Forms of Business Entity

7/31/2019 Forms of Business Entity

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Amar, Akbar, Anthony


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Three Types of Business Entities

Sole Proprietorship Partnership Company

Examples M/s Ladduram & Sons S S Billimoria & Co. Mro-tek Limited

No. of Shareholders One Person

Minimum: 2 Minimum: 7

Maximum: 20 Maximum: No Limit

Management Control Proprietor Partners Board of Directors

Liability Unlimited Unlimited LimitedLegal Registration No Provision Voluntary Compulsory

Flexibility Maximum Depends on Partners Comparatively Less


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Amar Akbar AnthonyAmar , Akbar and Anthony were three school timefriends . After passing from school , the three met eachother and were discussing about their future plans . Allthree were sure that they would take up to doingbusiness after finishing their graduation.

Amar was very ambitious and always thought of growingvery fast and managing a large empire of business. Hewas contemplating setting up of a retail chain of panshops across the country .

Akbar never believed in such large dreams and had alwaysbelieved in being self reliant. Akbar was planning tostart a sponge iron unit.

Anthony believed in being a team member . He wasplanning to start a event management firm.


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Required

Suggest the type of business entity thatwould fit the profile of each individual. Givereasons

In the above case, should the type ofbusiness being taken up , influence thetype of business entity ? Discuss

What other factors do you think areessential while deciding on the type of

business entity.


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Issue Sole

Proprietorship

Partnership Private Limited Public Limited Only Limited

(Guaranteed)

Income Tax Audit > 40 L turnover

Profession > 10

> 40 L turnover

Profession > 10

> 40 L turnover

Profession > 10

> 40 L turnover

Profession > 10

> 40 L turnover

Profession > 10

External(Statutory) Audit Not Required Not Required Compulsoryunder the Statute

Companies Act

Compulsoryunder the Statute

Companies Act

Compulsoryunder Guarantee

Limited Compan

Internal Audit Not Required Not Required Turnover is > Rs

10 crores

Turnover is > Rs

10 crores

Turnover is > Rs

10 crores

Registration

Process

Not Required Partnership deed

attested in Court

Under Companies

Act 1956 (RoC)

Under Companies

Act 1956 (RoC)

Under Companies

Act 1956 (RoC)Liability Unlimited Unlimited Limited Limited Limited by

Guarantee

No of

Shareholders

Single Min 2 Max 20 Min 2 Max 50 Min 7 Max

Unlimited

Min 2 Max 50

Annual (RoC)

Papers

Not required to

file other than ITdept.

Not required to


RoC requirements

(state wise)

RoC requirements

(state wise)

RoC requirements

(state wise)

Raising Finance Secured /

Unsecured Loans

Secured /

Unsecured Loans

Decided by BoD

by a special

resolution (MoA

rights)

AGM or EGM Decided by BoD

by a special

resolution (MoA

rights)


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Issue Sole

Proprietorship

Partnership Private Limited Public Limited Only Limited

(Guaranteed)

Income Tax Audit > 40 L turnover

Profession > 10

> 40 L turnover

Profession > 10

> 40 L turnover

Profession > 10

> 40 L turnover

Profession > 10

> 40 L turnover

Profession > 10

External

(Statutory) Audit

Not Required Not Required Compulsory

under the Statute

Companies Act

Compulsory

under the Statute

Companies Act

Compulsory

under Guarantee

Limited Compan

Internal Audit Not Required Not Required Turnover is > Rs

10 crores

Turnover is > Rs

10 crores

Turnover is > Rs

10 crores

Registration

Process

Not Required Partnership deed

attested in Court

Under Companies

Act 1956 (RoC)

Under Companies

Act 1956 (RoC)

Under Companies

Act 1956 (RoC)

Liability Unlimited Unlimited Limited Limited Limited by

Guarantee

No of

Shareholders

Single Min 2 Max 20 Min 2 Max 50 Min 7 Max

Unlimited

Min 2 Max 50

Annual (RoC)

Papers

Not required to


Not required to


RoC requirements

(state wise)

RoC requirements

(state wise)

RoC requirements

(state wise)

Raising Finance Secured /

Unsecured Loans

Secured /

Unsecured Loans

Decided by BoD

by a special

resolution (MoA

rights)

AGM or EGM Decided by BoD

by a special

resolution (MoA

rights)


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The case details the following threepoints on the friends:

Amar was very ambitious and alwaysthought of growing fast A RetailChain of Pan Shops across thecountry

Akbar was not ambitious and believedin being self-reliant Sponge IronUnit

Anthony was a team member

Event Management Firm


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Given the limited amount of information about each person,one can state that LLC suits Amar, Sole Proprietorship suitsAkbar, and Partnership suits Anthony.

