Business Organizations

Unincorporated vs Incorporated Business

• An unincorporated business organization has no separate legal identity and the owners of
the business may have no financial protection if the business fails, and their personal assets
may be used to pay off business debts.
• An incorporated business organization has a separate legal identity, its debts are its own,
and the personal liabilities of its owners are limited to the amount invested in the business.
The choice of legal structure can depend on a variety of different factors,
• Linked to the nature of the business,
• The persons involved with it,
• The scale of the operation, and
• Finance and working capital requirements.
 Unincorporated Business Organization
• An organization that is unincorporated has no separate legal identity of its own.
• The risks and liabilities belong to the individuals who own or manage it.
• Individuals enter into contracts on behalf of the organization, and they are responsible for its
debts and other liabilities.
• Their personal assets are at risk if the assets of the business are not sufficient to cover all the
debts and liabilities.
• Unincorporated organizations can operate relatively informally which gives flexibility but
can result in unclear powers and processes for decision-making.
• An unincorporated business may be owned by one person who runs the business as a sole
trader, or by two or more persons who have come together for the common purpose of
running a business.
 Incorporated Business Organization
• An incorporated organization is a legal entity in its own right.
• It must be created by a legal process and it continues in existence despite change in
membership until the relevant legal procedure takes place to dissolve it.
• The organization itself has obligations and liabilities and this means it carries out functions
such as entering into contracts, employing staff, and leasing property in its own name.
• The owners of an incorporated business organization have limited personal liability.
• The debts and obligations of the organization are its own responsibility and not the
responsibility of individual members, shareholders, or directors.
• However, with incorporation and limited liability come regulation and disclosure
requirements.
There are different types of incorporated organizations, and these are
• Private limited companies and Public limited companies, and since 2001 there has been a
growing use of limited liability partnerships.
 Sole Trader Sole proprietorship (inidividual ownership)
• In this type the individual entrepreneur supplies the entire capital.
• He organizes and manages the business himself and takes the entire risk and so it is called
one man business.
• A sole proprietorship is a business owned and operated by one individual. Also called
individual ownership – a business owned by one person (a restaurant, a retail store, a farm
etc.)
• The owner has unlimited control over the business and enjoys all the profits
• There are no regulations, disclosure, or public accountability requirements, nor are there
rules governing the conduct of the business.
• However, a sole trader must comply with the same general obligations as all businesses, in
relation to issues such as employment law and health and safety law.
• The owner also has unlimited personal responsibility for the losses and debts
 Sole Proprietorship - Advantages
• The simplest way to set up a business – low start-up costs/Easy to start
• Less administrative paperwork
• Owner in direct control of decision making
• Minimal working capital required
• All profits to the owner
• No registration/Least Legal Formalities.
• Easy decision-making/Quick Decisions and Prompt Actions/Flexibility.
• Easy to windup
• Secrets (information about business techniques)
• No corporate taxes
• Personal Attention to Customers
 Disadvantages
• Owner fully responsible for all debts and obligations related to his or her business
• Creditor would normally have a right against all of his or her assets, business or personal
(unlimited liability)
• Difificult to raise capital/funds
• Lack of continuity in business organization in the absence of the owner
• Limited Life
• Cannot Compete with a big business.
• Personal Limitations.
• Division of Labour is not possible.
• No Economies of Large Scale.
 Suitability of SP/Applications
• For business where capital required is small and risk involvement is not heavy, this type of
firm is suitable.
• It is also considered suitable for the production of goods which involve manual skill e.g.
handicrafts, jewelry, tailoring, haircutting, etc.
• For small scale business requiring small capital
• Which can be spared by one man.
• Where management by one man is possible.
• Where local market is available.
Is the sole proprietorship the best form of business ownership?
 Meaning & Definition of ‘Partnership’

• Simply speaking, a partnership is an association of persons who conduct some

business activity and agree to share profits earned out of it.
• Acc to Partnership Act: Partnership is the relation between two or more persons
who have agreed to share the profit of a business carried on by all of them or
any of them acting for all.
• Thus, Partnership is the name of legal relationship between/among persons who
have entered in to the contract of partnership.
 Meaning of ‘Partner’ ‘Firm’ and ‘Firm Name’

• Section 4 of Partnership Act, 1932 provides that:

