Sole proprietorship, partnership, franchising and corporate

1. Forms of business
ownership
Saranya S
PhD/KSRCT
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2. Forms of business ownership
• Sole proprietorship
• Partnership
• Corporation
• Franchising
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3. Sole proprietorship
• As the name suggests, ‘sole’ means ‘only one’ and
‘proprietorship’ implies ‘ownership’. Hence, a sole
proprietorship is a form of business organisation,
wherein a single person owns, manages and
controls, all the business activities and the individual
who operates the business is called as a sole
proprietor or, a sole trader.
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4. Sole proprietorship
• Sole proprietorships are easy to establish and dismantle, due to a
lack of government involvement, making them popular with small
business owners and contractors.
• A sole proprietorship is very different from corporations and limited
partnerships, in that no separate legal entity is created. As a result,
the business owner of a sole proprietorship is not exempt from
liabilities incurred by the entity.
• For example, the debts of the sole proprietorship are also the debts
of the owner. However, the profits of the sole proprietorship are
also the profits of the owner, as all profits flow directly to the
business's owner.
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5. Characteristics of a sole proprietor
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6. Sole proprietorship
Advantages
• Easy formation and closure
• Direct motivation
• Maintenance of business secrets
• Quick decision and prompt action
• Better control
• Flexibility in operation
• Least record keeping
• Close personal relation
Disadvantages
• Limited resources
• Limited managerial ability
• Lack of continuity
• Limited size
• Unlimited liability
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7. PARTNERSHIP
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8. Partnership
• The term partnership, is used to mean a business
structure wherein two or more individuals, come
together for undertaking a lawful business and have
agreed to share the profits and losses arising from it.
• The management and operation of the business
should be performed either by all the partners or
any of them, acting for all the partners.
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9. Concept of partnership
• The Partnership is the relation which subsists
between individuals, who have decided to pool their
money, skill and resources in business, to share
profits and losses, in an agreed ratio. The members
of a partnership, are jointly known as
the partnership firm and severally known
as partners.
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10. Characteristics of partnership
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11. Formation of partnership
• The formation of a partnership requires a voluntary
"association" of persons who "co-own" the business and
intend to conduct the business for profit.
• Persons can form a partnership by written or oral agreement,
and a partnership agreement often governs the partners'
relations to each other and to the partnership.
• Some partnerships may contain individuals as well as large
corporations.
• Family members may also form and operate a partnership.
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12. Types of partnership
• By duration:
– Partnership at will: Partnership existing as per the will of the partners.
– Particular partnership: When the partnership is created, to carry on a
certain project, for a specified time.
• By liability:
– General Partnership: Partnership in which partners have unlimited and
joint liabilities. All the partners can take part in the management, and
they are bound by the acts of one another as well as of the firm.
– Limited Partnership: The type of partnership in which except one
partner all the partners have limited liability.
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13. Legal relations between partners
• In India, it is governed by the Indian Partnership Act, 1932 and is
formed as per the provisions of the act.
• The document which contains the terms of a partnership as agreed
among the partners is called “Partnership Deed”.
• It can be written or oral.
• Written partnership deed should be duly stamped as per the Indian
Stamp Act ,and duly signed by all partners.
• It lays down the terms and conditions regulating partnership, such
as profit and loss sharing ratio, nature of the business, duration of
business, duties and obligations of partners, capital contributed by
each partner, manner of conducting business and so on.
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14. Legal relations between partners
• Each partner is jointly liable with a partnership for the
obligations of the partnership.
• Each partner has a right to share in the profits of the
partnership. Unless the partnership agreement states
otherwise, partners share profits equally.
• Moreover, partners must contribute equally to
partnership losses unless a partnership agreement
provides for another arrangement.
• In some jurisdictions a partner is entitled to the return of
her or his capital contributions.
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15. Legal relations between partners
• In addition to sharing in the profits, each partner also
has a right to participate equally in the management
of the partnership.
• In many partnerships a majority vote resolves
disputes relating to management of the partnership.
• Nevertheless, some decisions, such as admitting a
new partner or expelling a partner, require the
partners' unanimous consent.
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16. Rights of incoming partners
• Incoming partner is the new partner who will be
joining the partnership firm.
• The process is also known as a admission of a
partner.
• Partners to a firm are free to develop any procedure
or understanding for inducting a new partner into
their firm.
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17. Rights of incoming partners
• New partners to be introduced into an existing
partnership firm with the consent of all partners.
• If there are Seniors partners they can induce new
partners.
• Incoming partner is only liable for the transactions
which were made after he has joined the firm.
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18. Outgoing partner
• A partner who is going to leave a particular firm with
purposely or to he/she might be died or expelled by a
firm.
• It can be in a form of;
– Retirement of a partner,
– Expulsion of a partner,
– Insolvency of a partner,
– Death of a partner.
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19. Retirement of a partner
• By consent: A partner can be retired with a consent of all
the partners.
