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OFG BUSINESSES
LEGAL FORMS OF BUSINESS OWNERSHIP
In the private sector, there are three main legal forms of business ownership.
(1) The Sole Proprietorship (2) Partnership and (3) The Company. The forms
of businesses and their registration procedures are enumerated in the
following paras.
1. SOLE PROPRIETORSHIP
Introduction. The individual proprietorship or sole proprietorship is the oldest
form of business organization. It is as old as the civilization itself. Historically,
it appears that business started first with this form of organization. It is the
simplest and natural type of organization.
Sole proprietorship is also called individual proprietorship, or one man
business. Sole proprietorship is a form of business organization in which an
individual introduces his own capital, uses his own skill and intelligence in the
management of its affairs, assumes all the risks of business and is solely
responsible for the results of its operations. He, thus, owns all and risks all.
The business is exclusively in the hands of an individual. Most of the bakery,
hardware stores, service stations, barbers shop, doctor's clinic, service
stations, beauty parlours, etc. are examples of sole proprietorship.
Definitions of sole proprietorship
Some of the important definitions of sole proprietorship are as follows:(1) Paterson and Plowman. "A sole proprietorship is a business unit whose
ownership and management are vested in one person. The individual
assumes all risk of loss or failure of-the enterprise and receives all profits from
its successful operation."
(2) James Stephenson. "A sole trader is a person who carries on business
exclusively by and for himself. He is not only the owner of the capital of the
undertaking but is usually the organizer and manager and takes all the profits
or responsibilities for losses.
Characteristics of sole proprietorship The main characteristics of sole
proprietorship are as under:1) Ownership. The business is owned by a single individual.
2) Management and control. Being small in size, it is managed by the owner
himself. However, he may have some paid workers to assist him. In any case,
the ultimate control rests in his hands.
(3) Finance. The necessary capital to run the business is provided by the sole
owner. However, he may borrow from other sources such as friends or bank
as need arises.
(4) Risk. The proprietor himself bears all the risks. No body else has any
stake in the business.
(5) Unlimited liability. The sole trader is personally liable for debts of the
business. The creditor can lay claim not only on his business assets but also
his personal properly such as car, houses, furniture etc to recover the loan.
(6) Legal status. In law, the sole trader and his business are considered as
one. In other words, all the assets and liabilities of the business are the
personal assets and liabilities of the proprietor. We can say that the owner
and the business exist together. In other words, the two are considered as
one in the eyes of law.
(7) Relationship with customers. The sole trader tries to keep good
relationship with his customers. The customers are generally personally
known to the proprietor and their orders are higher valued.
(8) No legal formalities. The sole trader can set up or close the lawful
business as and when he likes. The operation of his business is not governed
by any special act or ordinance.
(9) Ease of dissolution. The sole trading business is as easy to end or
dissolve as is its formation. The decision of the proprietor alone ends the
business.
2. ADVANTAGES AND DISADVANTAGES OF
SOLE TRADERSHIP THE SOLE PROPRIETORSHIP
Sole proprietorship is a form of business enterprise in which an individual
owns the business, assumes all risks and operates the firm for his own
personal interest. Sole proprietor here is the sole owner, manager, controller,
financier and risk bearer. He wears many hats, of financial planning,
marketing, development, business strategies, risks, etc.
The individual runs the business alone though he may obtain the assistance
of paid employees. The sole tradership is very popular with small scale
business such as tailoring, hair dressing, retailers, accounting, legal
profession etc., etc. The sole proprietor forms of business ownership is very
popular in Pakistan. Its prospects here are also quite bright.
1. Name clause. This clause states the name of the company. A company may
select any name but it should not resemble the name of any other company. It
should also not contain the words like king, queen, emperor, government
bodies, UNO., WHO etc. The name should not be objectionable in the opinion
of the government. The Companies Ordinance provides that the name of
company must end with the world 'Limited' so that all the persons dealing with
the company must know that their liability is limited to the extent of their
shares. In the ^se of a private limited company, the words (private) limited to
be used as the last word of the name.
