Proprietary Org Lesson 4

8/14/2019 Proprietary Org Lesson 4

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Sole proprietary firms

Chapter 4



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 .



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



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



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



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



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 %



Partnership Orgs

Chapter 5

P t hi Fi



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



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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Proprietary Org Lesson 4

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