Chapter 2

OWNERSHIP OF BUSINESS

Legal Control over the business

Instructor Name
Khaliq ul Rehman
 Definition of Organization

 Types of Business Organization

 Laws Governing Business organisations

1. Definition of Organization
In general, an Organization is a tool to arrange individual or
combined resources for a particular purpose in an efficient and
effective manner.
Organization is a set of people and resources or maybe a way/act
to perform activities…
Since people from different backgrounds come to work
together, organizations are strongly influenced by the people
that form them.
Their personalities, attitudes, perceptions, behaviors, and
expectations significantly affect the functioning of an
organization.
2. TYPES OF BUSINESS ORGANIZATIONS
(i) sole proprietorship,

(ii) partnership, and

(iii) corporation or the limited liability company

 Each type of organization has features that
distinguish one from the other:
 Purpose (depending on the goals)
 Ownership (legal right to control)
 Funding (Funding refers to the financial

resources)
 Accountability (Accountability refers to the
obligation or responsibility)
 Purpose. They have different purposes.
 Business organizations exist to make a profit.
 Public sector organizations exist to provide a benefit to the
public, such as good government or key services such as
health, education, a police force, national defense, and so
on.

 Ownership. They have different types of owners. Companies

are owned by their shareholders,
 whereas public sector organizations are owned by the
government (as the representative of the general public).
 Funding.
Business organizations obtain the funds they need to operate
from a variety of sources.
A stock market company, for example, obtains its long-term
funds from a mixture of reinvesting profits in the business,
issuing new shares and borrowing from the lenders.

Charities rely on a mixture of government grants and private

donations for the funds they need.

Public sector organizations obtain their funds from the

government, which in turn raises through the taxation.
 Accountability.
The management of an organization is
accountable to its owners for the goals and
objectives of the organization.
The directors of a company, for example, are
accountable to the shareholders for the
financial performance of the company.
 Broadly speaking, organizations can be
classified in two broad categories:

1. Business organizations, and

2. Not-for-profit organizations
This type of organization engages in
commercial activities, with the purpose of
making a profit.
The main types of business organization:
Sole Proprietorships
Partnerships
Limited Companies or corporations
Sole Proprietorships
A sole proprietor is an individual who owns and
operates his or her own business, but might employ a
small number of people.
There are no legal formalities needed to set up as a
sole proprietor. Any profit made after tax belongs to
the owner
Typical examples:
a local restaurant, a barber shop, a laundry service,
and a local clothing store.
 Ease and Low Cost of Formation
(through news paper, not establish a separate
legal entity (its own rights, responsibilities,
and legal personality, separate from its owners
or founders) , may also need to apply for an
occupational license.
 Secrecy
Sole proprietorships make possible the greatest degree
of secrecy (does not have to discuss his or her
operating plans with other partners or public)
 Distribution and Use of Profits
All profits from a sole proprietorship belong
completely to the owner ( Not have to share
them with any partners or stockholders).
The owner decides how to use the funds—for
expansion of the business, or salary
increases, for travel to purchase additional
inventory, or to find new customers.
 Greater Flexibility and Direct Control
The sole proprietor has complete control over
the business and can make decisions on the
spot without anyone else’s approval.
 Ease of Government Regulations
Sole proprietorships have the most freedom from
government regulation(for example securities laws
apply only to corporations that issue stock Security).
proprietorships must be careful to obey labour laws and food
safety regulation in case of food related businesses
 Lower Taxation
Profits from sole proprietorships are considered
personal income and are taxed at individual tax
rates than imposed on some other forms of
business ownership.
 Ease of dissolution
A sole proprietorship can be dissolved easily. No approval of co-
owners or partners is necessary. The only legal condition is
that all financial obligations must be paid or resolved.
 Unlimited Liability
The sole proprietor has unlimited liability in
meeting the debts of the business.
if the business cannot pay its creditors, the owner may be forced to use
personal, nonbusiness holdings such as a car or a home to pay off the
debts under the bankruptcy laws. The more wealth an individual has, the
greater is the disadvantage of unlimited liability
Difficulty in raising funds
Among the relatively few sources of money available
to the sole proprietorship are banks, friends and
family, or his or her own funds
 Limited skills.
diversefied fields such as management,
marketing, finance, accounting,
bookkeeping, and personnel management.
 Lack of Continuity
The life expectancy of a sole proprietorship is directly linked to
that of the owner and his or her ability to work. The serious
illness of the owner could result in failure of the business if
competent help cannot be found.
 Difficulty in finding qualified Employees
It is usually difficult for a small sole proprietorship
to match the wages and benefits offered by a
large competing corporation
 Taxation
Although we listed taxation as an advantage for sole
proprietorships, it can also be a disadvantage,
depending on the proprietor’s income and the
marginal tax rate (the tax rate at which an additional
dollar of income is taxed) of corporations
 “A partnership exists when the ownership of
a business is shared by at least two people”.
 maximum number of partners is 20