• By express agreement: If there is any express agreement
among the partners as to how an outgoing partner will
leave the firm then that agreement should be followed.
• In the case of partnership at will: By Notice ; An outgoing
partner can leave the firm by giving notice to all the
other partners of his intention to retire.
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20. Retirement of a partner
• Liability for the acts of the firm done before retirements:
– A retiring partner remains liable for all the acts of the
firm done up to the date of his retirement.
• Liability for the acts of the firm done after retirements:
– A Retiring partner will not be able for the acts of the
firm done after his retirement if a public notice of his
retirement has been given
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21. Expulsion of a Partner
A Partner cannot be ordinarily expelled from the firm. However,
he can be expelled by following a prescribed procedure:
• The power of expulsion should be given to a partners by an
express contract between them.
• The power of expulsion should be exercised by majority of a
partners.
• The power of expulsion should be exercised in absolute good
faith.
• All the conditions must be satisfied before a partner is
expelled from a firm.
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22. Insolvency of partner
• “When a partner in a firm is adjudicated an insolvent,
he ceases to be a partner on the date on which the
order of the adjudication is made, whether or not
the firm is thereby dissolved.”
• However, the partners may specifically provide in
their agreement that in such cases the firm shall not
be dissolved and the remaining partner may continue
the firms business.
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23. Insolvency of partner
• The effects of insolvency are as under sec 34(2):
– The estate of the insolvent partner is not liable for the
acts of the firm which are done after the order of
insolvency.
– It may be noted that a public notice to the effect that
a partner has become insolvent is also not necessary.
The fact of a insolvency is a notice by itself.
– The firm is also not liable for any act of the insolvent
partner done after the date of the order of the
insolvency.
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24. Death of a partner
• On the death of the partners, a change occurs in the
constitution of the firm if the remaining partners
continue the firm.
• However, the partners may specifically provide in their
agreement , that in such cases firm shall not be dissolved,
and the remaining partners shall continue the firms
business.
• The estate of a deceased partner is not liable for any acts
of the firm which are done after his death.
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25. Sole proprietorship Vs. Partnership
Basic of comparison Sole proprietorship Partnership
Number of owners One owner More than one
Decision making
process
Only the sole proprietor has
to make the decision
Either all partners or majority of the
partners has to agree upon a decision.
Liability Only the sole proprietor is
liable
All partners are held liable
Sharing profits and
burden
No one to share profits and
burden of the enterprise
All partners share profits and burden
of the enterprise
Chances of failure As with any other business More chances due to
misunderstandings and disagreements
between partners
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26. CORPORATION
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27. Corporation form of organization
• A corporation is a legal entity, organized under state laws,
whose investors purchase shares of stock as evidence of
ownership in it.
• The word "corporation" derives from corpus, the Latin word
for body, or a "body of people“.
• A corporation is an organization—usually a group of people or
a company—authorized by the state to act as a single entity (a
legal entity) and recognized as such in law for certain
purposes.
• Most jurisdictions now allow the creation of new corporations
through registration.
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28. Types of corporation
• A Corporation Can Be:
– Stock or Non-stock Corporation
– Public and Private Corporation
– Domestic or Foreign Corporation
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29. Types of corporation
• Stock Corporation- capital stock divided into shares;
and authorized to distribute profits.
• Non-Stock Corporation- According to the Corporation
Code of the Philippines, it is one where no part of its
income is distributable as dividends to its members,
trustees, or officers, subject to the provisions of this
Code on dissolution.
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30. Types of corporation
• Public Corporation (Open Corporation) - A
corporation whose shares are publicly traded and are
usually held by a large number of shareholders.
• Private Corporation (Close Corporation) - Corporation
whose shares are not publicly traded, and are held by
a small number of stockholders (shareholders).
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31. Types of corporation
• Domestic Corporation - A corporation that is
conducting business and is based in the country in
which it is established
• Foreign Corporation - A corporation that is chartered
under the laws of one country but is operating in
another county.
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32. Advantages of corporations
• Limited liability. The shareholders of a corporation are only liable up to the
amount of their investments. The corporate entity shields them from any
further liability, so their personal assets are protected.
• Source of capital. A publicly-held corporation in particular can raise
substantial amounts by selling shares or issuing bonds.
• Ownership transfers. It is not especially difficult for a shareholder to sell
shares in a corporation, though this is more difficult when the entity is
privately-held.
• Perpetual life. There is no limit to the life of a corporation, since ownership
of it can pass through many generations of investors.
• Pass through. If the corporation is structured as an S corporation, profits
and losses are passed through to the shareholders, so that the corporation
does not pay income taxes.
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33. Disadvantages of corporations
• Double taxation. Depending on the type of corporation, it may pay
taxes on its income, after which shareholders pay taxes on any
dividends received, so income can be taxed twice.
