Professional Documents
Culture Documents
Definition:
It is the relationship between two or more than two persons who have agreed to share the
profits of the business.
OR
Partnership is an association of two or more than two persons with the object of sharing
profits and losses and losses for accounting purpose, the partnership firm is regard
separated from its partners. Law regulates that a partnership firm shall not be more than
20 partners except in the case of professional firms (CA firms, lawyers firm etc) where
the limit prescribed by law is 50.
Merits of Partnership:
1. Easy to Form:
The partnership like the sole-proprietorship, can be easily organized. There are no legal
formalities involved in the establishment of partnership business. The partners enter into
a partnership deed and commence the business.
2. Larger Capital:
Partnership can bring more capital to the business by the joint effort of the partners.
Partnership is normally in strong position to raise capital and expand the business since
there is a pooling of resources from more than one person.
3. Diversified Skills, Knowledge and Experience:
As there are many persons involved in the operation of business and all of them are stake
holders, therefore there efficiency can be obtained by their diversified skills, knowledge
and experience, division of labor and specialization.
4. Favorable Credit Standing:
Partnership enjoys a better credit rating in the eyes of creditors, as the liability of each
partner in the organization is unlimited. The financial institutions can safely advance
loans to the firms.
5. Distribution of Responsibilities:
The overall responsibilities of a business can easily be distributed the partners.
6. Easy entry or exit:
If any partner wishes to leave the firm or new partner wants to join it, partners with
mutual consultation can alter the association by amending / re-establishing the
partnership deed.
7. Confidentiality:
The partners can keep the business secrets because the firm is not required under the law
to publish its profit and loss account and balance and other disclosures.
8. Special protection to Minor / Disable Person:
A death or lunacy of a partner may not cause dissolution of partnership firm, his minor
can be admitted only to the profits of the partnership with the consent of other partners.
9. Tax Advantage:
In the case of registered firm, the profits are allocated to partners, they pay tax on their
individual share of profit and hence enjoy the privilege of lower assessment.
10. Ease of Dissolution:
A partnership firm can be easily dissolved with the mutual consent of the partners as
compared to the complicated procedures involved in winding up of limited companies.
Demerits of Partnership:
1. Unlimited Liability:
One of the basic defects of partnership is the personal liability of partners who are jointly
and severally liable for the debts of the firm.
2. Limited Life of Firm:
The duration of the partnership firm is always uncertain. If any partner retires or dies or
where a new partner is admitted, differences may arise causing the business to an end.
3. Frozen Investment:
It is very easy for a partner to invest money, but it is most difficult to withdraw funds
from the partnership business.
4. Disputes Among the Partners:
It could be difficult to carry on the business if the partners do not have consensus over
several business matters.
5. Loss of Business Opportunities:
In case of differences among the partners, it may take too long to reach a decision,
resulting in the loss of business opportunities.
6. Lack of Public Confidence:
Partnership form of organization may not enjoy public confidence due to lack of publicity
and absence of regulations.
7. Risk and Implied Authority:
In a partnership form of organization, each partner binds other partners by his acts done
on behalf of the firm. Thus, the other partners may have to pay to satisfy the liability
arising from the act of fellow-partner.
8. Public Investment:
A partnership firm cannot raise its capital through public offer as in the case of limited
company.
COMPANIES
Limited Company:
A limited company is a business organization form as a separate legal entity under the
Companies Ordinance 1984, divided into transferable share (can sell or purchase).
The liability of shareholders is limited to the extent of amount paid on their shares and
they are not personally liable for the debts of the company.
Merits of Limited Company:
1. Greater Permanency:
The life of a limited company as compared to the partnership is very stable. Where a
shareholder dies or sells-out his share to another person, the company shall continue its
business without any effect on its legal formation.
2. Limited Liability:
In a limited company, the shareholders have limited liability to the extent of the amount
paid on their shares and in the case of loss or winding-up, the shareholders are not
required to pay anything or any amount.
3. Easy Transfer of Ownership:
The shareholder / members of a limited company may easily transfer (sell-out) its shares.
4. Public Investment:
Huge amount of capital can be raised through public offering.
5. Management Functions:
The chairman and the board of directors regulate the overall affairs of the company. The
business organization is divided into departments / divisions. Each department is headed
by highly-qualified and experienced personnel.
