INTRODUCTION TO BUSINESS

DIFFERENT FORMS OF
BUSINESS OWNERSHIP

CHAPTER # 2

Hamidul Islam [Hamid]

Assistant Professor,
Department of Marketing, FBA, AIUB
1
 WHAT TYPE OF BUSINESS
IS RIGHT FOR YOU?

Each form of business ownership has Advantages and

Disadvantages.

If you are planning to go into any type of business, you

need to review these pros and cons and determine
which form of ownership meets your needs.

Based on the business requirements, and your skills &

abilities, you need to start a new business.

2
 FACTORS TO BE CONSIDERED
BEFORE STARTING A BUSINESS
 Capital Requirements:
The amounts of funds necessary to finance business the
operations.

 Time Requirements:
The time needed to operate the business and provide
guidance to employees.

 Tax Liability:
What taxes a business must pay to various governments
on earnings of business.

3
 FACTORS TO BE CONSIDERED
BEFORE STARTING A BUSINESS

 Management Abilities:
The skills & abilities needed to plan, organize and
control the business operations.
 Risk:
The amount of personal property a person is willing to
lose by starting a business.
 Control:
The amount of authority (decision making power) the
owner exercises.

4
 DIFFERENT FORMS OF BUSINESS
 Sole Proprietorship:
A business that is owned and usually managed by
one person/individual.
 Partnership:
A business owned and managed by two or more
people.
 Corporation:
A legal entity with authority to act and have liability
separate from its owners.

5
 DIFFERENT FORMS OF BUSINESS
 Sole Proprietorship
A business that is owned and usually managed by one
person/individual. The person may receive help from
others in operating the business, but he/she is the
only boss: the sole proprietor of the company.
￭ Small Independent Retail Shops
￭ Boutique shop
￭ Bakery shop
￭ Restaurant
￭ Tea-stall etc.

6
 DIFFERENT FORMS OF BUSINESS

Sole Proprietorship (Contd.)

 The Sole Proprietor often aided by one or two employees, operates
a shop that frequently caters to a group of regular customers.
 The Capital (money) needed to start and operate the business is
normally provided by the owner through personal wealth or
borrowed money.
 The sole proprietor is usually an active manager (owner manager),
working in the business. He/She controls the operations, supervises
the employees and makes the decisions.
 The sole proprietor who is the owner usually accounts for the
success and failure of the business.

7
FEATURES OF SOLE PROPRIETORSHIP

￭ Capital provided by one through personal

wealth or borrowed money and He/She;
￭ Should be an active manager
￭ Controls the operations
￭ Supervises the employees
￭ Makes and takes the decisions
￭ Should have good managerial skills & abilities

8
 ADVANTAGES OF SOLE PROPRIETORSHIP
 Easy of Starting and Ending the Business:
All one has to do to start a sole proprietorship is buy or lease the
needed equipments and put up some announcements saying s/he is in
business. It is just as easy to get out of business; s/he simply stops.
 Being Your Own Boss:
Working for others simply does not have the same excitement as
working for own-self—at least, that’s the way sole proprietorship feel.
 Freedom to Control:
The owner has the freedom to make the final decisions on any sector.
 Maintaining Secrecy:
As the owner is one there is no chances or limited chances to be shared
of the business secret information.
 Sole Participation in Profits and Losses:
All profits earned or losses incurred by operating the business are to be
shared by the individual.

9
 ADVANTAGES OF SOLE PROPRIETORSHIP
 Pride of Ownership:
People who own and manage their own businesses are rightfully proud
of their work. They deserve all the credit for taking then risks and
providing needed goods or services.
 Retention of Company Profit:
Other than the joy of being boss, there is nothing like the pleasure of
knowing that one can earn as much as possible and not have to share
that money with anyone.
 Tax Breaks:
A major advantage of the sole proprietorship is that the businesses pays
no income tax. A Corporation pays taxes on profits; its owners, the
shareholders pay taxes on dividends. Whereas, a sole proprietor pays
no tax on business profits, instead the person is taxed as an individual
on all his/her income earned from the business.

