SAI COMMERCE CLASSES (SAI)

(ACCOUNTS, ECONOMICS & BUSINESS STUDIES)

ASHISH RASTOGI
2/481, Awas Vikas, Budhi Vihar, Manjhola, Moradabad-244001
M. A., M. COM & M.ED
Mob. 7983764423, 7985822634
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CHAPTER NO. 2
FORMS OF BUSINESS ORGANIZATIONS: SOLE TRADE AND
PARTNERSHIP
MEANING AND FEATURES OF BUSINESS ORGANIZATIONS
Those organizations which deal in production, distribution and exchange of goods and
services for earning the profits are known as business organizations. These are formed to
provide the satisfaction to the customers. These are also known as business enterprises,
business undertakings and business concerns. Every business organization has the separate and
distinct entity because they work with different names and have different nature.
(ALL THE STTEMENTS ARE THE FEATURES OF BUSINESS
ORGANIZATION)
CLASSIFICATION OF BUISNESS ORGANIZATION
Business organizations are classified into three categories:
1. PRIVATE SECTOR ENTERPRISE: Those organizations which are fully owned, controlled
and financed by private entrepreneurs, called private sector enterprises. When it is owned,
controlled and financed by a single individual then it is called sole proprietorship. On the
other hand when it is owned, managed and financed by the group of persons then it is called
Joint Hindu Family Business, partnership, joint-stock company or co-operative society
business. Profit earning is the main motive of these organizations. There is no participation of
the government. All the finance is arranged by its owners. So its owner has independent
control over the business. Sole proprietorship business, Partnership business, Co-operative
society business, Hindu undivided family business and Joint stock company business are the
forms of private sector enterprises.
(ALL THE STATEMENTS ARE THE FEATURES OF PRIVATE SECTOR
ENTERPRISES)
2. PUBLIC SECTOR ENTERPRISE: Those enterprises which are owned and operated by the
Central or State government, are called public sector enterprises. Reserve Bank of India and
Delhi Transport Corporation are the examples of public sector enterprises. Rendering the
services is the main motive of these organizations. All the finance is arranged by the
government through budget. These are accountable to the public for their performance. The
audit of these organizations is conducted by Comptroller and Auditor General of India.
Departmental undertakings, Public corporation and Government companies are the forms of
public sector enterprises.
(ALL THE STATEMENTS ARE THE FEATURES OF PUBLIC SECTOR
ENTERPRISES)
MEANING OF JOINT SECTOR ENTERPRISES
Those organizations where ownership, control and management are shared between private
individuals and government, called joint sector enterprises. Here both the sectors work
together. Indian Oil Corporation and Gujrat State Fertilizers are the examples of joint sector
enterprises. The shares of the government, private businessmen and public in the capital are 26
percent, 25 percent and 49 percent. The main aim of these organizations is to providing the
services.
MEANING AND FEATURES OF SOLE TRADE OR SOLE
PROPRIETORSHIP BUISNESS
A business which is owned, managed and controlled by a single individual, known as sole
proprietorship business. A person who starts this business or who takes the profits and bears
the losses, called sole proprietor. It is a popular form of business organization. There are the
following features of this business:
1. SINGLE OWNERSHIP: The sole proprietorship firm is owned by a single individual only.
All the capital is supplied by single individual.
2. INDIVIDUAL RISK BEARING: A person who starts this business called sole proprietor. All
the profits are taken or loss born by this person only.
3. ONE MAN CONTROL: In this business all the decisions are taken by the sole proprietor. He
has full control over the business.
4. FREEDOM OF OPERATION: No legal formalities are required to start, dissolve and
manage the business. Only a license is required to start this business.
5. UNLIMITED LIABILITY: In this business a sole proprietor is personally liable to pay the
debt. If the business assets are not sufficient to meet all the business liabilities then the proprietor
will have to pay from his personal property.
6. SMALL SIZE: It is done only on a small scale.
7. LACK OF BUSINESS CONTINUITY: It is not perpetual. It means that it will be closed on
the death or insolvency of proprietor.
ADVANTAGES/MERITS OR DISADVANTAGES/DEMERITS OF SOLE
PROPRIETORSHIP
There are the following advantages or merits of sole proprietorship business:
1. EASY TO FORM AND DISCLOSE: A sole proprietorship organization is easy to form or
dissolve. No legal formalities are required to form or dissolve it. After paying its debt, it can be
dissolve whenever proprietor desire.
2. DIRECT INCENTIVE: There is a direct relation between effort and reward. It means when
a proprietor puts extra efforts then profit will increase.
3. QUICK DECISION: All the decisions are taken by the proprietor himself without any
consultation so quick decisions and quick action can be taken in this business.
4. PROFIT: In this business all the profit is taken by the sole proprietor. In the similar way
whole loss is also born by this person only.
