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NAME

UMAR FAROOQ TIPU

ROLL N0.

51

SEMESTER

6 TH

ASSIGNMEMT

BUSINESS LAW
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Q.1: Define following in your own words.

a. Sole proprietorship,

b. Partnership,

c. Company.

ANS: (A) Sole proprietorship:

The word sole means “single or solo”

and proprietor means “owner”. A sole proprietorship therefore is a business

owned by a single person. Sole proprietorship is the oldest form of business

organization in the world and it is also the most common form of business

organizations. A sole proprietorship is also known as the sole trader, individual

entrepreneurship or proprietorship.

Definition:

A type of enterprise that is owned and run by one person and in which there is no

legal distinction between the owner and the business entity is called sole proprietorship.

The sole trader receives all profits (subject to taxation) and has unlimited

responsibility for all losses and debts. Every asset of the business is owned by the proprietor

and all debts of the business are the proprietor's. It is a "sole" proprietorship in contrast

with partnerships. In addition, a sole proprietorship usually does not have to be incorporated or

registered. Thus, it is the simplest form of business structure and the ideal choice to run a small

business or medium scale business.

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A sole proprietorship can operate under the name of its owner or it can do business

under a fictitious name, such as Nancy's Nail Salon. The fictitious name is simply a trade name--

it does not create a legal entity separate from the sole proprietor owner.

Advantages:

 It is the easiest form of business to set-up.

 The owner has full control over his business and he can do whatever he

wants to do with it.

 It is the least complex form of business to run.

 In case of profit, the sole owner can keep all the profit for himself after

paying taxes.

 In case of sole proprietorship, low amount of taxes are inflicted.

 Another advantage of sole proprietorship is that owner has to deal with

very few government regulations.

Disadvantages:
With most choices people made, there is always a positive side and a
negative side. Same rule applies here too. Some of the drawbacks are,

 In case of sole proprietorship, the only source of working capital,

beside the money you borrow, is your own money. This in a result
limits the capital of business.
 The major and the most prominent disadvantage of the sole
proprietorship is that of unlimited liability. If business end up
unsuccessful then the owner has to bear all the losses.
 In case of sole proprietorship, the human resources are limited and
thus as a result one person is burdened behind his abilities.
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 Sole proprietorship has a limited life because its life depends on the
life of the owner and with owner’s life the life of business also came
to an end.

(B) Partnership:

A partnership is an arrangement where parties, known as business

partners, agree to cooperate to advance their mutual interests. The partners in a partnership may

be individuals, businesses, interest-based organizations, schools, governments or

combinations. Organizations may partner to increase the likelihood of each achieving their

mission and to amplify their reach. A partnership may result in issuing and holding equity or

may be only governed by a contract.

Definition:

A partnership is a kind of business where a formal agreement between two or more

people is made and agreed to be the co-owners, distribute responsibilities for running an

organization and share the income or losses that the business generates.

Features of Partnership:

 Contract or Formation:

When a partnership is formed, the partners sign a legal

agreement called a “Partnership agreement”. Which basically state how the business

partnership will be organized? The agreement includes the following basic information:
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o Name of the partners.

o Name and nature of the business.

o Amount of investment by each partner.

o Duties, rights, and responsibilities of each partner.

o Procedure for sharing profits and losses.

o How assets will be divided when and if the partnership is

dissolved.

 Unlimited Liability:

All the partners are liable for the payment of the debts, even if they

have to liquidate their personal assets.

 Continuity:

In the context of death, bankrupt, and retirement of any partners, etc., the

partnership will be dissolved and the remaining partners must make a fresh agreement

amongst each other. Similarly, a son cannot inherit his father’s partnership, but with the

agreement of other partner members, he can be added as a new partner.

 Number of Members:

There is no specific number as to the maximum number of

members a partnership firm can have. However, according to the Companies Act, 2017,

for banking only 10 members are allowed. For companies, the maximum member should

not exceed more than twenty.

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 Mutual Agency:

This means all the partners should take responsibility for a company’s

operation. But sometimes one partner on behalf of the rest of the partners can supervise

or take actions.

Types of partnership:
A partnership is divided into different types depending on the state

and where the business operates. Here are some general aspects of the three most common types

of partnerships.

 General Partnership:

A general partnership comprises of two or more owners

to run a business. In this partnership, each partner represents the firm with equal

right. All partners can participate in management activities, decision making, and

have the right to control the business. Similarly, profits, debts, and liabilities are

equally shared and divided equally.