10
 DISADVANTAGES OF SOLE PROPRIETORSHIP
 Unlimited Liabilities—The Risk of Personal Losses:
The responsibility of business owner for all the debts of the business.
Obligations of investors to use personal assets, when necessary to pay
off the debts to business creditors.
 Limited Financial Resources:
Funds available to the business are limited to the funds that the one
(sole) owner can gather. Therefore funds are limited to personal
wealth.
 Limitations in Managerial Skills & Abilities:
All businesses need management; that is someone must keep
inventory records, accounting records, tax records and so forth. Many
people who are skilled at selling things or providing a service are not
skilled in keeping records. Sole proprietors may have no one to help.

11
DISADVANTAGES OF SOLE PROPRIETORSHIP

 Few Fringe Benefits:

As the owner is the boss, s/he loses the fringe benefits that often
come from working for others. (Health insurance, disabilities
insurance, sick leave and vacation pay)
 Limited Growth:
Expansion is often show since a sole proprietorship relies on its
owner for most of its creativity, business know-how and funding.
 Limited Business Life Span:
Death, Illness, bankruptcy or retirement of the owner terminates
the proprietorship.

12
 DIFFERENT FORMS OF BUSINESS
 Partnership
A business owned and managed by two or more people.

An Association of two or more persons to carry on as co-owners of a

business for profit.
A partnership can be based on a written contract or a voluntary
and legal oral agreement. The law regards individual as partners
when they act in such a way as to make people believe they operate
a business together.

13
 Types of Partnerships

1. General Partnership
2. Limited Partnership
3. Joint Venture

14
 Types of Partnerships

1. General Partnership
An arrangement by which two or more partners
conducting a business jointly have unlimited
liability which means their personal assets are
liable to the partnership’s obligation.

A general partner has authority to act and make binding

decision as an owner. Partners generally share profits and
losses according to a plan specified by agreement between
them.

15
 Types of Partnerships

2. Limited Partnership
A Partnership where two or more partners united to conduct a
business jointly, and in which one or more of the partners is
liable only to the extent of the amount of money that partner
has invested.

The general partners arrange and run the business, while the limited
partners are investors only. Investors receive special tax advantages
and protection from liability.

Limited partners legally may have no say in managing the business. If

there is any violation, the limited partnership status is dissolved.

16
 Types of Partnerships

3. Joint Venture
A business arrangement in which two or more parties agree to
pool their resources for the purpose of accomplishing a
specific purpose or objectives or to complete a single
transaction.
A joint venture (often abbreviated JV) is an entity formed between two
or more parties to undertake economic activity together. The parties
agree to create a new entity by both contributing equity (capital),
and they then share in the revenues,
revenues expenses, and control of the
enterprise.
The venture can be for one specific project only, or a continuing
business relationship such as the Fuji Xerox joint venture.

17
The Partnership Contract:

Sound business practice dictates that a partnership agreement be

written and signed, although it is not a legal requirement. Such a

contractual agreement is called Articles of Partnership.

Written articles of partnership can prevent or lessen
misunderstandings at a later date. Oral partnership agreements,
though quite legal, tend to be hard to recreate and are open to
misunderstandings. Written articles of partnership provide a
proof of an agreement.

18
The Partnership Agreement includes:
 Name of business partnership

 Type of business

 Location of the business

 Expected life of the partnership

 Names of the partners and amount of each one's investment

 Procedure for distributing profits and covering losses

 Amounts that partners will withdraw for services

 Procedure for withdrawal of funds

 Duties of each partner

 Procedures for dissolving the partnership

19
 Advantages of Partnerships
 More Capital:
In the sole proprietorship, the amount of capital is limited to personal wealth
and the credit of the owner. But in a partnership business, when two or more
people pool their money and credit, it is easier to pay the rent, utilities, and
other bills incurred by a business.