5. PERSONAL TOUCH: In this business all the work is done by the proprietor himself. So he
maintains direct relationship with its customers.
6. INDEPENDENT CONTROL: In this business the overall control of the business lies in the
hands of sole proprietor. So he enjoys complete freedom of action.
7. SUITABLE FOR SMALL SCALE OPERATIONS: It is a suitable form of business for
small scale enterprises which have limited capital such as local grocery shops, small bakery
shops, tailoring shops, etc.
There are the following disadvantages of this business:
1. LIMITED RESOURCES: In this business finance is provided by the proprietor himself. So
due to limited capital investment, it has limited scope of growth.
2. UNLIMITED LIABILITY: In this business a sole proprietor has unlimited liability. It means
in case of loss, the proprietor becomes personally liable to pay the debt.
3. LIMITED SKILLS: In this business all the activities are performed by the single individual.
A single individual cannot be expert in all the fields.
FORMATION OF SOLE TRADE
Sole trade is a type of business organization which is owned, managed and controlled by a single
individual. To start this business, firstly a sole trader has to select the business line after that he
has to choose a business name and finally he has to choose the location where he wants to do this
business. No legal formalities are required to start this business. It can be closed at any time just
after paying external liabilities.
MEANING AND FEATURES OF PARTNERSHIP
As per section 4 of the Indian partnership Act, 1932, Partnership is the relation of two or more
persons who have agreed to share the profits of the business carried on by all or any of them
acting for all. The persons who are engaged in this business or who entered in this business
individually called partners and collectively called partnership firm. The name under which they
start this business called firm name. There are the following features of partnership:
1. MEMBERSHIP: There must be minimum two members to form a partnership. Remember
that all of these must be competent to contract. The maximum number of partners does not
exceed 10 persons in banking business and 10 in other business. As per section 464 of the
Companies Act, 20I3 the maximum prescribed limit is 100 but as per rule 10 of Companies
Rules 2014, the maximum number of partners does not exceed 50 for all type of partnership
firms.
2. AGREEMENT: Partnership can be formed through an agreement. It may be oral, written or
implied. The written agreement of partnership is called partnership deed.
3. LAWFULL BUSINESS: The partnership can be formed only for a lawful activity or lawful
business. Cooperation for illegal acts such as theft, murder, smuggling, etc. is not partnership.
4. PROFIT SHARE: The agreement of partnership must be to share the profits of the business
in a specified manner. Without this share, no partnership can be formed.
5. LIABILITY: The liability of all the partners in a partnership firm is unlimited. The partners
are individually and collectively liable to pay the debt of the firm.
6. MUTUAL AGENCY RELATIONSHIP: Every partner is the owner as well as agent of the
firm and agent of the other partners. So for the every single act of any partner, other partners
will be liable.
7. REGISTRATION: As per the Partnership Act registration of the partnership firm is not
compulsory. It depends upon the intention of the existing partners.
8. TIME PERIOD: The partnership firm continues till all the partners desire to continue it. On
the retirement or death of the partners, it comes to an end.
MERITS/ ADVANTAGES AND DEMERITS/ DISADVANTAGES OF
PARTNERSHIP
There are the following advantages or merits of the partnership firm:
1. EASY FORMATION: The formation of partnership firm is not tough due to have no legal
formalities. Even the registration of the firm is not compulsory. It depends upon the intention of
the partners.
2. MORE FINANCIAL RESOURCES AS COMPARED TO SOLE PROPRIETORSHIP
FIRM: Partnership business is started by two or more persons who collectively invest capital
into the business. So due to collectively collection, large amount of capital can be arranged in
this business.
3. SCOPE FOR EXPANSION: Due to have more financial resources there is more scope of
expansion and growth of the business.
4. COMBINED DECISIONS: In this business all the decisions are taken with the consent of all
the partners which helps to reduce wrong judgement. In this business, skill and experience of all
the partners can be used for the growth and development of the organization.
5. SECRECY: A partnership firm is not required to publish its annual accounts publically. There
is no requirement of audit and no requirement to submit annual reports to the government.
6. REDUCTION IN RISK: In this business risk is distributed in all the partners in an agreed
ratio that reduces the burden and stress of the individual partner.
On the other hand there are the following demerits or disadvantages of this business:
1. UNLIMITED LIABILITY: The liability of partners is unlimited and they are liable
individually as well as jointly.
2. MORE CHANCES OF CONFLICTS: All the decisions in partnership business are taken by
the partners with the consultation of each partner. So there may be differences in the opinion of
certain issues.
3. LACK OF PREPETUALITY: On the death, retirement or insolvency of any partner,
partnership comes to an end.
4. LESS TRUST OF PUBLIC: Partnership firms are not required to publish their financial
accounts or reports so they have less trust of public.
5. DELAY IN DECISIONS: All the decisions are taken in this business with the consultation of
all the partners so quick decisions are not possible in this business.