 Limited Partnership:

This partnership includes both the general and limited

partners. The general partner has unlimited liability, manages the business, and

the other limited partners. Limited partners have limited control over the business

(limited to his investment) and are not associated with everyday operations of the

firm.

In most of the cases, the limited partners only invest and take

a profit share, and they do not have any interest in participating in management or
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decision making. This noninvolvement means they don’t have the right to

compensate the partnership losses from their income tax return.

 Limited Liability Partnership:

In Limited Liability Partnership (LLP), all the

partners have limited liability. Each partner is guarded against other partner’s

legal and financial mistakes. A limited liability partnership is almost similar to a

Limited Liability Company (LLC) but different from a limited partnership or a

general partnership.

 Partnership at Will:
Partnership at will can de be defined as when there is no clause

mentioned about the expiration of a partnership firm. Under section 7 of the

Partnership Act 1932, the two conditions that have to be fulfilled by a firm to become

a Partnership at Will are:

1. The partnership agreement should have not any fixed

expiration date.

2. No particular determination of the partnership should be

mentioned.

Therefore, if the duration and determination are mentioned in the

agreement, then it is not a partnership at will. Also, initially if the firm had a fixed

expiration date, but the operation of the firm continues beyond the mentioned date

that it will be considered as a partnership at will.

(c) Company (corporation):

Literary meaning of the word ‘company’ is an association of

persons formed for common object. A company is a voluntary association of persons recognized
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by law, having a distinctive name and common seal, formed to carry on business for profit, with

capital divisible into transferable shares, limited liability, a corporate body and perpetual

succession.

Definition:

A company has different definitions based on the country it is situated in.

 In the UK:
A company is a body corporate or an incorporated business organization

registered under the companies act. It can be a limited or an unlimited company, private

or a public company, company limited by guarantee or a company having a share capital,

or a community interest company.

In UK the words ‘company’ and ‘corporation’ are used interchangbly.

 According to the law in the USA:

A company can be a “corporation, partnership,

association, joint-stock company, trust, fund, or organized group of persons, whether

incorporated or not, and (in an official capacity) any receiver, trustee in bankruptcy, or

similar official, or liquidating agent, for any of the foregoing”

 The Companies Act 2013 of India defines a company as-

A registered association

which is an artificial legal person, having an independent legal, entity with a perpetual

succession, a common seal for its signatures, a common capital comprised of transferable

shares and carrying limited liability.

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 A more precise, global and modern definition of a company could be:

A business entity which acts as an artificial legal person, formed by a legal person or

a group of legal persons to engage in or carry on a business or industrial enterprise.

Views of jurists:
o According to Justice James, “A company is an association of persons

united for a common object.”

o According to Lord Lindley, “By a ‘company’ is meant an association

of many persons who contribute money or money’s worth to a

common stock and employ it for some common purpose. The

common stock so contributed is denoted in money and is the capital

of the company. The persons who contribute it or to whom it belongs

are members. The proportion of capital to which each partner is

entitled is his share.”

o According to Kimball and Kimball, “A corporation is by nature an

artificial person created or authorized by the legal stature for some

specific purpose.”

o According to Prof. Haney, “A company is an artificial person created

by law having a separate entity with a perpetual succession and a

common seal.”

Features of a company:
On the basis of definitions studied above, the following are

the characteristics of a company,

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 Company is an artificial person created by law.

 It has a separate legal entity, totally different from its members.

 A company has infinite life.

 A corporation has its own seal.

 In a company every member has a limited liability instead of unlimited one.

 A shareholder can transfer his share to anyone without the consent of other members.

 The field of work of a company is limited as curtailed by the company’s charter and

memorandum.

 A company is a voluntary association of persons to earn profit.

 A company is represented by its representative management (board of directors) instead

by members.

 A company is created by law, take out its business according to law and will be

terminated according to the law through a process called winding up.

Q.2: What is the difference between the above three?

ANS: Some of the differences between the sole proprietorship, partnership

and company are given below:

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TYPE SOLE PARTNERSHIP COMPANY

PROPRIETORSHIP

STRUCTURE Business handled by 2 or more (max. 20) Consists of members

single individual. doing business ranges from 1 to

together for profit. many.

FORMATION No need to be formed in Oral and written
Must be
writing because it is formation both is
formed in
already a single person valid.
writing,
business and one doesn’t
through a
need and kind of
Memorandum
assurance from oneself.
and Articles

of

Association.