• Persons who have agreed into partnership with one another are called
individually ‘PARTNERS’ and collectively ‘FIRM’ and the name under which
their business is carried on is called the ‘FIRM NAME’
• “Partnership is thus, invisibility which binds the partners together and firm is
the visible form of those partners who are thus bound together”.
 Essentials of Partnership
• At least two person
• Agreement or Contract
• Business- A partnership is formed for the purpose carrying on business.
1. The business must be in existence at the time of formation.
2. The business must be a running business
3. The business must be lawful
4. The purpose of business must be to earn profit
• Share profit- Sharing of losses by all the partners is not essential.
• The partners may have express agreement, may agree that any one or more of them shall not
be liable for the losses.
• But if nothing is expressly agreed upon by the partners, it is implied that the profit and
losses will be shared equally.
 Advantages of Partnership Firm

• Easy to form: Like sole proprietorships, partnership businesses can be formed

easily without any compulsory legal formalities. It is not necessary to get the
firm registered.
• A simple agreement or partnership deed, either oral or in writing, is sufficient
to create a partnership.
• Availability of large resources: Since two or more partners join hands to start
a partnership business, it may be possible to pool together more resources as
compared to a sole proprietorship.
• The partners can contribute more capital, more effort and more time for the
business
• Better decisions: The partners are the owners of the business. Each of
them has equal right to participate in the management of the business. In case
of any conflict, they can sit together to solve the problem. Since all partners
participate in the decision-making process, there is less scope for reckless and
hasty decisions.

• Flexibility in operations: A partnership firm is a flexible organization. At any

time, the partners can decide to change the size or nature of the business or
area of it’s operation. There is no need to follow any legal procedure. Only the
consent of all the partners is required.
• Sharing risks: In a partnership firm all the partners “share” the business risks. For
example, if there are three partners and the firm makes a loss of Rs.12,000 in a particular
period, then all partners may share it and the individual burden will be Rs.4000 only.
Because of this, the partners may be encouraged to take up more risk and hence expand their
business more.

• Benefits of specialization: Since all the partners are owners of the business, they can
actively participate in every aspect of business as per their specialization, knowledge and
experience.
• E.g. If you want to start a firm to provide legal consultancy to people, then one partner may
deal with civil cases, one in criminal cases, and another in labor cases and so on as per the
individual’s specialization. Similarly, two or more doctors of different specialization may
start a clinic in partnership.
• Protection of interest of each partner: In a partnership firm, every partner
has an equal say in decision making and the management of the business. If
any decision goes against the interest of any partner, he can prevent the
decision from being taken.
• In extreme cases an unsatisfied partner may withdraw from the business and
can dissolve it. In such extreme cases the “partnership deed” is required. In
absence of the partnership deed, no legal protection is given to the partners.
 Disadvantage of Partnership Firm

• Unlimited liability: All the partners are jointly liable for the debt of the firm.
They can share the liability among themselves or any one can be asked to pay
all the debts even from his personal properties depending on the arrangement
made between the partners.
• Uncertain life: The partnership firm has no legal existence separate from it’s
partners. It comes to an end with death, insolvency, incapacity or the retirement
of a partner. Further, any unsatisfied or discontent partner can also give notice
at any time for the dissolution of the partnership.
• No transferability of share: If you are a partner in any firm, you cannot
transfer your share or part of the company to outsiders, without the consent of
other partners. This creates inconvenience for the partner who wants to leave
the firm or sell part of his share to others.
• Lack of harmony: In a partnership firm every partner has an equal right
to participate in the management. Also, every partner can place his or her
opinion or viewpoint before the management regarding any matter at any
time. Because of this, sometimes there is a possibility of friction and
discontent among the partners. Difference of opinion may lead to the end of
the partnership and the business.
• Limited capital: Since the total number of partners cannot exceed 20, the
capital to be raised is always limited. It may not be possible to start a very
large business in partnership form.
 Partnership deed

• A partnership is formed by an agreement. This agreement may be in writing or

oral though the law does not expressly require that the partnership agreement
should be in writing, when the contract of partnership is made in writing, it
takes the form of a document.
• The document which contains the terms of a partnership as agreed among the
partners is called “partnership deed”.
• The partnership Deed is to be duly stamped as per the Contract Act, and duly
signed by all the partners.
 Contents of partnership Deed

