Chapter 3 – Business Organizations
Sole proprietorship / Sole trader
Businesses owned by an individual are known as sole proprietorship.
This type of business organization is common because it is easy to commence, requires only
a small amount of capital and can take independent decisions.
E.g. A grocery shop
Characteristics of sole proprietorship:

Capital is provided by one person – the owner provides funds for the business.

Profits or losses to be born alone – all the profits and losses of the business belong to
the owner.

Unlimited liability – the unlimited liability of the owner may require the owner to sell
his personal properties to settle the debts of business.

No legal personality – a sole trade business is not considered as a separate legal
person. It can do any legal business activity only by the name of the owner.

No continued existence – a sole trade business will have to stop its business activities
due to the death of the owner or him being mentally unsound to conduct the
business.

Not mandatory to register – it is not a must to register a sole trade business.
Advantages
 Convenient to start
 All the profits belong to the owner
 Privacy of the business information is
secured
 Ability to use own skills at the best
 Independent decision making
Disadvantages
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Unlimited liability of the owner
Difficulties in raising capital
No continuous existence
No legal personality
Individual decisions of the owner can be
unsuccessful
Partnerships
Two or more people doing a business together with an objective to earn profit is known as a
partnership.
Usually, professionals such as accountants, lawyers, doctors conduct their practice as a
partnership. E.g. Audit firms, law firms
Characteristics of partnerships:

Number of members in a partnership – there should be minimum 2 and maximum
20 members to start a partnership.

Partnership agreement – this is the agreement among the partners which can be
either written, oral or implied. If the initial capital of the partnership is greater than
Rs. 1000, a partnership is required to be conducted under a written agreement. This
written agreement is known as partnership deed.

Unlimited liability of partners

Not mandatory to register

No separate legal identity

No continued existence
Advantages

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Convenient to commence
Can raise more capital
Can utilize different skills of partner
Shared liability among partners
Can take collective decisions
Disadvantages

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Unlimited liability
Profit shared among partners
Conflicts among partners
No continued existence
No legal personality
Incorporated companies
A firm which is required to be registered under the Companies Act No. 07 of 2007, with a
legal personality, can raise capital by issuing shares and the liability of the shareholders
being limited, is an incorporated company.
The owners of these companies are the shareholders.
Characteristics of incorporated companies:

Incorporation under the Companies Act – it is mandatory to register.

Continued existence - the death of shareholders or shareholders being bankrupt
shall not affect to the continued existence of its business activities.

Ability to register with limited liability - The liability of shareholders are limited to the
amount of capital they have invested in the company.

Can raise capital by issuing shares – can issue shares to the public.
Advantages

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

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Can raise more capital
legal personality
Continued existence
Limited liability
Managed by a Board of Directors
Disadvantages
 More legal provisions
 Profits and ownership are shared