Choosing a Form of Business Ownership

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Forms of Business Organization
Joint Stock Companies and
Banks
Dr. Attaullah Shah
Legal Forms of
Business
Sole Proprietorships
Partnerships
Corporations
General Partnership
Regular Corporation
Limited Partnership
Subchapter S
Corporation
(S-Corporation)
Master Limited
Partnership
Sole Proprietorships
Business owned (and usually operated)
by one person
Simplest form of business ownership
Most popular form of business
organization – 72.2% of all
Most common in:
– Retailing
– Service
– Agriculture
Sole Proprietorship -- Advantages
Ease of Startup
– Little legal documentation
– No co-owners to consult
Least expensive to start
Pride of Ownership
Retention of profits
Flexibility
No Business Income Tax
Sole Proprietorship -Disadvantages
Unlimited Liability
Limited Life – Business ends when owner
leaves the business
Limited Access to Start-up Capital
Limited Access to Credit
Limited Management Expertise
Difficulty in Hiring Employees
Proprietor not considered an employee
Partnerships
Two or more owners
Least numerous form – 7.7% of all
businesses
Partnership Agreement
– Specifies rights and obligations of partners
– If written, called the Articles of Partnership
(Articles of Co-partnership)
Partnership -- Advantages
Greater Access to Capital
Greater Access to Credit
Retention of Profits
More Management Expertise
No Business Income Tax
Partnership -- Disadvantages
Shared Profits
Unlimited Liability for “General Partners”
Each partner has “Agency” power
Limited Life
– Business ends when any partner withdraws
Management Disagreements
Frozen Investment
Types of Partners
General Partner
– Unlimited Liability
– Assumes Management Role
Limited Partner
– Liability limited to Investment
– May not take active managerial role
Every partnership must have at least one
general partner
Types of Partners
General Partnership
– All partners are general partners
Limited Partnership
– One or more limited partners
Master Limited Partnership
– Owned & managed like a corporation
– Taxed like a partnership
– Shares may be sold
Corporations
Generally larger than other forms (Except for SCorporation)
– 20.1% of all U.S. Businesses
– Account for 87.1% of all U.S. Business Income
Considered a separate legal entity
– Owners called “Stockholders” or Shareholders”
Ownership evidenced by “Stock Certificate”
Governed by “Board of Directors”
Corporations -- Advantages
Limited Liability
Ease of Ownership Transfer
Unlimited Life
Greater Access to Capital
Specialized Management Expertise
Corporations -- Disadvantages
More difficult & costly to form
– Requires a “Corporate Charter”
Subject to greater governmental scrutiny
Diluted earnings
Double taxation
Corporations vs.
Sole Proprietorships
SP
Corp
Income
$1,000,000
$1,000,000
Expenses
500,000
500,000
EBT
$500,000
$500,000
(Assume Business Tax Rate = 50%)
Business Tax
0
250,000
Net Profit
$500,000
$250,000
(Assume a 30% Personal Tax Rate)
Personal Tax 150,000
75,000
$ to Owners $350,000
$175,000
Corporate Charter
Legal Permission to Operate as a
Corporation
Issued by state
May not conduct business as a
corporation without a charter
Contents of a Corporate Charter
Company Name & Address
Names & addresses of Incorporators
Purpose of the Corporation
Maximum amount of stock & Classes of
Stock to be issued
Rights & Privileges of stockholders
Length of time the corporation is to exist
Stockholder Rights
Common Stock
– Votes in corporate matters
– One vote per share owned
Preferred Stock
– No voting rights
– Dividend claims are paid 1st
Dividend
– Distribution of earnings to the stockholders of
a corporation
Organizational Chart
Owners/
Stockholders/
Shareholders
Chief Executive
Officer (CEO)
Board of Directors
President
Senior
Vice President
Vice President
Finance
Vice President
Production
Vice President
Marketing
Vice President
Human Resources
Types of Corporations
Government-Owned Corporation
– “Public Corporation”
– Owned & operated by government
– Post al Corporation, NASA, FIDIC,SNGPL
Quasi-Government Corporation
– “Quasi-Public Corporation”
– Privately owned, government controlled monopoly
– Public utilities, Fannie Mae, Freddie Mac, Sallie Mae
Private Corporation
– Owned by individuals or other companies
Types of Corporations
Not-For-Profit Corporation
– Organized to provide a social, educational, religious,
or other service
– Habitat for Humanity, Red Cross
For-Profit Corporation
Closed Corporation
– Stock owned by relatively few people
– Stock not sold to general public
Open Corporation
– Stock is bought and sold on security exchanges
– Can be purchased by any individual
Types of Corporations
S-Corporation (Subchapter-S Corporation)
– Corporate structure designed for small business
– Taxed as a partnership if there are 75 or fewer
stockholders
– No non-resident alien stockholders
– Only one class of stock
Limited-Liability Company (LLC)
– Combines the benefits of a corporation & partnership
– Not limited to 75 stockholders
Mergers & Acquisitions
Hostile takeover
Types of mergers
– Horizontal: Similar products / services
– Vertical: Different but related firms
– Conglomerate: Completely different
industries
Merger Trends
– Divestiture
– Leveraged Buyout (LBO)
Franchising
Franchise
– License to operate an individually owned
business as though it were part of a chain of
outlets or stores
– The business itself
Franchising
– Actual granting of a franchise
Franchising
Franchisor
–
–
–
–
Supplies a known & advertised business name
Supplies management skills
Supplies training & materials
Supplies method of doing business
Franchisee:
– Supplies labor & capital
– Operates the franchised business
– Agrees to abide by the franchise agreement
Franchising Advantages
Franchisor
– Fast, Selective Distribution
– Motivated Franchisee
Franchisee
– Opportunity to start a business
– Business Experience of others
– Nationally recognized name
– National promotional campaigns
Franchising Disadvantages
Mainly from Franchisee’s Viewpoint:
– Franchisor’s contract can dictate every aspect
of the business
– Pay for security
– Long hours
– Competition from same company
Joint Stock Company:
The limitations of sole-proprietorship and partnership forms of
ownership gave birth to joint stock company form of organisation.