REGISTRATION No need for registration May or may not be Must be registered

but in case of some registered but it is under the Companies

business it must have preferred to register it Act 2017. Companies

license to carry out the under partnership Act cannot operate

business for future legal without registration.

problems.
MEMBERSHIP There is only one person A maximum of 20 No maximum number

partners, unless it is a unless it is a private

professional firm. company (50

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members).
MANAGEMENT The sole owner himself Partners are the Company members

manage and control the agents of the are not always the

business partnership and are company’s managers,

entitled to manage directors or agents.

the business on

behalf of other

partners.
ENTITY Business is not the legal In case of Company or

entity in the eyes of law partnership, business corporation is

but the owner is. is not recognized as recognized by law as

the legal entity. legal entity.

BORROWING It has unrestricted It has unrestricted Its borrowing power

POWER borrowing power borrowing power is restricted to the

purpose of its

objective as stated in

its memorandum of

association.
LIABILITY Sole owner has the The partners have the Company members

unlimited liability to deal burden of unlimited have limited liability

with liability on their up to their shares.

shoulders.
DISSOLUTION It can be dissolved Can be dissolved There must be a

informally without informally even if a formal procedure,

involving the court or law single partner wants winding up and

to do so, he can. liquidation, in

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dissolving the

company

Q.3: What kind of business in your view is more safe and profitable?

Give at least 5 reasons.

ANS: In my view company (corporation) is more safe and profitable type of business to be
involved in as compared to sole proprietorship and partnership.

REASONS:

 The first and the prominent reason why I have chosen a company over other type

of businesses is that it has a limited liability factor in it. Every member is liable up to the limit of

his shares and he cannot be forced to pay more than that. It is a kind of protection buff given to

the members by a company against infinite losses.

 My second reason is that company is a legal person in itself and it has nothing to

do with the legal personality of its members. Therefore, if during business a company came

across any kind of problems it will be faced by the company as a legal person but not by its

members in their personal legal capacity. So here company is again shielding its members from

legal technicalities and problems by facing it itself.

 Third one is that a company has a large capital as compared to sole proprietorship

and partnership. And we all know that a large capital means a large some of investment and as a

result more income and profit. So here our shareholders get more income by investing a small.

And tell me who do not want to earn more by investing less.

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 My 4th reason is that a company’s life is infinite. It can survive the death of all his

members. In case of sole proprietorship, if the owner dies the business came to an end. In case of

partnership, if one of the partners dies partnership came to an end. If one of the partner wants to

leave the partnership. The partnership dies with his departure. In case of a company, members

come and go but the company remains firm doing its business. Here the company is again

offering security to his members in situation like death of his members and in case of dispute

between the members.

 In almost all the companies the activities and business management is all done by

groups of people under the supervision of the board of directors. In most cases the board of

directors is consist of the experts and in very few cases it has some company members in it too.

So, in a company the shareholders are free from business management activities as it is done by

board of management for him. It saves a lot of time for members of the company and gives them

opportunity to invest in other places as well. While on the other side the sole proprietorship and

partnership keep a person all to itself all the time.

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Q.4: If you have 1 million rupees what kind of business would you like to

start and why? Support your answer with reasons.

ANS: If I have a sum of 1 million rupees, i would like to buy some shares in a company and
invest it there because I think it is the most reasonable way of putting that sum of money to

work.
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Reasons:

 I cannot start a sole proprietorship in 1 million sum because for sole proprietorship

first I need to arrange a place then to decorate it and then buy my business stuff. (E.g.

medicines for the medical shop etc.) I do not think so that 1 million sum is enough for doing

all this stuff.

In case of partnership, if I invest it there then I will face the problem of

unlimited liability and if business goes through any kind of losses then I will not only lose my 1

million but if the losses are high then I will have to pay from my pocket for the losses not

satisfied by my 1 million.

So, here I am left with one option and that’s the investment in a company and it

looks the most reasonable option after discussing the above two.

 By buying shares in a company generates income automatically and in a uniform

manner. While in case of sole proprietorship and partnership the income is in flux mostly

and directly depend on how much time you are giving to your business, how you are

handling the day to day business activities, how you are treating your clients etc. But this is

not the case with the person who buys shares in a company.

 There is a factor of unlimited liability involved in sole proprietorship and

partnership which will not only swallow my investment of 1 million but will extract more

from my accounts in case of huge losses.

In case of company the liability is limited and only my 1 million is at stack.