Point to note that the proprietorship and partnership kind of

organizations have unlimited liability and also have to pay onlypersonal tax on profits.

On the other hand, a company has a limited liability, hasdouble taxation (personal tax, corporate tax, and sometimeseven dividend tax) and also involves more paper work (due toregulatory requirements).

Company is a dynamic entity (say, due to low risk and ease ofgetting easily financed by way of both debt and equity).

The three factors which make it easier for a LLC to raise capitalare unlimited life, easy ownership transferability, & of course,

limited liability.


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The type of business being taken up does influence onthe type of business entity being selected for theventure.

For example, a business which is large and/or hasgrowth opportunities should be pursued using a LLCwhereas a farmer managing his small farm and notinterested in expanding should go in for a soleproprietorship kind of organization.

In a economic scenario, wherein the corporate areforced to pay high tax and have large amount ofpaper work, it is very likely to force most people toshift to sole proprietorship kind of organizations.


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Shareholders (owners) biases in decidingon the type of organization.

For example, How transparent do you want to be? Do you want to evade tax? Do you want to cut down on your paper

work? Is the business very risky? Are the partners comfortable enough with

each other? Are there any agency related problems if

so how are they being controlled?


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To the optimist, the glass is half full.

To the pessimist, the glass is half empty.

To the accountant, the glass is twice as

big as it needs to be.


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Introduction

Accounting

Financial

Accounting

Accounting

Analysis

Used for reporting

Audience: Outside World

(Govt. Bodies, society, etc.)

Providing information for

planning and control

Audience: Internal

(Managers and investors)


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Foundations of Accounting

3 Founding Ideas of Accounting

Productive

Capital

Profitable

Operations

Capital

Maintenance


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Purposes Of AccountingInformation

Purposes of

Accounting Information

Attention

Directing

Problem

Solving

Score

Keeping

Reporting on

the financialhealth

Signaling the user

about the need totake a decision

Provision of such

information that wouldenable to find solutions


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Branches of Accounting

Accounting

Enterprise

Accounting

Social

Accounting

Government

Accounting

Financial

Accounting

Management

Accounting


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Enterprise Accounting

Specifically addresses issues of measurementand valuation in the context of businessenterprises

Has evolved into two disciplines

Financial Accounting

Providing financial information relating tothe entity to outsiders

Management/Cost Accounting

Reporting the activities of the entity tomanagers so as to enable them to planand control the activities of the entity vis--vis other competing entities


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Accounting Information users

Stakeholders are the ones who have aninterest in what happens as a result of theentities activities

Stakeholders classified as Internal users viz. managers

External users viz. creditors and equityinvestors, government, society


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Class Discussion

Stakeholder Area of interest

Tax liabilities of the firm

Potential for pay awards and bonus dealsEthical & environmental activities of the firm

Whether the firm is has a long-term future

Profitability and share performance

Ability of the firm to carry on providing a service

or producing a product

Government

Unions & staffPublic/Society

Lenders

Shareholders

Customers

Note: These should not be regarded as the 'only' answers


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BHEL and its Stakeholders

Stakeholder Would be interested due to

Government & its agencies Income tax & other tax liabilities

Top Managers, Workers, Unions Potential for pay hikes, bonus, and incentives

Public Ethical and environmental activities

Long-term Lenders, Present &

Potential Shareholders

Whether the firm has a long-term future

Fund managers & Analysts Profitability & share performance

Customer Ability to take a bigger order, etc

Supplier & Other Creditors Whether to offer the firm credit and if so, terms


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Thank You

Forms of Business Entity

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