Two important limitations of earlier form of organisation were
inadequacy of funds and unlimited liability.
The earlier form of organisation could not meet the increasing
demand for funds of organisation. The other limitation which
hampered the growth of business was the unlimited liability of
owners.
Joint stock company was first started in ITALY in THIRTEENTH
century.
During 17th and 18th centuries, joint stock companies were
formed in ENGLAND under ROYAL CHARTER or ACTS OF
PARLIAMENT.
DEFINITION:A company is ‘’ a voluntary association of many individuals for
profit having limited liability and contribute money or money’s
worth to a common stock.
Characteristics of Joint Stock Co.
ASSOCIATION OF PERSONS:A company is an association of persons joining hands with a common
motive. A private limited company must have at least two persons and
public limited company must have at least seven members to get it
registered. Furthermore, the number of shareholders should not exceed 50
in private companies but there is no maximum limit in a public limited
company.
INDEPENDENT LEGAL ENTITY:The company is created under law. It has separate legal entity apart from
its members. A company acts independently of its members. The company
is not bound by the acts of its members. The company can sue and be
sued in its own name.
LIMITED LIABILITY:- The liability of its shareholders is limited to the value
of shares they have purchased. In case the company incurrs huge
liabilities, the shareholders can only be called upon to pay the unpaid
balance on their shares.
COMMON SEAL:A company being an artificial person cannot put its
signatures. The law requires every company to have a
seal and get its name engraved on it. The seal of the
company is affixed on all important documents and
contracts as a token of signature.
TRANSFERABILITY OF SHARES:-
The shares of the company can be transferred by its
members. Under ARTICLES OF ASSOCIATION, the
company can put certain restrictions on the transfer of
shares but it cannot altogether stop it.
SEPARATION OF OWNERSHIP AND MANAGEMENT:The shareholders of a company are widely scattered. A
shareholder may like to invest money but may not be
interested in its management. The companies are managed
by the board of directors.
PERPETUAL EXISTENCE:- The company has a permanent
existence. The shareholders may come or may go but the
company will go on forever. The continuity of the company is
not affected by death, lunacy or insolvency of its
shareholders.
CORPORATE FINANCE:- A joint stock company, generally,
raises large amounts of funds. The is divided into small
shares of domination. A large number of persons purchase
shares and contribute to the capital of the company.
CENTRALISED AND DELEGATED MANAGEMENT:-
A joint stock company is an autonomous and self
governed body. The shareholders being large in number
cannot look after the day-to-day activities of the
company. They elect board of directors in general body
meeting for managing the company. All policies of the
company are decided by a majority vote. All decisions
are taken in a democratic way.
PUBLICATION OF ACCOUNTS:-
A joint stock company is required to file annual
statements with the registrar of companies at the end of
a financial year. They are available for inspection in the
office.
Kinds of Companies: ACCORDING TO INCORPORATION
The companies may be divided into three categories according to
incorporation.
CHARTERED COMPANIES:- These type of companies are
incorporated under ROYAL CHARTER by the king or HEAD OF
THE STATE. Under the charter, certain exclusive rights and
privileges are granted to the company for undertaking certain
commercial activities. If the company violates the rules, the head of
the state can close such companies.
STATUTORY COMPANIES:- These companies are formed under
special act of parliament or of a state legislature. These companies
may or may not use the word ‘limited’. The EXAMPLES of such
companies are State Bank of Pakistan THE INDUSTRIAL
FINANCE CORPORATION OF Pakistan, STATE TRADING
CORPORATION OF Pakistan, etc.