• Independent management. If there are many investors having no
clear majority interest, the management team of a corporation can
operate the business without any real oversight from the owners.
• Complex process. Setting up is a complex process. Requires heavy
paper work.
• Lack business confidentiality. Public reports are available in open
domain. The competitors could access it.
• Extensive rules. Standard of law need to be followed extensively to
avoid penalties.
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34. FRANCHISING
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35. Franchising – Definition
• A continuing relationship in which a franchisor
provides a licensed privilege to the franchisee to do
business and offers assistance in organizing, training,
merchandising, marketing and managing in return
for a monetary consideration.
• Franchising is a form of business by which the owner
(franchisor) of a product, service or method obtains
distribution through affiliated dealers (franchisees).
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36. Importance of franchising
• Franchising is a business strategy for getting and
keeping customers.
• It is a marketing system for creating an image in the
minds of current and future customers about how
the company's products and services can help them.
• It is a method for distributing products and services
that satisfy customer needs.
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37. Importance of franchising
• Franchising is a network of interdependent business
relationships that allows a number of people to share:
– A brand identification
– A successful method of doing business
– A proven marketing and distribution system
In short, franchising is a strategic alliance between
groups of people who have specific relationships and
responsibilities with a common goal, i.e., to get and
keep more customers than their competitors.
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38. Concept of franchising
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39. Franchising relationship - examples
• Manufacturer – retailer agreement: as occurs with car vehicle
dealership
• Manufacturer – wholesaler agreement : commonly observed
in soft drink companies, where the franchisor grant a license
to the franchisee to manufacture and distribute its products.
• Wholesaler – retailer agreement: commonly observed in co-
operatives, where the franchiser sells products to the
franchisee, who sells it to general public.
• Retailer – retailer agreement: the “classic” business format,
where the franchisor markets a product through a network of
franchisee retailers.
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40. Advantages of franchising - franchisor
• The business can expand using other people’s money, which provides
income (royalties) and allows the franchisor to expand more rapidly.
• The franchisor may have several sources of income, such as franchise fees,
franchise royalty fees, training fees, service fees, advertising and
marketing administrative fees, rebates from suppliers, and the sales of
products and supplies to the franchisees.
• Being able to open in multiple locations more rapidly gives the franchisor a
competitive advantage over other businesses selling similar products or
services.
• The franchisor brings into the company people (franchisees) who are
entrepreneurs, full of motivation to succeed.
• The franchisor needs a smaller central organization compared to a
business that owns all the branches.
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41. Advantages of franchising - franchisee
• A greater chance of succeeding.
• Ongoing support from franchisor.
• Being part of a known brand. In many cases, benefiting
from regional or national advertising campaigns.
• Adopting a proven business model.
• Many franchisors provide customer leads through
websites and centralized call centers.
• Being part of a network of franchisees.
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42. Disadvantages of franchising - franchisor
• Loss of ownership – the franchisee has put up money and
becomes a kind of partner in the business.
• Loss of territory. In most cases the franchisee will be granted
an exclusive territory.
• Confidentiality – a franchisor will have to divulge more
confidential information about the business to franchisees
than to employees.
– Even though a franchisee should have signed a
confidentiality agreement, monitoring the provisions of
the contract is not easy.
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43. Disadvantages of franchising - franchisee
• Lack of independence – goods usually come just from the
franchisor, the premises can only be decorated in a
certain way, the range of products available for sale are
restricted, etc.
• Lack of control over prices – the company may decide on
a nationwide discount on products that may not work in
the franchisee’s market.
• Long-term growth – the franchisee’s ambitions regarding
to become large business one day may be limited by the
franchise setup and the franchisor’s aims.
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44. Types of franchising arrangements
• Franchisors use different ways of developing their franchise. The types of franchise
arrangements include:
• Single-unit franchising
– With this arrangement the franchise buys the right to run just ONE franchise
unit.
• Multi-unit franchising
– This is when a franchisor owns more than one unit in the same franchise
network.
• Area developer
– An area developer franchisee is granted the exclusive rights to develop the
franchise system in a defined territory e.g. city, state, within a specific time
frame.
– They do not sell franchises.
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45. Types of franchising arrangements
• Master franchising
– A master franchisee is given the rights to open and develop
franchises in a defined territory, and is also allowed to sell
franchises within that area.
– They sell them to sub-franchisees.
– Master franchisees may hold the rights for regions, states or the
country as a whole if the franchise is from outside of the
country.
– The master franchisee becomes technical the franchisor for their
territory, i.e. they do the recruiting, training, marketing etc.
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46. Types of franchising arrangements
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47. Corporation Vs. Franchising
Basic of comparison Franchising Corporation
Ownership Private individual Share holders
Basic Chain of a company Single or group of companies
Control Franchisor Board of directors
Mode of operation Royalties payment Work with shares
Liability Franchisor is liable Limited liability to share holders
Legal formation Contract with franchisor Registered by law
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48. THANK YOU
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