However, a Partnership Deed should contain the following clause:

• Name of the firm, Name of the partners
• Nature and place of business
• Duration of partnership
• Capital
• Share of partners in profits and losses
• Bank Account firm, Books of account
• Rules as to admission, expulsion, retirement of partners
• Powers of partners
• Dissolution of firm
• Settlement of disputes
 Types of Partners

• Active or Actual partner

• Sleeping partner
• Nominal partner
• Sub- Partner
• Active partner–Actively participates in the conduct of the business
• Sleeping Partner–Doesn’t take active part
• Nominal Partner–A partner who lends his name to the firm without having
any real interest in it, he or she neither owns a part of the firm nor actively
participates in its affairs
• Sub-Partner–When a partner agrees to share his profits derived from the
firm with a third person, a sub-partnership may arise. The third person is
called as sub partner
Q: A was a minor admitted to the benefits of a partnership. After
attaining majority he decided not to continue as a partner. He did not
give any public notice of the same. Is he liable for the acts of other
partners after his retirement?
• A group of newly qualified solicitors wanted to set up in partnership but,
in order to comply with legal requirements, they needed a partner with at
least three years’ experience. Lee, who had been qualified for over 25
years, agreed to be a partner and was paid a monthly sum. He did not
take a share of profits and had not contributed to the setting up of the
business.
• He claimed he was akin to a ’sleeping partner’. When the firm got into
financial difficulties, the court had to decide if Lee was a partner and
liable to the claimant.
• Decision: Although Lee was paid a fixed sum irrespective of the firm’s
profits and had made no contribution to capital, the firm could not
lawfully practice without Lee and therefore he was a full partner and
liable to the claimant.
 Rights of Partners

• Right to take part in business

• Right to be consulted
• Right to access to books
• Right to share the profits
• Right in emergency
• Right as an agent of the firm
• Right to prevent admission of a new partner
• Right not to be expelled
 Duties of Partners

• To carry on business to the greater advantage

• To be faithful
• To render true accounts
• To give full information
• Duty to share losses
• To act within authority
• To be liable for the act of the firm
 Types of Partnership

General Partnership
Limited Partnership
Limited Liability Partnership
 1. GENERAL PARTNERSHIP

• Involves two or more owners carrying out a business purpose.

• General partners share equal rights and responsibilities.
• Partnership profits are not taxed to the business, but pass through to the
partners.
• A partnership begins when the partners begin their business activity.
• It does not begin when an agreement is made which could be prior to or
after the parties embark upon business activities
• Case: The defendants wished to open an Indian restaurant and, having little money, agreed
to go into partnership with the claimant who was going to provide some of the finance for
the venture. Premises were found and arranged to be converted into a restaurant, and
equipment was purchased.
• However, before the restaurant opened a dispute arose between the parties and the agreement
between the defendants and the claimant was terminated.
• The question was whether a partnership had existed even though the restaurant had not yet
begun to trade?
• Decision: A partnership had existed. Many businesses require expenditure before
commercial trading commences and, as this had been a joint venture undertaken with a view
to profit, it had been a partnership.
 2. LIMITED PARTNERSHIP