REGISTERED COMPANIES:- These are the companies formed and
registered under the provisions of the companies act. Most of the
companies in Pakistan are registered under the COMPANIES ACT 1956.
these companies may be limited by shares, limited by guarantee or
ACCORDING TO LIABILITY=
According to liability, the companies may be classified into three
categories.
1.
COMPANIES LIMITED BY SHARES:- The companies limited by
shares have a share capital. The capital is divided into shares.
The shareholders are not liable to pay anything more than the
value of shares held by them, whatever be the liabilities of the
company.
2.
COMPANIES LIMITED BY GUARANTEE:- These companies are
also formed under the companies act with a stipulation in the
memorandum clause that members are guaranteed to pay a
certain amount of money in case of its winding up. The amount
which members undertake to pay is called the guarantee money.
3.
UNLIMITED COMPANIES:- The companies registered without
limiting the liability of members to the value of shares are called
unlimited companies. All members are liable to meet the liabilities
of the company to an unlimited extent.
1.
A.
B.
2.
ACCORDING TO TRANSFERABILITY OF SHARES:PRIVATE COMPANY:- A private company can be formed with the
association of at least two members but the maximum number of
shareholders cannot exceed fifty. A private company restricts by its
articles, a) the right of members to transfer its shares, b) limits the number
of its members to fifty, and c) prohibits any invitation to the public to
subscribe to is shares and debentures.
EXEMPTIONS AND PRIVILEGES OF PRIVATE COMPANY
A private company can be started with just two members whereas a public
company requires at least seven members.A private company is not
required to file a prospectus or a statement in lieu of prospectus with the
registrar of companies.
There is no restriction of minimum subscription as in the case of public
company. It can directly allot the shares. It can work with just two
directors. A private company is not required to hold a statutory meeting
and filing a statutory report.
PUBLIC COMPANIES:- Public company means that public at large is
interested in those companies. A minimum of seven members are
required to constitute a public company and to get it registered. There is
no restriction on the maximum number of members. Public companies are
required to issue a prospectus for inviting people to purchase their shares.
A public company can start work only after getting ’CERTIFICATE OF
COMMENCEMENT’ from the ‘REGISTRAR OF COMPANIES’. The
MERITS OF JOINT STOCK COMPANY
1. ACCUMULATION OF LARGE RESOURCES: - a company can collect
large sum of money from large number of share holder. need for more
fund arise, the number of shareholder can be increased .
2. LIMITED LIABILITY:-The liability of members in a company is limited to
the nominal value
the shares
3. CONTINUITY IN EXISTENCE:-The member of a company may go on
changing from time
to time but that does not affect the continuity of a company. The death or
insolvency of members does not in any way affect the corporate existence
of company.
4. EFFICIENT MANAGEMENT: - In the company form of organization,
ownership is separate
from management its enables the company to point expert and qualified
person for managing various business function.
5. ECONOMIES OF LARGE SCALE PRODUCTION:-The availability of
large resources, the
company can organize production on a big scale .The increase in scale
and size of business bill result in economics in production, purchase ,
marketing and management , etc.
6. TRANSFERABILITY OF SHARES:- A share holder can dispose of his
share at any time when the market condition are favorable or he is in need
of money, the facility of transferring shares encourages many person to
invest.
7. DIFFUSED RISK: - In company form of organization, the number of
contributors is large; so risk is shared by a large number of persons.
8. DEMOCRATIC SET – UP: - Every individual has an opportunity to
become a shareholder. Secondly, the board of directors is elected by the
members. So members have a say indicating the policies of the company.
The Company form of organization is democratic from ownership and
management side.
9. SOCIAL BENEFITS: - The company form of organization mobilizes
scattered saving of the community. These saving can be better used for
productive purposes. Large – scale production enjoy a number of
economics enabling low cost of production
DEMERITS OF JOINT STOCK COMPANY
1.DIFFICULTY IN FORMATION:- There is no. of stages is involved in
company promotion. It is both expensive and risky.
2.SEPARATION OF OWNERSHIP AND MANAGEMENT:-.The ownership
and management of a public company is in different hands . The management
may indulge in speculative business activities.
3.EVILS OF FACTORY SYSTEM:- The stock company are attribute the evils
of factory system like insanitation ,air pollution ,congestion of cities.
4.SPECULATION IN SHARES:- The joint stock company facilitate
speculation in the shares at stock exchanges.
5.FRADULENT MANAGEMENT:- The promoters and director may indulge in
fraudulent practices due to not invested much in the company.
6.LACK OF SECRECY:- Every thing is discussed in the meeting of board of
directors
7.DELAY IN DECISION MAKING:- There is no single individual can make a
policy decision.
