Question

* Understand the characteristics of the major forms of business organizations

* Advantages and disadvantages of the major forms of business organizations

* Legal consequences of Partnership

* Methods of Arranging Business Activity

Answer 1

The four major business organizations forms are

1 sole proprietorship- A business run and owned by person for his own benefit and where business existence is entirely dependent on the owner's decision and if the owner dies so does the business

Advantages

1. Easy to manage and conduct

2. Least legal restrictions

3. Quick decisions and prompt action

4. Better labour relationship

5. Personal attention to customer queries

Disadvantages

1. Amount of capital invested is small therefore modern requirements cannot be fulfilled

2. A single person cannot provide the various expertise required to run a business

3 Risk taking is low

2 Partnership- (a) general - where partners invest their funds, resources and are 100% liable for business debts equally

(b) limited liability partnership where partners can arrange a formal agreement stating liability of partners according to funds and resources committed by them in the partnership.

Advantages

1. Formation of partnership is easy as compared to a joint stock company

2. Enjoys freedom and is not subject to govt restrictions or checks

3. The amount of capital invested is more than that of a sole proprietorship

4. People possessing different kind of skills come together

5 A problem can be assessed by different viewpoint

6 working can be kept secret and confidential

disadvantages

1. Due to unlimited liability the risk involved is more

2 The death or retiremtn of a partner may end the partnership

3. All partners are liable for the act done by one partner

4. Profits are shared, thus hardwork sometimes doesnt earn the incentive.

3 Joint stock company - Here capital is contributed by a large number of persons in the form of shares of different values. The capital is raised by selling shares of different values. Persons who purchase the share are known as shareholders and the managing body is called “Board of Directors” elected by these shareholders.

Advantage

1. The shareholders bear no risk as the liability is limited. Which draws more investment

2. Not affected by the retirement of any shareholder

3. Great potential for expansion

Disadvantage

1. Lack of personal interest on the part of salaried managers leads to inefficiency and waste

2. It requires a large number of legal formalities to be observed

3. Difficult to preserve secrets

3. Creation, organization, and dissolution of partnerships are governed by state law. However, many states have adopted the Uniform partnership act.

A partner relationship is generally the result of a contract either express or implied To determine whether a partnership exists courts look at: (1) intention of the parties, (2) sharing of profits and losses (3) joint administration and control of business operation, (4) capital investment by each partner, and (5) common ownership of property

Federal Laws

Federal law plays a minimal role in partnership law except in the context of a diversity action, or in instances where a partnership agreement contains an effective choice-of-law provision designating the application of federal law. Federal law also governs whether a partnership exists for federal tax purposes.

Taxation

For state and federal tax purposes, a partnership is not a taxable entity. Partnership income is taxable to the partners in proportion to their share in the company's profits.

4. A business activities include any activity a business engages itself into for earning profits and includes operating, investing and financing activity

Under sole proprietorship- No legal formalities are necessary to organize such businesses, and usually business operations can begin with only a limited investment. But Accounting is necessary for all forms of business organizations, and each company must follow generally accepted accounting principles (GAAP)