On the other hand if firm is registered then it can get all of the above benefits.
TYPES OF PARTNERSHIP FIRMS
Partnership firm can be classified into two categories:
1. ON THE BASIS OF TIME PERIOD: On the basis of time period, partnership can be
classified into three categories:
A) PARTNERSHIP AT WILL: A partnership which is formed for an indefinite period, called
partnership at will. After giving a notice, it can be dissolved at any time whenever partners
desire.
B) FIXED PERIOD PARTNERSHIP: A partnership which is formed for a fixed period like 3
years or 5 years, called fixed period of partnership. It is automatically terminated on the expiry
of fixed period.
C) PARTICULAR PARTNERSHIP: A partnership which is formed for a particular venture is
known as particular partnership. It is automatically terminated on the completion of venture.
2. ON THE BASIS OF LIABILITY: On the basis of liability, partnership is classified into two
categories:
A) GENERAL PARTNERSHIP: A partnership in which the liability of all the partners is
unlimited, called general partnership. In India, all the partnerships are general partnership
firms.
B) LIMITED LIABILITY PARTNERSHIP: A partnership in which liability of all the
partners except one partner is limited to the extent of their share is known as limited liability
partnership. In India, Limited liability Partnership was introduced by enacted Limited
Partnership Act, 2008. For this partnership the liability of one partner must be unlimited. The
partners with limited liabilities are called special partners or limited partners. Special partners
are not allowed to participate in the management of the firm but they have right to inspect the
Book’s of accounts.
TYPES OF PARTNERS
There are four types of partners:
1. ACTIVE PARTNER: A partner who participates in the management of the firm,
contributes the capital, takes the profit or bears the losses and has unlimited liability, called
active partner.
2. SLEEPING OR DORMANT PARTNER: A partner who contributes the capital and shares
the profits or losses of the firm but does not participate in the management is called sleeping
partner or dormant partner.
3. SECRET PARTNER: Secret partner is one whose association or relation with the firm is
not known to outsiders. He contributes the capital and takes active part in the business.
4. NOMINAL PARTNER: A nominal partner is one who allows the use of his name and
goodwill for the benefit of the firm and can be represented as a partner. He is not a real
partner. He does not contribute any capital, not participate in the management, not get any
share in the profit but he is liable for outsiders for the debts which is given by others to the
firm on behalf of that partner. There are two types of nominal partners:
A) NOMINAL PARTNER BY ESTOPPEL: A partner by estoppel is one who accepts that he is
a partner in a partnership firm by his words or conduct. He is liable for all the debt which is
given to the firm by others on behalf of this person.
B) NOMINBAL PARTNER BY HOLDING OUT: A partner by ‘holding out’ is one who is
actually not a partner but does not object when others call him as a partner.
CAN A MINOR BE ADMITTED OR NOT IN THE PARTNERSHIP FIRM?
As per The Indian Partnership Act, 1932 a minor cannot be a partner of a partnership firm
but he can only be admitted to the benefits of the existing firm. A minor does not contribute any
capital and not allowed to participate in the management but he is liable for outsiders. He does
not bear any share of loss but gets the share of profit. After attaining the age of majority the
minor has to give a public notice where he declares that he will continue his work as a partner or
not. If he does not give any notice within the prescribed period then he will deemed as an active
partner.
REGISTRATION OF PARTNERSHIP
The registration of partnership is not compulsory. It depends upon the intention of the
partners. The registration of the firm is a very simple process. For the registration, a
partnership firm has to submit a statement in a prescribed form with the registrar along with
some fees of registration. There are the following contents of this statement:
* Name of the firm
* Place of the business
* The date when each partner join the firm
* Name of other places where the firm carries on business
* Name and addresses of the partners
* Duration of partnership
The statement must be signed by all the partners. If the registrar of the firm is satisfied with
the statement then he shall enter the name of our firm in the register of the firms. After
entering the name, he will issue a certificate of registration to the firm.
An unregistered partnership firm suffers in the given areas:
* It cannot enforce claim against the third party in the court.
* It cannot sue against its partners.
* Partners of the unregistered firm cannot file a case against each other.
On the other hand if firm is registered then it can get all of the above benefits.
MEANING OF PARTNERSHIP DEED AND ITS CONTENTS
A written agreement of partnership is called partnership deed. A partnership deed has the
following details:
* Name of the partnership firm
* Name of the firm’s business
* Place of the business
* Name and address of the partners
* Capital contribution by the partners
* Profit sharing ratio
* Rate of interest on capital allowed by the firm to the partners
* Rate of interest on drawings charged by the firm from the partners
* Salary and commission
* Methods of valuation of goodwill
* Procedure of admission or retirement
* Rights and duties of the partners
* Loans and advances and the rate of interest

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ASHISH RASTOGI