Types of Banks
On the basis of ownership
On the basis of domicile
On the basis of Function
Types of Bank on the basis of
Ownership
The banks are classified on the basis of
ownership into two categories.
1. Public sector banks
2. Private sector banks
Types of Bank on the basis of
Ownership
1. Public sector banks:
The banks owned and controlled by the
Government are called Public sector bank.
e.g national Bank of Pakistan
2. Private sector banks:
The banks owned by corporations are called
private sector banks. e.g Habib Bank, Bank
Alfalah etc.
Classification of banks on the basis
of domicile
The banks are divided on the basis of
domicile into two categories.
1. Domestic banks
2. Foreign banks
Classification of banks on the basis
of domicile
1. Domestic banks.
The banks registered and incorporated
within the country are called domestic
banks. e.g. Bank of Punjab, MCB Bank etc
2. Foreign Banks
The banks which have their origin and head
offices in the foreign countries are called foreign
banks. e.g. Citi bank, Standard Charted Bank etc
Classification of Banks on the basis of Function
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
Central Bank:
Commercial Banks:
Exchange Banks:
Saving Banks:
Agriculture Banks:
Industrial Banks:
Co-operative Bank
Mortgage Bank
Investment Bank
Merchant Bank
Consortium Bank
Export-Import Bank
School Bank
Labour Bank
Classification of Banks on the basis
1. Central Bank: of Function
Central Bank is the bank of banks. Every civilized country now has its
own central bank.
The primary function of the central bank is to regulate the flow of
money and credit in order to promote efficiency, stability and growth in
the country.
In Pakistan “State Bank of Pakistan” is the central bank (in England it
is “Bank of England” and in America it is “The Federal Reserve
System”).
Functions of central bank are;
–
–
–
–
–
–
–
–
–
Sole right of note issue
Banker, agent and advisor to the government
Banker to commercial banks
Controller of credit
Clearing agent
Lender of last resort
Custodian of foreign exchange reserves
Development Role
Other Functions
Classification of Banks on the basis
of Function
2.Commercial Banks:
Commercial banks are those banks which are engaged in
performing the routine duties of banking business.
They collect surplus money and make loans and advances in
the form of overdrafts, cash credit and discounting bills of
exchange.
They also provide special financial services and agency
services.
Commercial banks in short are considered the life blood of the
economic society.
Functions of commercial banks are;
– Basic Functions
– Secondary Functions
Classification of Banks on the basis
of Function
3. Exchange Banks:
Exchange banks are mainly deal with international trade. These
banks takes the responsibility of settlement of foreign exchange
and arrange the foreign businesses.
In Pakistan commercial banks have been allowed to do the
business of Exchange Bank.
American Express bank, Rupali bank, bank of Oman are some
examples of exchange banks.
There functions are;
– Currency exchange
– Providing information for international business
– Providing finance for international business
– Bank drafts and Bill of exchange
– Letter of credit
Classification of Banks on the basis
of
Function
4. Saving Banks:
Saving banks are those banks which collect and keep the small
savings of the public. They are called thrift promoting institutions.
The Saving banks invest the funds in the safest government
securities and offer reasonable rate of profit on saving accounts.
Students, government employees and household women are
usually opening such accounts.
A prior notice to bank is necessary for withdrawal of huge amount
(More than Afs 15000)
National Saving bank in England and Post office saving bank in
Pakistan are examples of saving banks.
There Functions are;
– Accepting deposits of people for saving
– Investing the money of people in safe means of investment
Classification of Banks on the basis
of Function
5. Agriculture Banks:
The bank is responsible for the development of agriculture
sector of the country.
Agriculture banks are set up to provide financial assistance to
the agriculturists and agro-based industries.
Agricultural Development bank of Pakistan, Agricultural
Mortgage Corporation in England and Federal Land Bank of
USA
There functions are;
–
Providing long term advances for buying tractors etc
– Short term loan for purchasing seeds and fertilizers
– Introducing modern techniques in farming
– Making awareness in farmers by seminars
– Medium term loans for construction of tube wells
Classification of Banks on the basis
of Function
6. Industrial Development Banks:
The Industrial banks provide medium and long term credit to the
industries. The growth of industries depends on these banks.
There functions are:
–
–
–
–
Granting loans to set up new companies
Long term loans for machinery and construction of building
Loans for modernization and replacement of business units
Short term loan for purchase of raw material and payment of daily
expenses.
Assignment:
Compare and contrast the various forms of
business forms in terms of their advantages and
disadvantages. ( Group-1)
Explain the role of Joint Stock Companies in the
capital formation. Describe five major joint stock
companies of Pakistan. (Gp-2)
Describe the role of State Bank in the monetary
control of Pakistan economy.(Gp-3)
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