Chapter 2 PRC 5 ITB BIZNOTES (Prime Edition) by Sir Osama Waheed Page 7
CH # 2 OWNERSHIP OF BUSINESS
ORGANIZATION OF BUSINESS
Organization can be described as the process of dividing up activities in an efficient and
effective manner to enable a system of co-operative activities of 2 or more persons to achieve
common objectives and goals of a company or group of people.
Types of Organisation
1) Business Organisations
(Commercial & industrial activities, with objective of making profit)
▪ Sole traders
▪ Partnerships
▪ Limited companies
2) Not-for-profit organizations. (Do not seek to make profit. Divided into 2 main types)
➢ Public sector organizations: Govt departments or organisations funded by Govt
➢ Non-Government Organizations (NGO): Partly or wholly funded from non-
government sources. Examples are charities.
➢ Clubs and societies (for common interests)
- Exist because their members are drawn together by a common interest.
- Assets of clubs and societies are the property of members
- Most income comes from member’s subscriptions.
➢ They produce income and expenditure accounts, rather than profit & loss account
➢ Cooperatives: These are association of persons, usually of limited means, who
voluntarily come together to achieve a common economic end through the formation
of a controlled business organization making equitable contributions to raise capital
and accepting a fair share of risks and benefits. A cooperative is not formed with
profit as the guiding objective but to render services to society and its members.
Feature Business Organisations Not For Profit
Purpose Make a Profit Provide a benefit to Public
Ownership Normally Shareholders Govt. or Members
Funding Different Sources Normally
- New Shares - Govt. Grants
- Profits reinvestment - Donations from Public
- Loans
Accountability To owners of business To Govt. or Members
Chapter 2 PRC 5 ITB BIZNOTES (Prime Edition) by Sir Osama Waheed Page 8
Sole Proprietorships
Definition: A sole proprietorship is an individual-owned business with no legal formalities,
offering complete control and decision-making freedom.
Examples: Local restaurants, construction firms, barber shops, laundry services, & shops
Key Characteristics:
1. Responsibility: Sole proprietors bear full responsibility for business performance, often
facing more pressure than employees.
2. Experience: Many successful sole proprietors have prior industry experience,
understanding market dynamics and customer behavior.
Advantages:
1. Ease of Formation: Quick, inexpensive setup with minimal legal requirements.
2. Secrecy: Maximum confidentiality, as proprietors need not disclose operating plans or
financial reports.
3. Profit Control: Sole owners retain all profits, deciding fund usage for business growth,
salaries, or other needs.
4. Flexibility and Control: Complete control allows quick decision-making in response to
market changes.
5. Government Regulations: Enjoy more freedom from government regulations compared to
larger entities.
6. Lower Taxation: Profits taxed at individual rates, avoiding special franchise or corporate
taxes.
7. Ease of Dissolution: Simple dissolution process without approval from co-owners, focusing
on settling financial obligations.
Disadvantages:
1. Unlimited Liability: Sole proprietors face unlimited liability, risking personal assets to
settle business debts.
2. Fundraising Challenges: Difficulty in raising funds, limited to personal funds, bank loans,
or contributions from friends and family.
3. Limited Skills: Sole proprietors need diverse skills, including management, marketing,
finance, and more.
4. Lack of Continuity: Business life expectancy tied to the owner's ability to work, making
continuity uncertain during owner illness.
5. Employee Recruitment: Challenges in attracting qualified employees due to limited wages,
benefits, and advancement opportunities.
6. Taxation Complexity: Tax advantages may vary based on income and corporate tax rates,
influencing decisions to incorporate.
Chapter 2 PRC 5 ITB BIZNOTES (Prime Edition) by Sir Osama Waheed Page 9
Partnerships
Definition: A partnership is a business structure where ownership is shared by at least two
individuals, collectively forming the "firm." Law relates to it is Partnership Act 1932.
Partnership Types:
1. General Partnership: Complete sharing in business management with unlimited liability
for debts.
2. Limited Partnership: Involves at least one general partner with unlimited liability and
limited partners whose liability is restricted to their investment.
3. Limited Liability Partnership (LLP): Similar to a general partnership, with partners not
held responsible for business debts and liabilities.
Formation and Agreement:
1. Partners agree orally or ideally in writing on profit and loss sharing.
2. A written partnership agreement outlines terms, conditions, purpose, contributions,
responsibilities, and compensation.
Advantages:
1. Ease of Formation: Simple setup with a partnership agreement, less complex laws
compared to corporations.
2. Fundraising Availability: Partnerships combine talents and funds, making it easier to raise
capital for operations and expansion.
3. Combined Knowledge: Partnerships benefit from diverse skills, allowing for effective
management and specialization in various areas.
