decision making
  3. All profits belong to the owner
  4. Personal satisfaction
  5. Business affairs are kept very private.

Disadvantages of Sole Proprietor

  1. Unlimited liability
  2. Expansion problems due to lack of capital
  3. Lack of continuity
  4. Cannot take advantage of large scale buying.

Partnership

A Partnership is defined as two or more, but not exceeding a legally defined number of people (twenty in Pakistan) who agree to provide capital and work together in a business with a purpose of making profit.

Advantages of Partnership

  1. easy to set-up
  2. Provides a larger capital base and hence more growth prospects
  3. Work load is shared
  4. Responsibility and control is also shared
  5. Provides a diversified pool of expertise resulting in efficient management.

Disadvantages of Partnership

  1. Unlimited liability
  2. Disagreement among the partners may cause delays in decision making
  3. Lack of continuity.

Legal requirements of Partnership

  1. The maximum number of partners is defined
  2. Partners have to sign a partnership deed according to the articles of partnership for that particular country
  3. All partners participate in management but the right of a junior partner may be restricted by articles
  4. There may be "sleeping" partners who do not participate in day-to-day management affairs.
  5. The sharing of profits and losses according to the partnership deed or in the absence of any such clause according to the law of the country.
  6. A partnership doesn't possess a corporate status and each partner is severally and jointly liable. Each partner incurs unlimited personal liability for not only himself but for all other partners for any debts incurred by the partnership.

Limited Liability Companies

The most widely quoted definition of a company was given by an American judge, Justice John Marshal in 1819, in which he defined a corporation as an "artificial being, invisible, intangible and existing only in contemplation of law". In other words, a company is a legal person, i.e., a legal entity having many rights and responsibilities like a person.

For example, the Companies' Ordinance of Pakistan (1984), which governs the conduct of companies in Pakistan, defines it as "a company formed and registered under this ordinance or an existing company". An existing company is a company that was formed and registered under any previous Companies Act.

Advantages of Limited Company

  1. Greater permanency and stability of company life
  2. Limited liability in case of any loss
  3. Transfer of Owner is very easy
  4. The grab huge capital and investors

Disadvantages of Limited Company

  1. Company formation is very complicated and requires legal work
  2. Double taxation
  3. Exploitation of shareholders
  4. Stock exchange speculation is harmful for shareholders

Characteristics of a Company

  1. Voluntary association of persons
  2. Separate legal entity
  3. Limited Liability
  4. Separation of ownership from management
  5. Transferability of shares
  6. Perpetual existence
  7. The ability to acquire broad capital base