 Combined Managerial Skills:

In a partnership, people with different talents and skills may join together to
form a business. It is simply much easier to manage the day-to-day activities
of a business with carefully chosen partners. Partners give each other free
time from the business and provide different skills and perspectives .

20
 Advantages of Partnerships
 Ease of Starting:
As it involves a private contract contractual agreement, a partnership is fairly
easy to start. It is nearly as free from government regulation as a sole
proprietorship.
 Clear Legal Status:
The legal outline for partnerships have been established through the court. The
questions of rights, responsibilities, liabilities and partner duties have been
covered. Therefore the legal status of a partnership is clearly visible. Lawyers can
provide legal advice about the partnership issues.

 Tax Advantages:
The partnership has some potential tax advantage over a corporation. In
partnership has some proprietorship, the owners pay taxes on their business
earnings. But the partnership as a business does not pay income tax.

21
 Disadvantages of Partnerships
When two people agree on anything, there is the possibility of conflict
and tension. Partnerships have caused splits among families, friends,
and marriages.

 Unlimited Liability:
Each general partner is liable for the debts of the firm, no matter who
was responsible for causing those debts. You are liable for your partner
s’ mistakes as well as your own. Like sole proprietors, general partners
can lose their homes, cars, and everything else they own if the business
loses a lawsuit or goes bankrupt.

Instability:
If a partner dies or withdraws from the business, the
partnership is dissolved.

22
 Disadvantages of Partnerships
 Disagreements Among Partners:
Disagreements over money are just one example of potential conflict
in a partnership. Who has final authority over employees? Who hires
and fires employees? Who works what hours? What if one partner
wants to buy expensive equipment for the firm and the other partner
disagrees? Potential conflicts are many. Because of such problems,
all terms of partnership should be spelled out in writing to protect all
parties and to minimize misunderstandings.

Decisions made by several people (Partners) are often better than

those made by one, but when there are two or more people deciding
on some aspect of the business can be dangerous. Power and
authority are divided and the partners will not always agree on each
other. As a result poor decision making and more time consuming
can occur.

23
 Disadvantages of Partnerships
 Investment withdrawal difficulty:
A person who invests money in a partnership may have a hard time
withdrawing the investment. It is much easier to invest in a partnership than
to withdraw. Sure, you can end a partnership just by quitting. However,
questions about who gets what and what happens next are often very
difficult to solve when the partnership ends.

 Limited Capital Availability:

The partnership may have an advantage over the sole proprietorship in the
availability of capital, but it does not compare to a corporation in ability to
raise capital. Partners sometimes have limited capabilities and cannot
compete in businesses requiring large amount of capital. The amount of
capital a partnership can raise depends on the personal wealth of the
partners and their credit ratings.

24
 DIFFERENT FORMS OF BUSINESS
 Corporation
 Some industries such as automobile manufacturing, computer
manufacturing, oil refining and natural gas production require
millions of dollars to operate a business.
 Typically such vast amount of money are put together by
attracting numerous investors.
 The unincorporated forms of business – sole proprietorship and
the partnership do not attract investors who do not want to make
decisions or to be actually involved in managing the firm.
 A legal entity with authority to act and have liability separate
from its owners.

25
 CORPORATION
 In the eyes of law, the corporation is an artificial being,
invisible and intangible. It has the legal rights of an
individual; it can own property, purchase goods and
services and sue other persons or corporation.
 Basically a vast amount of money put together to attract
investors.
 The corporation owners spread over a wide geographical
area can hire professional managers to operate the
business.
 It has legal right, purchase property, goods and services.

26
 Forming a Corporation
Charter
A state’s written agreement giving a corporation the right to operate as
a business. The state-issued document authorizing its formation.
The individuals forming the corporation are called its Incorporators.

 Domestic Corporation
An enterprise organized under the laws of one state or country and
doing business within the state or country.

 Foreign Corporation
A business incorporated in one state or country and doing business in
another state or country.