4. Flexibility: Quick decision-making due to partner involvement in day-to-day operations.
5. Less Regulatory Control: Fewer regulatory controls than corporations, focusing on
industry-specific laws and regulations.
Disadvantages:
1. Unlimited Liability: General partners face unlimited liability, risking personal assets for
business debts; limited liability partnerships (LLPs) are an option to mitigate this.
2. Profit Sharing: Sharing profits among partners can be challenging, especially if
contributions vary.
3. Difference of Opinion: Diversity in partners may lead to disagreements on key business
decisions, causing communication breakdowns.
4. Dissolution Challenges: Partnership dissolution is complex, involving the calculation of
leaving partners' share value, transfer guidelines, and buy-sell agreements.
Chapter 2 PRC 5 ITB BIZNOTES (Prime Edition) by Sir Osama Waheed Page 10
Features of Company
Distinguishing Features of Company
Separate legal personality:
▪ Company can enter into contracts with other persons
▪ A company owns its own assets
▪ A company is personally liable to pay tax on its income (profits).
Limited liability
▪ The liability of the owners of a company for the debts of the company is limited to the
amount of their investment in the company.
Transfer of ownership and perpetual succession
▪ Any legal person can own shares in a company (even another company can own shares)
▪ Shareholders can transfer their share in the ownership of the company to someone else,
▪ It does not affect the legal status or legal existence of company.
▪ Company continues to exist (unaffected by change in ownership)
Types of Company
Company: A Company formed and registered under this Act or the company law.
Company law The repealed Companies Act, Companies Ordinance, 1984, Companies
Ordinance, 2016 and also includes this Act unless the context provides otherwise
Companies limited by shares Liability of its members is limited by the memorandum to the
extent of amount, if any, remaining unpaid on the shares respectively held by them.
Companies limited by guarantee Liability of owners is limited to the amount member
guarantees to contribute in the event that the company goes into liquidation
▪ The company may or may not have share capital
▪ If Company has share capital; Liability shall also include amount unpaid on shares (if any)
Unlimited companies This has all advantages of a normal company except that, liability of its
members is not limited
Public Company A company which is not a private company
Listed Company. Whose securities are listed on stock exchange and are traded on it
Unlisted Company Whose securities are not listed on stock exchange
Private Company includes:
Single Member Company Which consists of a single member who is director of the company.
[In these companies (SMC-PVT) Limited is added to the name]
Other Private Company can be registered by at least two members and it restricts
• Maximum number of members to 50 (members jointly holding shares shall be
counted as 1)
• Right to transfer the shares by its members (save as otherwise provided in act),
• Invitation of subscriptions from general public for its shares debentures or
Redeemable capital.
Chapter 2 PRC 5 ITB BIZNOTES (Prime Edition) by Sir Osama Waheed Page 11
Limited Companies or corporations
Main Features:
- A limited company has a separate legal identity from its owners, and all owners enjoy limited
liability.
- Owners are not personally responsible for business debts beyond their original investment.
Legal Entity and Ownership:
- A company, also known as a corporation, is a legal entity created under government
regulations.
- Owners purchase shares of stock, becoming stockholders.
- Private limited companies have restricted ownership, while public limited companies allow
shares to be easily bought or sold.
Stockholders, Directors, and Management:
1. Stockholders: Owners of a corporation holding shares of stock, with rights to dividends,
ownership transfer, and voting.
2. Directors: Elected by stockholders to govern the corporation, set goals, and oversee
operations. Boards include executives and outside directors.
3. Management: Corporate officers (CEO, CFO, etc.) hired by the board, responsible for
achieving corporate goals.
Advantages of Companies:
1. Resource Combination: Corporations merge financial and human resources for growth
and profitability.
2. Limited Liability: Owners' liability is limited to the amount of stock they own, protecting
personal assets.
3. Ownership Transfer: Stockholders can easily sell shares without affecting corporate
status.
4. Unlimited Life: Corporations have an unlimited life, unaffected by owner changes or
withdrawals.
5. Tax Deductions: Eligible for certain tax deductions, reducing taxable income.
6. Financing Attraction: Ability to raise funds by selling new shares, attracting investors for
expansion beyond sole proprietorships or partnerships.
Disadvantages of Companies:
1. Double Taxation: Corporations pay income taxes on profits, and dividends paid to
stockholders are taxed as personal income.
2. Cost and Complexity: Formation involves multiple steps, incurring substantial costs
including registration, license fees, legal, and accounting expenses.
3. Government Restrictions: Subject to various regulations, reporting requirements, and SEC
registration for public companies.
4. Competitive Disadvantage: Published financial reports may give competitors an
advantage, and compliance with reporting requirements imposes costs.
Chapter 2 PRC 5 ITB BIZNOTES (Prime Edition) by Sir Osama Waheed Page 12
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