 “A business that is co-owned by two or more

people is referred to as a partnership”
The co-owners of the business are called
partners and they collectively form the ‘firm’.
 The parties agree, either orally or ideally in
writing, to share in the profits and losses of a
joint enterprise.

 A written partnership agreement.

its purpose, and the contributions of each partner (financial,
asset, skill/talent, etc.). It also outlines the responsibilities
and duties of each partner and their compensation structure
(salary, profit and loss sharing, etc).
There are two basic types of partnership:
general partnership
limited partnership
General partnership
A general partnership involves a complete sharing in
the management of a business.
each partner has unlimited liability for the debts of the
business. (business cannot meet its financial
obligations, the personal assets of the business owners
can be used to settle those debts)
limited partnership
A limited partnership has at least one general partner, who
assumes unlimited liability, and at least one limited partner,
whose liability is limited to his or her investment in the
business.(it means that the individual's personal assets are
protected from the business's debts and legal obligations)
Limited partnerships exist for risky investment projects where
the chance of loss is great.
The general partners accept the risk of loss; the limited
partners’ losses are limited to their initial investment.
There are also limited liability partnerships (LLP)
 Ease of formation (The partners agree to do
business together and draw up a partnership
agreement)
 Higher availability to raise funds
(Partnerships have the benefit of a
combination of talents and skills and pooled
financial resources)
 Combined Knowledge and Skills (Partners share
the responsibilities of managing and operating the
business. Combining partners skills to set goals,
manage the overall direction of the firm, and solve
problems increases the chances for the
partnership’s success)
 Flexibility of decision making (Partnerships can
react more quickly to changes in the business
environment than can large corporations
 Less Regulatory Control (for operations, A
partnership does not have to file public financial
statements with government agencies or send out
quarterly financial statements to several thousand
owners, as the corporations do such as Unilever and
Pakistan State Oil.)
 Unlimited Liability (All general partners have
unlimited liability for the debts of the business)
 Sharing of profits (As a result, higher the number of
total partners, smaller the share of each individual
partner)
 Difference of opinion (In contrast of combined
knowledge and skills)
 Dissolution of partnerships (As a rule, partnerships
are easier to form than to leave. When one partner
wants to leave, the value of their share must be
calculated that is problem)
“A limited company is that it has a separate legal
identity from that of its owners”.
All owners of a company have limited liability
If the company collapses, they cannot be forced to use
personal funds to pay off business debts.

“A company, also known as a corporation, is a legal

entity, created under the government regulations,
whose assets and liabilities are separate from its
owners”.
It doesn't depend on the lives or actions of its owners.
 Many small companies are privately held,
meaning that ownership is restricted to a
small group of investors, and are called
private limited companies.
 Most large corporations are publicly held,
meaning that shares can be easily purchased
or sold by investors. These companies are
called public limited companies.
Structure of a company / corporation
A company is created or incorporated through a
charter. The organizational structure has three key
components: stockholders, directors, and
management.
Stockholders (or shareholders) are the owners of a
corporation, holding shares of stock that provide them
with certain rights.
(may receive a portion of the corporation’s profits and
they can sell or transfer their ownership in the
corporation)
 The stockholders elect a board of directors to
govern and handle the overall management of the
corporation.
 Small firms may have as few as 3 directors, whereas
large corporations usually have 10 to 15 directors
 The executives/officers of a corporation are its top
management and include the president and chief
executive officer (CEO), chief financial officer (CFO),
vice presidents, treasurer, and secretary, who are
responsible for achieving corporate goals and
policies.
Advantages of Companies
Combination of resources and economies of scale
(to merge financial and human resources into
enterprises with great potential for growth and
profits).
Limited liability (separate legal entities that exist
apart from their owners)
Ease of transferring ownership (Stockholders of
public companies can sell their shares at any time
without affecting the status of the corporation).
 Unlimited life (The life of a corporation is unlimited.
Because the company is an entity separate from its
owners, the death or withdrawal of an owner does
not affect its existence, unlike a sole proprietorship
or partnership).
 Tax deductions (Companies are allowed certain tax
deductions, such as operating expenses, which
reduces their taxable income)
 Ability to attract financing (Companies can raise
money by selling new shares of stock)
Disadvantages of Companies
Double taxation of profits
Cost and complexity of formation (license fees etc)
Increased government restrictions (companies are
subject to many regulations and reporting
requirements) for example companies must also
register with the Securities and Exchange Commission
of Pakistan (SECP) before selling stock to the public.
 Sole Proprietorship Partnership Corporation
Advantages:
Ease and low cost of formation Ease of formation with relatively low Limited liability of owners
organizational cost
Secrecy Higher ability to raise funds due to more Ease of transferring ownership
owners
Distribution and use of profits solely by Combined knowledge and managerial skills Unlimited life - continuity due to lack of
owner owner dependency
Greater flexibility and direct control Flexibility of decision making Tax benefits and deuctions

