SOLE

PROPERITORSHIP,
PARTNERSHIP
AND
CORPORATION
SUBMITTED TO : Sir Javaid Iqbal
SUBMITTED BY : Reema Pervez
DATE OF SUBMISSION : 28th May,2013

SOLE PROPRIETORSHIP
Definition
The simplest form of business owned and operated by a single person is known as sole
proprietorship. It is also called sole trader.
Advantages of sole proprietorship

Ownership
Only one person has the ownership which makes approval and execution of
contracts easy.

Ease of formation
There are no legalities for formation of a sole proprietorship. It is easy to form
and can be formed at any time.

Sole decision maker

The sole trader makes the decision by himself. Though the decisions may or may
not be right but they are made without any argument.

Mixed assets
In this type of business entity the owner can mix his business assets with personal
assets i.e. can easily withdraw assets from business.

Ease of dissolution
In case of dissolution the owner does not have to go through long legal
procedure.

No legal formalities
The formation, procedures and liquidation of sole proprietorship is not guided by
any laws. This makes it the easiest form of business.

Relations with customers

As there is only one person carrying on the operations of business, it is very easy
for him to establish and maintain good relationships with customers.

No corporate taxes
No corporate taxes are levied on sole traders which results in higher profits.

Disadvantages of sole proprietorship

Unlimited liability
The liability of sole trader is unlimited i.e. he is responsible for an unlimited
amount of money.

Finance
Sole trader cannot gather capital of finance through issuance of share. Apart from
issuance of shares it is difficult for sole trader to get finance that is why
businesses owned by single owner have few chances of expansion and growth.

Limited life
In case of death of the owner, legal heirs seldom carry on the operations of
business. The factor of limited life affects the reliability of business.

Lack of assistance
The owner is the sole decision maker as well as the sole manager, absence of
assistance causes hindrance in prosperity of business.

Operational problems
A single being cannot be expert of all the operations of business. The activities
about which owner has less or no knowledge has may suffer operational problems
and result in loss.

Risk averse
The owner has to bear all the losses himself and has unlimited liability, it makes
the owner risk averse. As it is said high the risk, higher the profit, the risk
aversive nature of owner holds back the business from growth.

PARTNERSHIP
Definition
Partnership is the form of business in which two or more persons carry on business for
the purpose of earning profit. The sharing of profits and losses is proportionate.

According to Partnership Act 1932 partnership is defined as; partnership is the relation
between persons who have agreed to share profits of a business carried on by all or any of them
acting for all
Advantages of partnership

Simple formation
Compared to the formation of the corporation, the formation of partnership is
easy.

Simple dissolution
Dissolution of partnership leads to termination of it. Though both words are
interchangeably used but they hold different meanings. The legal formalities
attached with dissolution of partnership are very few.

Partners as employees and managers

Partners can take part in management or any other job of the business. It brings
more dedicated employees to business as well as increases the profit share of the
partner who takes part in activities of business.

Social benefit
Public relations are vital for the expansion of business. In partnership all partners
bring their contacts to the business which increases the profits.

Flexible policies
The partnership deed is agreed upon by all partners and can be changed anytime
by mutual consent of all partners.

Individual taxes
All the partners have to pay individual taxes. A partnership firm is not a separate
entity so no taxes are levied separately on it.

Consent of all partners

The decisions of business are made by consent of all the partners of the firm.
Every partner has an equal say in decision making.

Audit
If partnership firm is not registered, it has no legal entity so it has no restriction
for conducting audit.

Disadvantages of partnership

Limited life
A partnership firm is easily dissolved e.g. in case of death of one partner, in case
one partner goes insolvent etc. the life of partnership firm is limited.

Unlimited liability
All the partners have unlimited liability to bear the losses above their share in
business.

Liable for other partners

All partners are jointly and individually liable for actions of other partners.

Disagreements
As the decisions are made by all the partners, disputes may arise. Partners need to
be flexible to avoid such situations.

Limited capital
A partnership firm had more capital than sole trader but has less capital than a
joint stock company.

CORORATION
Definition
A corporation is a business formed by a group of people having separate legal entity from
the persons carrying it out. A corporation can sue and can be sued in its own name.
Advantages of corporation

Limited liability
A corporation has a separate legal entity so no stake holder is responsible for its
debts. The shareholders and stock holders of corporations have limited liability.

Perpetual life
Corporations have longer life as compared to sole trader and partnership.

Transfer of ownership

One can easily transfer his share in the corporation without asking other
shareholders.

Separate legal entity

A corporation is a separate legal entity and its shareholders are not liable for its
acts. Corporation can sue and be sued in its own name.

Capital
Corporations can sell shares for raising capital which provides them with huge
capital that is why corporations have large scale business and expand rapidly.

Disadvantages of corporation

Formation
The incorporation of a corporation requires fees and has a legal procedure which
has to be followed. Its formation is relatively difficult as compared to partnership
and sole proprietorship.

Books of accounts
A corporation is obliged to maintain and yearly publish its books of accounts.

Audit report
External audit has to be conducted by all corporations and the audit replrt is to be
published along with the financial reports of corporation.

Less secrecy
The affairs, assets and liabilities are known by general public. The financial
position of a corporation can be easily interpreted from its financial reports.

Dissolution
As corporation is a separate legal entity the law provides procedure for dissolution
of it. The dissolution of corporation and liquidation of its assets may take several
months.

Taxes
Being a separate legal entity, taxes are imposed on corporation separately. The
corporation pays tax when profit is made and its shareholders pay tax on the
dividend they receive, in this way indirectly double tax is imposed on
corporations.

DIFFERENCE BETWEEN SOLE PROPRIETORSHIP, PARTNERSHIP AND

CORPORATION

SOLE

PARTNERSHIP

CORPORATION

Separate entity from

Separate entity form

owner

owner

Relatively difficult from

Relatively difficult

sole proprietorship

from partnership

PROPRIETORSHIP
LEGAL

Same entity as owner

STATUS
FORMATION

Very easy to form

MANGEMENT Owner manages the

LIFE SPAN

All partners can mange or Managed by board of

business

any of them, acting for all directors

Ends with death of

Dissolves with death,

Continues for a very

owner

insolvency or insanity of

long time

any one of the partners.

RIGHTS OF

Only owner has the

Divided among all

Divided among all

OWNERSHIP

rights

partners

shareholders

LIABILITY

Unlimited

unlimited

Limited

TAXATION

Owner pays tax

All partners individually

The corporation and

pay tax

shareholders separately
pay tax