• Allows each partner to restrict his or her personal liability to the amount of his or her
business investment
• A limited partnership allows for one or more of the partners to have limited liability,
provided at least one of the partners has full liability.
• There is no upper limit to the number of limited partners provided at least one partner
has full liability.
• The partner or partners who have full liability are liable for all debts and obligations of
the firm and are referred to as general partners
• At least one participant must accept general partnership status
• The general partner retains the right to control the business, , while the limited partner(s)
do(es) not participate in management decisions
• Limited partners are not liable for any of the debts and obligations of the firm beyond the
sum they have contributed as capital to the partnership.
• A limited partner can not withdraw his/her contributed money or property until the
partnership ceases. If some or any of it is withdrawn, the limited partner will be liable up
to the amount withdrawn.
• Limited partners cannot bind their firm in any transaction, and in order to retain their
limited status, they must not participate in the management and running of the business.
• A limited partner who does take part in the management of the firm will be liable for all
the debts and obligations incurred while doing so.
• All limited partnerships must be registered and, until registered, the limited partnership
will be regarded as a general partnership.
• On registration, various details must be given, including the date when the partnership
commenced, its name and place of business, the nature of its business, the names of the
general and limited partners, and the sum contributed by each limited partner
• In practice there are few limited partnerships in existence, as generally someone
wishing to limit their liability or participate in management of a business is more likely
to become a shareholder in a limited company
 3. LIMITED LIABILITY PARTNERSHIP
• Also known as LLPs
• Offer some personal liability protection to the participants
• Liability is limited to the amount which each partner contributes towards the
LLP
• The persons involved in LLPs are called members as opposed to partners and
• The members may be individuals or companies.
• LLP itself is liable up to the extent of its assets but the liability of each of its
members is limited.
• Any alteration of membership of an LLP does not affect its existence, and,
therefore, if a member leaves, the LLP will continue to exist
• An LLP must register its annual audited accounts with the Companies Registrar, and
the accounts are available for public inspection.
• Although similar to a limited company in many respects, the LLP has the
organizational flexibility of a partnership and is taxed as a partnership.
• The tax position may be an advantage to members of LLPs because they are taxed on
their share of the profits, whereas a company must pay corporation tax and its
shareholders must pay income tax on dividends they received
• Perhaps the most significant difference between LLCs and LLPs is that LLPs must
have at least one managing partner who bears liability for the partnership's actions.
With an LLP, whoever is in charge is legally exposed in the same way owners of a
simple partnership are exposed
 Registration of Partnership Firms

• The registration of the firm may be affected at any time by filing an

application in the form of a statement, giving the necessary information, with
the registrar of the firms of the area.
• The application of the registration of a firm shall be accompanied by the
prescribed fee
• The statement shall be signed by all the partners or by their agents specially
authorized in this behalf [Sec. 58(1)]
 Registration of Partnership firm
• Two or more partners can form a firm under partnership Act 1932 for starting a business in Pakistan.

Where to get forms:

Application forms can be obtained from the Registration Section of the office of Registrar of Firms from
District Governments.
Stepwise Guidelines to prepare the case:
• STEP 1: Application on Form-1 under Partnership Act, 1932 should be duly filled on both sides and
attested by the notary public or class-1 officer.
• STEP 2: Partnership deed should be on judicial paper worth Rs. 500 in the name of the firm duly
signed by all partners and witness with complete particulars thereof. One copy attested by notary
public or Class-1 officer should be attached.
• STEP 3: Deposit an amount of Rs. 1,000/- through Chalan form in NBP or SBP and attach its receipt.
Payment in favor of Registrar of Firms, of Respective District
STEP 4: Attach photocopies of (CNICs) of all partners duly attested by notary public or
Class-1 Officers.
STEP 5: Attach proof of ownership or rent agreement of head office of the firm. Copy
should be attested by Notary Public or Class-1 Officer.
STEP 6: Any person other than partners can also lodge application of registration, provided
he/she has authority letter from partners on judicial paper duly attested by notary Public or
Class-1 Officer.

Where to submit:
After completion of all pre-requisites, submit all the produced documents to the Assistant
District Officer (Incharge, Registration Section of Firms) in person.
Processing
Applications will be processed under Registration Act 1932 as subject to completion of pre-
requisites.
 Contents

It shall state:
(a) The name of the firm;
(b) The place or the principal place of the business of the firm;
(c) The names of the places where the firm carries out the business;
(d) The date when each partner joined the firm;
(e) The names in full and permanent address of the partners,
(f) The duration of the firm.
 Registration contd..

• When the registrar is satisfied that the above provisions have been duly
compiled with, he shall record an entry of the statement in the register of Firms
and file statement (Sec. 59).
• He shall then issue under his hand a certificate of registration.
• Registration is effective from the date when the registrar files the statement
and makes entries in the Register of Firms and not from the date of
presentation of the statement to him.
• Registration to a firm under Sec. 59 cannot be declined for the reason of a
company being a partner of the firm.
 Effects of non-registration (Sec. 69)
• Suits between partners and firm. A person suing as a partner of an
unregistered firm cannot sue the firm or any partners of the firm to enforce a
right arising from a contract or conferred by the Partnership Act.
• Suits between firm and third parties. An unregistered firm cannot sue a
third party to enforce a right arising from a contract.
• Claim to set-off. An unregistered firm or any partner thereof cannot claim a
set-off (A set-off is the right of a debtor to balance mutual debts with a
creditor).
 LIABILITY OF PARTNERS TO THIRD PARTIES
• The partnership act covers the relationship of partners with persons outside the
partnership.
• It deals with contractual situations where a partner enters into a contract with a
third party on behalf of the partnership, and tortious situations where a partner
commits a tort while carrying out partnership business. such as negligently
crashing into another vehicle while driving on partnership business.

