proprietary org lesson 4
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Sole proprietary firms
Chapter 4
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Sole Proprietorship
Definition
Individual or sole proprietary ship also called sole trader ship or single entrepreneurship
or proprietary firms is the most common , simples & oldest form of business org
In such a unit a single man called proprietor orgs a business . It is owned , managed &
controlled & directed by him .
He fixes the amount of capital to be invested ( own or borrowed ) uses his own labor &
that of his family members , hires factors whenever necessary , orgs prod as efficiently
as possible & markets the product at the highest possible prices
He assumes full responsibility for all business risks & enjoys profits & bears losses
Characteristics
Ownership by a single person
Org & control – a single person org & manages as per his efficiency & experience . Has
full powers to conduct his business in any manner he likes . He is also not required to
take approval or agreement from others .
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Capital –owner uses own . May also borrow for investing in expansion
No sharing of profit & losses ---- retain profit & bear losses
Unlimited liability --- unlimited for all debts . If fails to clear business debts private
property can be attached by creditors
Easy to form –not subject to any legislation . No legal formalities involved if person over
18 years of age
Legal Status ---A sole trader company cannot be separated from its owner or proprietor .
Both same
Merits
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Merits & Demerits
Merits
Easily started – w/o legal formalities . Little govt interference . Simple to manage &
control . Requires small amount of capital for it generally adopts labor intensivetechniques . Eligible for finance /personal credit
Prompt action ---the proprietor can take quick decisions regarding business , location ,
method of prod , not required to consult anyone
Personal Interest –Ensure against waste of resources , optimize to maximize
Requirements of consumers --- direct & continuous contact . , personalized/customized
service feasible . Goods /services as per needs , tastes, desires . Will help to raise sales& profits . Suitable for small business .
Cordial Relations ---Direct , continuous contact with employees . Direct supervision .
Possibility of conflict of interest minimum
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Efficiency , hard Work & Direct Gain ---Since sole responsibility & unlimited liability
imperative to ensure efficiency & Effort to maximize gains
Business Secrecy –Not required to share or publicize plans . Not required to disclose
profits to the public . Also free to innovate /adopt new ideas & processes .
Economy in Expenses –overheads & running expenses economized since employees
limited or need based
Flexibility /Elasticity --- change in business introduced w/o consultation . Also adapt toeconomic /environ changes easily
Transferability ---
Self employment
Lower Tax Burden
Concentration of wealth
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Demerits
Limited Capital –amount an Indl can command is limited . Difficult to expand as raising
loans not easy. Hence size small
Unlimited liability & Risks ---risky as a wrong decision or adoption of wrong policy canlead to losses & even insolvency as liability is unlimited . This implies that if debts
exceed business assets private property can be attached to clear debts . This unlimited
liability inhibits business activities
Lack of skill for efficient management ----Not possible to attend to managerial functions& maintaining correspondence , accounts efficiently alone . More so if business spread
No economies of scale --- A sole trader cannot secure many of the economies of large
scale production such as purchase of raw materials at low prices , advantages of
specialization & minimize running costs .
Weakness in Bargaining & Competition ---On account of limitations of capital abilities &
skill the proprietor likely to remain weak in bargaining & competition
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Suitability –
Prior to industrial revolution sole trade firm was the most popular form of commercial
,org for conducting any business .
Post Industrial revolution partnership firms & company orgs achieved imp due to
increasing demand for capital & org power
Sole trader outlived utility except in
1 local markets –require simple org , ordinary skills & limited capital . Such conditions
are filled in the retail trade . Hence bulk of retail trading is carried out by sole traders ,
enjoys partial monopoly
2 Personal Contact –Ideal when personal contact essential like doctors /Lawyers .Proprietor can establish personal contact customize service & satisfy peculiar demands
3 Speculative Business .---suitable where business is speculative & there is considerable
& sudden change in demand & prices such as trade of gold /precious metals . Bullion
dealers have to take prompt decisions & actions
4 Assessment of sole Trades --- Numerically single proprietorship constitutes single
largest class of business establishments in all, countries . But amount of business islimited & contribution n to national wealth hardly 20 to 30 %
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Partnership Orgs
Chapter 5
P t hi Fi
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Partnership Firms
Definition
A partnership is usually formed to combine the capital , labor , & varied skills & abilities
Person may have capital but lack skills or abilities . A financer may need a managerial
expert as well as a technical expert & all of them may combine to set up a business with
common ownership & management under a voluntary agreement
The Indian Partnership Act !932 defines a Partnership as “ The relation between two or
more persons who have agreed to share profits of a business , carried out by all or any
of them acting for all “
Thus a partnership is an association of two or more persons to carry out business as co
owners for profit
The term business includes all trades ,occupation , professions . Owners of such firms
are individually called partners & collectively a FIRM . The name under which the
business is carried out is known as firm name which is generally after names of the
original partners
The firm name has no separate legal status like the name of a company & it cannot createany individuality or distinct legal existence . It however has a goodwill which continues
even after the partners have changed
Name may have been built up a strong reputation thus lead to vulnerability
.
Ch t i ti f P t hi Fi
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Characteristics of a Partnership Firm
When a business belongs to a single owner he is said to be the sole trader . If a few
persons combine to form an association enjoying joint ownership , control &
management , working under a voluntary agreement such an association is called
Partnership .
Features / Characteristics
1 Presence Of Business
A partnership is a form of business unit . The association of a few Indls for starting or
conducting certain business . , either industry or commerce or to carryout a certain
profession . E. g CA , Solicitors etc
It is not a club or a charitable association . The main purpose is to do certain business
the business must be profit seeking & lawful
Agreement
A partnership is a result of an agreement . It is created by mutual consent & voluntary
agreement . In other words there must be an oral /written agreement
The membership in a joint Hindu family firm is determined by birth & status . The
membership in a partnership firm is determined by an agreement
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