2. Situation clause. It is also known as domicile clause. The company is
Squired to state the name of the province in which the office is situated. It is
also necessary to give the exact address and name of the city where the
company is heated. This clause has the following advantage.
a)
A person can known, through this clause the jurisdiction of the court
under which the company operates.
(b) It also indicates the place for holding annual meeting of the company.
(c) The creditors, customers, government know the where about of the
company.
(d) All correspondence is done at the office address of the company.
3. Object clause. This clause is the essence of the Memorandum. It clearly
defines the sphere of the company's activities. It indicates a series of objects
for which the company is started. Any business activity carried outside the
territories specified in the object clause of memorandum is ultra vires and
void.
The object clause, the most important part of the Memorandum, should be
drafted very carefully. It is quite complicated to alter the object clause later on.
If a public company whishes to start any new business not covered in the
object clause, it has to pass a special resolution in the meeting.
The object clause offers protection to the shareholders by ensuring them that
the amount collected for undertaking is not risked in any other undertaking.
The creditors also feel protected by this clause.
4. Liability clause. This clause of Memorandum contains a declaration that the
liability of the members of the company is limited to the extent of the value of
shares purchased by them. In case a shareholder is to pay the unpaid calls on
the shares, he can be compelled to pay upto the extent of unpaid amount on
the shares and beyond that nothing more.
5. Capital clause. A company having a share capital shall state the total
maximum amount of share capital with which it is registered. The capital as
mentioned is called Authorized or Registered Capital. The capital is divided
into shares of a certain value which is specified in the capital clause. For
example. "The Authorized share capital of the company shall be Rs.5,000,000
consisting of 500,000 equity shares of Rs. 10 each".
6. Association and subscription clause. This clause contains a declaration by
the subscribers (7 persons in public company and 2 in a private Ltd.
company) that they are desirous of forming a company and agree to have
number of shares written against their respective names. Each signature of
subscriber must be supported by the signature of a witness with his address.
The subscriber is required to take at least one share each.
(ii) To convince those who have saving to invest about the genuineness of the
company and its future prospects.
(iii) To keep an authenticated record of the conditions on which the capital has
been raised.
(iv) To secure that the directors of the company accept responsibility for the
statements in the prospectus.
1-Contents of Prospectus
In contents, the detailed description regarding the establishment of the
company, its characteristics and its estimated future is given. The important
matters included in the prospectus are as follows.
11-Share Capital Under this head, information is provided regarding:
(i) Share capital of the company (a) Authorized (b) issued, subscribed and
paid up capital (c) Present issues offered for subscription.
(ii) Basis of allotment of shares.
(iii) Facilities available to non resident Pakistanis for purchase of shares etc.
Ill-Commission, Brokerage and Tax exemptions. This part contains the
following information. (i) Commission to be paid to the bankers to the issue.
(ii) Brokerage.
(iii) Tax exemption on investment on the shares of the company. (iv)
Exemption from custom duty and sales tax on plant and machinery, if any.
Brief history and prospects. It includes:
(i) Brief history of company. (ii) The main objects of the company. (iii) The
location of the plant.
(iv) Information about project, plant and its machinery, raw material, etc. (v)
Economic justification and marketability of the goods to be produced.
Financial Information Under financial information, the following particulars are
provided.
(i) Auditors Report. (ii) Shareholders equity and liabilities. (iii) Auditors
certificate on share capital. (iv) Estimated cost of the project and the means of
the finance.
Board of Directors
Under this head, the names, addresses, and occupation-of the board of
directors is given.
Interest of Directors This head provides information regarding:
(i) Interest of directors in dividends and other benefits. (ii) Remuneration to be
paid to the chief executive, directors and the secretary.
General Information The main information provided under this head are:
(ii) Election of directors. (iii) Powers of directors. (iv) Borrowing powers of the
directors. (v) Voting rights. (vi) Transfer of shares. (vii) Quorum of general
meeting. Miscellaneous The main contents under this head are:
(i) Place of registered office, factory. (ii) Bankers of the company. (iii) Bankers
to the issue both local and foreigner. (iv) Legal advisor, consultants to the
issue, etc.
Application and Allotment
The procedure of applying for shares, their scrutiny and allotment of shares is
made clear to the prospective investors in this section.