• Liability of a partner for acts of the firm.

• Liability of the firm for wrongful acts of a partner.
• Liability of the firm for misapplication by partners.
 Liability of a partner for acts of the firm(sec. 25)

• Every partner is liable, jointly with all the other partners for all acts of the
firm done while he is a partner.
• As between the partners themselves, the partner paying for more than his
share of the liability may claim contribution from the others according to the
terms of the partnership agreement
Liability of the firm for wrongful acts of a partner(Sec. 26)
• Where, by the wrongful act or omission of a partner acting in the ordinary
course of the business of a firm, or with the authority of his partners, loss or
injury is caused to any third party, or any penalty is incurred, the firm is liable
therefore to the same extent as the partner.
• The wrongful act may be tort, fraud, or negligence.
• Liability of the firm for misapplication by partners (Sec. 27).
• Where
(a) A partner acting within his apparent authority receives money or property from a third
party and misapplies it.
(b) A firm in the course of its business receives money or property from a third party, and the
same is misapplied by any of the partners while it is in the custody of the firm, the firm is
liable to make good the loss.
Liability of an incoming partner
• A new partner becomes liable for the debts and acts of the firm only from the date he is
admitted as a partner.
• He cannot be held liable for the acts of the old firm.
• A new partner may, however, agree to be liable for the debts existing prior to his admission
but such agreeing will not give to a prior creditor the right to sue him because of absence of
‘privity of contract.’
 Liability of outgoing partner
• A partner who retires from a firm is liable for partnership debts and obligations incurred
before his retirement
• However, the retiring partner may be discharged from any existing liabilities by an
agreement to that effect between himself, members of the firm as a newly constituted
partnership, and the creditors.
• This agreement, known as a novation, may be expressed or implied from the course of
dealing between the creditors and the newly constituted firm

• The retiring partner is also liable for future contracts with people who were customers of
the firm unless notice of the retirement is given to those existing customers.
 INCOMING AND OUTGOING PARTNERS

• Introduction of a partner
(1) Subject to contract between the partners and to the provisions of section
30, no person shall be introduced as a partner into a firm without the consent
of all the existing partners.
(2) Subject to the provisions of section 30, a person who is introduced as a
partner into a firm does not thereby become liable for any act of the firm done
before he became a partner
 Retirement of a partner
(1) A partner may retire
(a) with the consent of all the other partners,
(b) in accordance with an express agreement by the partners, or
(c) where the partnership is at will, by giving notice in writing to all the
other partners of his intention to retire.
• Expulsion of a partner
• The majority of partners cannot expel a partner unless power to do so has been conferred
by express agreement between the partners. This is to prevent a partner from being
victimized by other partners; however, partners may be justified in expelling a partner if
they no longer totally trust him
• The other partners must act in good faith and cannot unjustifiably expel a partner.
• Facts: The partnership agreement allowed expulsion by majority. The majority of partners
wanted to expel one of the partners for some time and did expel the partner after he was
involved in a tax fraud.
• Decision: The expulsion was for a legitimate reason and carried out in good faith and,
therefore, was valid.
• Insolvency of a partner
• Where a partner in a firm is adjudicated an insolvent he ceases to be a partner on the date
on which the order of adjudication is made, whether or not the firm is hereby dissolved.
• By death of a partner
• Where under a contract between the partners the firm is not dissolved by the death of a
partner, the estate of a deceased partner is not liable for any act of the firm done after his
death.
 Dissolution of partnership dissolution of Firm

• The dissolution of partnership between all the partners of a firm is called the
dissolution of the firm. [section 39]. Thus, if some partner is changed/added/
goes out, the ‘relation’ between them changes and hence ‘partnership’ is
dissolved, but the ‘firm’ continues.
• However, complete breakage between relations of all partners is termed as
‘dissolution of firm’. After such dissolution, the firm no more exists.
• Thus, ‘Dissolution of partnership’ is different from ‘dissolution of firm’.
‘Dissolution of partnership’ is only reconstruction of firm, while ‘dissolution
of firm’ means the firm no more exists after dissolution.
 Dissolution of the Firm