Ease of government regulations Ease of regulatory control Ability to attract funds allows growth

Lower taxation Business income taxed as personal income Ability to attract employees with specialized
of each partner skills
Ease of dissolution

Disadvantages:
Unlimited liability of owner for all Unlimited liability of owners for sharing of Higher cost and complexity of formation
business losses and liabilities business losses and liabilities
Difficulty in raising funds inhibit growth Complexity of profit and loss sharing Double taxation of corporate profits and
dividend
Limited skills and management expertise Difficulty in exiting or dissolution Higher regulatory control

Lack of continuity Potential for conflicts among partners

Difficulty in finding qualified employees Limitation of growth

due to limited long-term opportunities
 These type of organizations do not seek to
make a profit, although they must operate
within the limits of the funding and financial
resources that is available to them.
They can be divided into the following main
types:
 Public sector organizations
 Non-government organizations
 Clubs and societies
 Cooperatives
Public sector organizations: These are government
organizations that are funded by the government to
achieve social indicators of the country.
Examples are quality education to all, availability of
basic health facility, ensuring clean drinking water for
all citizens, etc.
Non-government organizations: These are not-for-
profit organizations that are partly or wholly funded
from non-government sources. Examples are
charities, clubs and societies.
 Clubs and societies: (individuals who come together
to pursue a shared interest, hobby, activity, or goal)

 These groups are typically formed within educational

institutions, communities, workplaces, or other social
settings and provide a platform for like-minded people to
connect, collaborate, and engage in activities related to
their common interest.
These non-profit making organizations, e.g. sports and social clubs, exist
because their members are drawn together by a common interest.
The assets of clubs and societies are the property of the members and most
income comes from member’s subscriptions.

Clubs and societies produce income and expenditure accounts, rather than
profit and loss accounts which show either a surplus or deficit of income
over expenditure, as they do not aim to make a profit
 Cooperatives: These are association of persons,
usually of limited means, who voluntarily come
together to achieve a common economic end
through the formation of a controlled business
organization making equitable contributions to
raise capital and accepting a fair share of risks and
benefits.
i.e. insurance, housing, and health care
cooperatives
 The laws and regulations affecting an entity,
and the possibility of major new laws or
regulations in the future have an impact on
how businesses operate.

 Strategic decisions by an entity might be

affected by legal considerations. For
example:
 An international company might locate some operations, for
tax reasons, in a country with a favourable tax system

 decisions to relocate operations from one country to

another could be affected by the differences in employment
law in the two countries, or by new employment legislation

 in many industries, companies are faced with environmental

legislation or health and safety legislation, affecting the ways
in which they operate, as well as the design of the products
they make and sell.
 it is required to complete the requirements
for incorporation, management, operations
and winding up of companies, provided in the
Companies Act, 2017 (the Act), issued by the
Securities and Exchange Commission of
Pakistan (SECP).
 Companies are required to comply with the requirements of
the Act, for which they will be required to incur a certain
cost, with respect to incorporation, human resources, audit
of financial statements, holding of annual general meetings,
record keeping etc.
 The law relating to partnership businesses in
Pakistan is the Partnership Act, 1932. The
Partnership Act includes the procedure of
registration and dissolution of a firms, rights
and duties of partners etc.
 partnership firms have ease of doing business as the
requirements applicable to companies for annual filing of
returns, audit of financial statements, holding of annual
general meeting etc are not applicable on partnership firms.
However, doing business as partnership requires
understanding of partners rights and duties of partners.