Sole Proprietorship

Sole Proprietorship in simple words is a one-man business organization. It is the type of entity that is fully owned and managed by one natural person (not a legal person/entity) known as the sole proprietor. The business and the man are the same, it does not have a separate legal entity.

A sole proprietorship usually does not have to be incorporated or registered. It is the simplest form of business organizations and the ideal choice to run a small or medium scale business. Let us look at some important features of a proprietorship.

Features of Sole Proprietorship

1] Lack of Legal Formalities

A sole proprietorship does not have a separate law to govern it. So there are not many special rules and regulations to follow. It does not require incorporation or registration of any kind. In most cases, only a license is required to carry out the desired business.

And just like in its formation, there is hardly any legal process involved in its closure. Overall it allows for ease of doing business with minimum hassles.

2] Liability

Since there is no separation between the owner and the business, the liability of the owner is also unlimited. So if the business is unable to meet its own liabilities, it will fall upon the proprietor to pay them. All of his personal assets (like his car, house, other properties etc) may have to be sold to meet the liabilities of the business.

3] Risk and Profit

The owner is the only risk bearer in a sole proprietorship. Since he is the only one financially invested in the company, he must also bear all the risk. If the business fails or suffers losses he will be the one affected.

However, he also enjoys all the profits from the business. He does not have to share his profits with any other stakeholders since there are none. So he must bear the full risk in exchange for enjoying full profits.

4] No Separate Identity

In legal terms, the business and the owner are one and the same. No separate legal identity will be bestowed upon the sole proprietorship. So the owner will be responsible for all the activities and transactions of the business.

5] Continuity

Just as we saw above the business and the owner have one identity. So a sole proprietorship is entirely dependent on its owner. The death, retirement, bankruptcy. insanity, imprisonment etc will have an effect on the sole proprietorship. In most of such cases, the proprietorship will cease to exist and the business will come to an end.

Advantages of Sole Proprietorship

• A proprietor will have complete control of the entire business, this will facilitate quick decisions and freedom to do business according to their wishes
• Law does not require a proprietorship to publish its financial accounts or any other such documents to any members of the public. This allows the business a great deal of confidentiality which is sometimes important in the business world
• The owner derives the maximum incentive from the business. He does not have to share any of his profits. So the work he puts into the business is completely reciprocated in incentives
• Being your own boss is a great sense of satisfaction and achievement. You are answerable only to yourself and it is a great boost to your self-worth as well

Disadvantages of Sole Proprietorship

• One of the biggest limitations of a sole proprietorship is the unlimited liability of the owner. If the business fails it can wipe out the personal wealth of the owner as well and affect his future business prospects too
• Another problem is the limited capital a sole proprietor has access to. His own personal savings and money he can borrow may not be enough to expand the business. Banks and financial institutions are also wary of lendings to proprietorships
• The life cycle of a sole proprietorship is undecided and attached to its owner. If the owner is incapacitated in any way it has a negative effect on the business, and it may even lead to the closure of the business. A sole proprietorship cannot carry on without its proprietor.
• A sole proprietor also has a limited managerial ability. He cannot be an expert in all the fields of the business. And limited resources may mean that he cannot even hire competent people to help him out. This may lead to the business suffering from mismanagement and poor decisions.

Partnership

In India, we have a definite law that covers all aspects and functioning of a partnership, The Indian Partnership Act 1932. The act also defines a partnership as “the relation between two or more persons who have agreed to share the profits from a business carried on by either all of them or any of them on behalf of/acting for all”

So in such a case two or more (maximum numbers will differ according to the business being carried) persons come together as a unit to achieve some common objective. And the profits earned in pursuit of this objective will be shared amongst themselves.

The entity is collectively called a “Partnership Firm” and all the individual members are the “Partners”. So let us look at some important features.

Features of a Partnership

1] Formation/Contract

A partnership firm is not a separate legal entity. But according to the act, a firm must be formed via a legal agreement between all the partners. So a contract must be entered into to form a partnership firm.

Its business activity must be lawful, and the motive should be one of profit. So two people forming an alliance to carry out charity and/or social work will not constitute a partnership. Similarly, a partnership contract to carry out illegal work, such as smuggling, is void as well.

2] Unlimited Liability

In a unique feature, all partners have unlimited liability in the business. The partners are all individually and jointly liable for the firm and the payment of all debts. This means that even the personal assets of a partner can be liquidated to meet the debts of the firm.

If the money is recovered from a single partner, he can, in turn, sue the other partners for their share of the debt as per the contract of the partnership.