6. Recognized Legal Entity:
A company is a separate legal entity and can enter into contracts, borrow money, open
bank accounts, and so on in its own name. It can sue or be sued, and deal and dispose-off
property in its own name.
7. Higher Profit:
Due to availability of large capital, the company can install expenses and up-to-date
machinery. Hence, there is greater production of goods. The company enjoys economies
of scales.
8. Spread of Risk:
In company form of organization, the risk is distributed among large number of
shareholders. Hence, the loss, if any, sustained by an individual, is nominal.
9. Democratic Organization:
The company makes its decisions in general meeting where voting is arranged-out, so
each decision is made with the mutual consent of all the investors (shareholders).
10. Investment for Lower / Middle-Class:
An individual of lower or middle class may also become a part of such a big profit
making organization.
Demerits of Limited Company:
1. Complicated Formation:
The formation of a company requires several complicated procedures as compared to that
in the case of partnership or sole-proprietorship. There are also many legal formalities.
2. Burden of Regulations:
A company needs to follow many laws, rules and regulations. For example, a listed bank
requires to comply with Companies Ordinance, Banking Ordinance, listing regulations,
and so on.
3. Exploitation of Shareholders Rights:
The directors retain majority of shares with them. Hence, in every meeting, they can
make the decisions even without the consent of individual shareholders.
4. Separation of Ownership from Control:
In a limited company, the shareholders who are real investors, are not allowed to take
part in the operations of the business. The directors, in collaboration with the managers
and other staff, carry out the operations.
5. Promotion of Frauds:
The company raises its capital through prospectus, which may be mis-stated by the
promoters. The financial statements may also be misstated. Thus, reflecting an untrue and
unfair view to the stake-holders (shareholders).
6. Stock-Exchange Speculations:
The limited company facilitates speculations in shares at stock-exchange. The reckless
speculation is harmful to the interest of shareholders and for sound investments.
7. Lack of Secrecy:
In a limited company, annual / half-yearly / quarterly reports regarding sales, net profit,
assets, liabilities, etc. of the company are published. The competitors thus gain the full
knowledge of strong and weak points of the company.
8. Impersonal Relationship:
As the size of the business run by the company is expanding day by day, feeling of
separation between the employers and employees is widening. The company is, thus,
considered sole-less and cold-blooded.
BUSINESS FINANCE
1. Long-term Finance:
The long-term finance is required by the business for the purchase of non-current assets.
It is also needed for the modernization and expansion of business. The company raises
long-term funds through:
(i) Own capital
(ii) Borrowed Capital
(i) Own Capital:
(a) Ordinary Share Capital:
Equity or ordinary shareholders are the real owners of the company. The company raises
maximum amount of capital through the sales of shares and retains the same through-out
the life of the company except in the case of winding-up or by-back. The Companies
Ordinance allows the issue of only fully-paid shares.
(b) Ploughing-back of Profits:
Ploughing-back of profits means re-investment of profits into the business. Company
retains a part of the profit every year in accumulated or unappropriated profit reserve and
plough-back the same into business for meeting its long-term fund requirements. It is an
internal source of financing.
(ii) Borrowed Capital/Borrowings/Loans:
(a) Debentures:
A company also raises long-term finance through borrowing. These loans are raised by
issuing debentures. A debenture is an instrument issued by a company to acknowledge a
loan taken by the company under its common seal under certain terms and conditions
which are indorsed on the back of the document.
The terms and conditions are:
(i) The rate of interest
(ii) The mode of payment of principal and interest
(iii) Security, if any.
A debenture-holder is the creditor of the company.
(b) Loans from Financial Institutions:
A company also meets its long-term financial requirements from financial institutions
like IDBP, ADBP, HBFC, HSBC, NIT, etc. Such financial institutions help in promoting
new companies, expanding and developing existing companies, providing under-writing
facility, providing local and foreign currency, providing agricultural, industrial, housing
and building finance, etc.
2. Short-term Finance:
Short-term finance is required for meeting the day-to-day expenses of the business e.g.
purchase of raw materials, payment of wages, gas, electricity, and so on. The short-term
funds have a maturity of less than one year.
Sources of Short-term Finance:
The main sources of providing short-term finance are:
(i) Commercial Banks
(ii) Trade Credits
(iii) Installment Credits
(iv) Advances
(v) Account Receivable Credits