27
 Forming a Corporation
Factors involved to start a corporation:

1. To form a corporation, any country needs at least 3 persons.

2. The applicants fill out an application form for a Charter
(Articles of Incorporation)
3. The form is then reviewed by the appropriate government officials.
4. After granting the charter, the incorporators and all subscribers or
the owners of the stock of the business meet and elect the Board of
Directors.
5. They also approve the bylaws of the corporation.

28
 Forming a Corporation
Factors involved to start a Corporation (Contd.)
6. The Board of Directors then meets to select the professional
managers and to make any other decisions needed to start the
business.

7. The corporation has relationship with shareholders, creditors,

customers, and employees.

8. The actual owner of corporation are shareholders who invest money

in the business.

9. The manager of the corporation decide what property to purchase,

when and whom to hire, where to borrow needed funds.

29
EXAMPLE OF DIFFERENT CORPORATIONS

30
 THE RANGE OF A CORPORATION’S RELATIONSHIPS

Is Owned By The Corporation Chartered by a Is Run By

state as a separate entity
Professional
Managers
Shareholders
(Investors of
money) Property
Owns (Equipment, Real
Estate, Inventory,
Buildings
Creditors (Banks, Owes
Recruits & Hires
Bondholders, other
Sells To People
businesses)
(Supervisors,
Customers Labourers, Clerks,
(Buyers of goods Sales Personnel)
and services)

31
 ADVANTAGES OF CORPORATIONS

Most people are not willing to risk everything to go into

business. Yet for a business to grow and prosper and
create economic opportunity, many people would have
to be willing to invest their money in it.
One way to solve this problem is to create an artificial
being, an entity that exists only in the eyes of the law
—a corporation. Let’s explore some of the advantages
of corporations:

32
 ADVANTAGES OF CORPORATIONS
 Limited Liability:
A major advantage of corporations is the limited liability of owners.
Corporations in England and Canada have the letters Ltd. after their
name, as in British Motors, Ltd. The Ltd. stands for “limited liability,”
probably the most significant advantage of corporations.

A person investing funds in a corporation receives shares of stocks

and becomes an owner. In a corporation, the liability for the
shareholder equals the amount of funds invested.

Thus if the business is forced to liquidate each owner loses only the
amount of money, he or she has invested.

33
 ADVANTAGES OF CORPORATIONS
 Greater Capital Base:
To raise money, a corporation can sell ownership (stock) to anyone
who is interested. This means that millions of people can own part of
major companies like IBM, Xerox, General Motors and others.
Corporations may also find it easier to obtain loans since lenders find
it easier to place a value on the company when they can review how
the stock is trading.
Corporations, however can attract capital from a large number of
investors by selling shares of stocks.
 Skilled Management Team:
The Board of Directors has the duty of hiring professional managers
and the owners delegate their power of operating business to these
managers. Professional managers are trained and experienced
executives. The professional managers may own shares of stock in
the business but not usually not enough to control the corporation.

34
 ADVANTAGES OF CORPORATIONS

 Easy Transfer of Ownership:

The Shareholders have the right to sell their shares of a corporation’s
stock to whomever they like, barring a legal restriction on some
closed corporations.

These shares of ownership can be sold whenever the shareholder

desires and at the price the buyer is willing to pay.

Thus shareholders can freely buy and sell shares of stock. The
investment flows easily and is not frozen. This right to sell shares of
stock gives corporations the ability to attract large number of
shareholders.

35
 ADVANTAGES OF CORPORATIONS
 Stability:
Because corporations are separate from those who own them, the
Shareholders’ death, retirement or sale of stock need not dissolve the
business.
The corporation’s policies may be hampered by the sale of large
blocks of stock, but business will go on. Nor will the death or
retirement of the President of the board or Chief Executive Officer
stop the corporation from doing business.

 Legal-Entity Status:
A Corporation can purchase property, make contracts or sue and be
sued in its corporate name. These characteristics distinguish it most
clearly from other forms of business organizations.