3] Continuity

A partnership cannot carry out in perpetuity. The death or retirement or bankruptcy or insolvency or insanity of a partner will dissolve the partnership. The remaining partners may continue the partnership if they so choose, but a new contract must be drawn up. Also, the partnership of a father cannot be inherited by his son. If all the other partners agree, he can be added on as a new partner.

4] Number of Members

As we know that there should be a minimum of two members for a partnership. However, the maximum number will vary according to a few conditions. The Partnership Act itself is silent on this issue, but the Companies Act, 2013 provides clarity.

For a banking business, the number of partners must not exceed ten. For a business of any other nature, the maximum number is twenty. If the number of partners increases it will become an illegal entity or association.

5] Mutual Agency

In a partnership, the business must be carried out by all the partners together. Or alternatively, it can be carried out by any of the partners (one or several) acting for all of them or on behalf of all of them. So this means every partner is an agent as well as the principal of the partnership.

He represents the other partners in some cases so he is their agent. But in other circumstances, he is bound by the actions of any of the other partners aking him the principal as well.

Types of Partners

Not all partners of a firm have the same responsibilities and functions. There can be various types of partners in a partnership. Let us study the types of partners and their rights and duties.

• Active Partner: As the name suggests he takes active participation in the business of the firm. He contributes to the capital, has a share in the profit and also participates in the daily activities of the firm. His liability in the firm will be unlimited. And he often will act as an agent for the other partners.
• Dormant Partner: Also known as a sleeping partner, he will not participate in the daily functioning of the business. But he will still have to make his share of contribution to the capital. In return, he will have a share of the profits. His liability will also be unlimited.
• Secret Partner: Here the partner’s association with the firm is not public knowledge. He will not represent the firm to outside agents or parties. Other than this his participation with respect to capital, profits, management, and liability will be the same as all the other partners.
• Nominal Partner: This partner is only a partner in the name. He allows the firm to use the name of his firm, and the attached goodwill. But he in no way contributes to the capital and hence has no share in the profits. He does not involve himself in the firm’s business. But his liability too will be unlimited.
• Partner by Estoppel: If a person makes it out to be, through their conduct or behavior, that they are partners in a firm and he does not correct them, then he becomes a partner by estoppel. However, this partner too will have unlimited liability.

Company

A company is a legal entity that people form. It allows them, usually as shareholders, to buy and sell goods and services. In most cases, companies want to make a profit. However, some companies are non-profit organizations.

Just like humans, companies can hire and fire workers. They can also buy shares in other companies, sue, and be the target of a lawsuit. Additionally, companies can borrow and lend money, and own property.

As legal entities, companies have similar rights and responsibilities to people. They may be responsible for human rights violations. They may also exercise human rights issues against individuals or the state.

Characteristics of a Company

The company has several distinct characteristics; the significant ones are discussed here:

Separate Legal Entity

A company is a separate legal entity from its members who constitute it. It can hold, purchase and sell properties and enter into contracts in its own name. It is an artificial legal person who can sue aid be sued. Companies are owned by shareholders and they elect the Board of Directors, who run the company. The board, in turn, selects the management. Thus the shareholders exercise only indirect control over the affairs of the company. The separation of ownership from the management some-times results in a conflict of interests between owners and management. The best the shareholders can do is to change some of the directors through a vote in the annual general meeting subsequent to any such conflict.

Limited Liability

The liability of the shareholders of a company is limited to the nominal value of the shares held by them. In the event of liquidation, the maximum loss of a shareholder is equal to the nominal value of the shares held by him. The creditors have no claim on the personal assets of the shareholders in the event of a liquidation.

Transferability of Shares

The shares of a joint-stock company are freely transferable. It does not require any permission from the company or consent of other shareholders. The shares of listed companies can be sold or purchased on the stock exchange and ownership transferred without any difficulty. However, in case of a private limited company, the transfer of shares is subject to the restrictions given in the company’s articles.

Ability to Acquire a Broad Capital Base

Following are significant factors that enable a company to raise large amount of capital

1. The nominal value of shares is kept small, as a result of which investment of any size is possible.
2. Limited liability minimizes the risk of the investors and makes investment attractive and safer.

An Artificial Person created by Law

A company is called an artificial person because it does not take birth as a natural person but it comes into existence through the law. The company possesses only those properties which are conferred upon it by its Memorandum of Association (Charter).

Continuous Existence

The companies generally have a continuous existence irrespective of changes in ownership. In the cases of sole proprietorship and partnership, change in ownership means the dissolution of the original business and formation of a new business.

Common Seal

Being an artificial person, a company can act through natural persons only. The acts of a company are authorized by the “common seal”. The “common seal” is the official signature of the company. A document not bearing the common seal is not binding on the company.