• Section. 39 provides that the dissolution of partnership between all the

partners of a firm is called ‘dissolution of the firm.’
• A partnership may be brought to an end either by agreement, automatically
under the PA 1932, or by a court order.
• As a partnership is a contract, it is possible that the partnership agreement
itself expressly states how the partnership can be terminated
 Modes of dissolution
• A firm may be dissolved in any one of the following ways:
• By Agreement.
• By Notice
• On the happening of certain contingencies
• Compulsory Dissolution
• Dissolution by the Court
• By Agreement: A firm may be dissolved with the consent of all the
partners or in accordance with a contract between the partners. Partnership is
created by a contract, it can also be terminated by a contract.
• By notice: Where the partnership is at will, the firm may be dissolved by
any partner giving the notice in writing to all the other partners of his
intention to dissolve the firm.
• A notice of dissolution once given cannot be withdrawn without the consent
of all the other partners.
• The firm is dissolved as from the date mentioned in the `notice as the date of
dissolution or, if no date is so mentioned, as from the date of the
communication of the notice.
3. On the happening of certain contingencies:
Subject to a contract between the partners, a firm may be dissolved if:
a.) If constituted for a fixed term, by the expiry of that term.
b.) If constituted to carry out one or more adventures or undertakings, by the
completion thereof.
c.) By the death of the partner.
d.) By the adjudication of partner as an insolvent.
4. Compulsory Dissolution: A firm may be compulsorily dissolved if:
(a) When all the partners, or all the partners but one, are adjudged insolvent.
(b) When some event has happened which makes it unlawful for the business of
the firm to be carried on.
5. Dissolution by the Court: Dissolution by the court is necessitated
when there is a difference of opinion between the partners regarding the
matter of dissolution in cases of:
(a) Insanity
(b) Permanent Incapacity
(c) Misconduct
(d) Persistent breach of agreement
(e) Transfer of interest
(f) Just and Equitable
• The expiry of a fixed term: this is where a partnership is for a limited term and expires
at the end of the agreed term
• The expiry of a particular purpose: this is where a partnership is entered into for a
single adventure or undertaking and it expires when that adventure or undertaking is
completed.
• The death or bankruptcy of any partner: the partnership agreement often provides that,
on the death of one partner, the surviving partners are to continue the business
• Where the continuation of the partnership is illegal:
• Facts: One of the partners in a firm of solicitors forgot to renew his practicing
certificate. It was illegal for him to practice as a solicitor without a certificate.
• Decision: The partnership automatically ended as it was illegal.
• A court may order the dissolution of a partnership on the application by a
partner in the following circumstances
• A partner becomes mentally ill or permanently incapacitated for some other
reason
• A partner persistently breaches the partnership agreement or conducts
himself in such a manner that it is not reasonably practicable for the other
partners to carry on in business with him.
• The business can only be carried on at a loss.
• It is just and equitable to dissolve the partnership.
• This ground allows a court to dissolve a partnership where there has been a
breakdown of the relationship between partners
• When a partnership is dissolved all the partnership assets are gathered and payments are
made in the following order:
1. All debts to outsiders.
2. Loans made to the partnership by the partners.
3. The individual partners will be repaid the capital sum they put into the partnership.
• If there is not enough in the partnership funds to repay all the capital, unless previously
agreed, the partners contribute to the lost capital in the same proportion as they share in
the profits.
4. The remaining sums are paid to the partners in the same proportion as they shared in
the profits.
• However, where a partnership is insolvent and one or more of the partners is personally
insolvent and is unable to pay their share of the losses, the solvent partners will be liable
to pay the shares of insolvent partners
 Insolvency and Winding Up of LLP

• An LLP does not dissolve when a member leaves but it may be wound
up in the same manner as limited companies.
• Once an LLP is wound up it ceases to exist. An LLP may be wound up
compulsorily by a court order or voluntarily by its members.
• The provisions relating to winding up and insolvency of companies
also apply to LLPs. If an LLP has any remaining assets these are
distributed in the same order as a company’s assets.
• The laws relating to wrongful and fraudulent trading also apply to
members