36
 DISADVANTAGES OF CORPORATIONS
 Difficulty and Expense of Starting:
Starting a corporation involves applying for a Charter from a state.
Each state has its own set of laws; these must be considered before
deciding where to incorporate. Fees and other expenses to start the
business need to be considered.
 Initial Cost:
Incorporation may cost thousands of dollars and involve expensive
lawyers and accountants.
 Multiple Taxation:
Corporate income is taxed twice. First the corporation pays tax on
income before it can distribute any to stockholders. Then the
stockholders pay tax on the income (dividends) they receive from the
corporation.

37
 DISADVANTAGES OF CORPORATIONS
 Lack of Control:
The individual shareholder has little control over the operations of
the corporations except to vote for a line up of individuals for the
Board of Directors. The buying and selling of shares of stock is the
only real control owner has.
 Possible Conflict with Board of Directors:
Some conflict may rise if the stockholders elect a board of directors
that disagrees with the present management.
 Lack of Personal Interest:
In most corporations except the small ones management and
ownership are separate. This separation can result in a lack of
personal interest in the success of the corporation.

38
 DISADVANTAGES OF CORPORATIONS

 Credit Limitations:
Banks and other lenders have to consider the limited liability of
corporations. If a corporation fails, its creditors can look only to the
assets of the business to satisfy claims.

 Difficulty of Termination:
Once a corporation is started, it’s relatively hard to end.

 Lack of Secrecy:
A corporation must provide each shareholder with an annual report
and other reports. These reports present data on sales volume,
profit, total assets and other financial matters. Public disclosure of
these data enables competitors and other outsiders to see the
corporation’s financial condition.

39
 TYPES OF CORPORATIONS
Private - Attempts to earn a satisfactory profit
Public - Owned and run by the government
Closed - Stock held by only a few owners and not actively
sold on the stock market
Open - Stock held by numerous people and actively sold
on the stock market. Eg. Beximco Pharmaceuticals Ltd.
Municipal - Cities and townships that carry out business.
Government owned Corporations. Eg. Dhaka City
Corporation, Chittagong City Corporation, etc.

40
 TYPES OF CORPORATIONS
Domestic - Incorporated in one state or country and doing business within
that state or country. Eg. AKIJ Group, Rahimafrooz, Square Group
Foreign - Incorporated in one state or country and doing business in
another state or country.
Example: Unilever Bangladesh Limited incorporated in UK.
Alien - Incorporated in one nation and operates in another state or
country.
Example: Coca Cola (COKE) --- Abdul Monem Limited.
Pepsi --- Transcom Beverages Ltd.
Nonprofit - Service organization incorporated for limited-liability status.
Eg. Save the Children, CARE, Anjuman-e-Mufidul Islam, etc.

41
 MERGERS
A Merger is a combination of two companies to
form a new company.

 Joining together of two corporations.

 Types of Mergers:
 Horizontal Merger
 Vertical Merger
 Conglomerate Merger

42
 MERGERS
 Horizontal Merger
It is a combination of two or more firms in the same area
of business.
Example: A Garment Manufacturer merging with another
Garment Manufacturer to gain dominant market share.
 Vertical Merger
It is a combination of two or more firms involved in
different stages of production or distribution of the
same product. Backward or Forward are the two types.
Example: Toyota Car Manufacturer merging with Dunlop Tire
Manufacturer or Toyota Car Manufacturer merging with an
Insurance Company.

43
 MERGERS
 Conglomerate Merger
It is a combination of firms engaged in unrelated lines
of business activity.

Example: South Korean car manufacturer Hyundai buys

a cement factory which is totally unrelated to the
automobile industry.

44
 Cooperatives
An Organization in which people collectively
own and operate a business in order to
compete with bigger competitors.

Take approval from Social Welfare Department.

Group of people doing business for their own benefit
or welfare.
Only the members get the benefits.
Profits are distributed among the members.

45
 Cooperatives
 Milk Vita
 AMUL in India
 Kingshuk Bhumukhi Shamabay Samity
 Dhaka Club
 Gulshan Club

46
END OF CHAPTER# 2

47