Money in my accounts and even the money which I have earned through the company are totally
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safe in case of losses suffered by the company. Then, tell me, why should not I invest my 1

million in a company instead of investing in sole proprietorship or partnership.

Q.5: Give at least 20 points of difference between partnership and company?

ANS: The important points of distinction between the company and partnership are given

below:

1. Definition:
Any voluntary association of persons registered as a company and formed for the

purpose of any common object is called a company. But a partnership is the relation between two

or more individuals who have agreed to share the profits of a business carried on by all or any of

them acting for all. The partners are mostly collectively called as a firm.

2. Law

A company is regulated and controlled by the Companies Act. But a partnership firm is regulated

by the Partnership Act, 1932.

3. Registration

A company should be compulsorily registered under the Companies Act. Its

formation is very difficult. But registration of a partnership firm is not compulsory under the

Partnership Act. The firm is based on the partnership deed. Its formation is very easy.
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4. Legal Position:

A company is a body corporate and a legal person having a corporate

personality distinct from its members. The members are not liable for the acts of the company.

But a partnership has no legal existence distinct from its members. Partners are liable for the acts

of the firm.

5. Life Time:

A company is a mere abstraction of law. So its existence is not affected by the

change of membership or death or insolvency of its members. But a partnership is a mere

aggregation of individuals. So the life of a partnership ends on the death or insolvency or

insanity of any one partner.

6. Liability:

The maximum liability of the shareholders, in case of a limited company, is

limited to the face value of the shares purchased by them. In case of companies limited by

guarantee, the liability of the shareholders will be up to the amount guaranteed by them. But in

case of a partnership. The liability of the partners is unlimited. The partners are jointly and

severally liable for all the debts of the partnership firm.

7. Transferability of Shares:

Shares of a company are freely transferable unless restricted

by the Articles. But a partner cannot transfer his share without the consent of all other partners.
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8. Contract:

A member of a company can enter into a contract with the same company. But a partner of a firm

cannot enter into contract with the same partnership firm.

9. Number of Members

A private company should have a minimum of 2 members and can have a

maximum of 50 members. A public company should have a minimum of 7

members and there is no maximum limit. But a partnership should have a

minimum of 2 and can have a maximum of 20 persons [10 in the case of

banking business].

10. Audit:

The accounts of a company should be audited by a qualified auditor. But in the

case of a partnership, the accounts need not be audited. Even though the partners decide to

arrange for the audit of their firm, the auditor need not be a qualified person. The powers, duties

and liabilities of an auditor of a company are regulated by the Companies Act.

But in the case of a partnership audit, the duties are governed by the provisions of the contract

entered into by the partners with the auditor.

11.Legal matters:

Company the members and shareholders are not liable in legal matters of their

company but the company as a legal entity is itself answerable.

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12. Implied Agency:

In case of a company, a shareholder is not regarded as its agent in

dealing with third parties. But in case of a partnership, a partner is an agent of the firm and of all

other partners in dealing with third parties.

13. Good Faith:

Since they are more in number, most of the shareholders of the company

may not know each other. We cannot expect that all the shareholders are just and honest to one

another. But in the case of a partnership, the partners know each other thoroughly. The

partnership agreement is based on utmost good faith. So the partners are to be just and honest to

one another.

14. Management:

The management of a company is in the hands of a group of elected

representatives of the shareholders. Even this group finds it difficult to administer the day-to-day

affairs of the company. It is carried on mostly by salaried people. Such people cannot be

expected to take active part in the management as the owners.

But in the case of a partnership, the management is in the hands of the partners themselves. They

work in absolute sincerity. They can give personal attention to the customers and thus strengthen

the customer-firm relationship.

15. Decision-Making:
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In case of companies, taking decisions on important issues requires a

fairly long time. But in case of a partnership firm, quick decisions are possible.

16. Issue of Debentures:

Joint stock company is the only business organization which is

authorized to borrow money through the issue of debentures. A partnership firm cannot issue

debentures.

17. Restrictions:

The outsiders who deal with a company should be aware of the provisions of

its Articles of Association. This is because, the restriction on directors affect the outsiders. But in

case of a partnership, restriction on any partner does not affect the outsiders. So they need not be

aware of the provisions of the partnership deed.

18. Secrecy:

The companies have to file their documents, returns, reports, balance sheet, profit

and loss account etc. with the Registrar. Some of them are open to public. So, there is no secrecy

at all in case of companies. But in case of a partnership, the firm need not prepare and file such

documents. So its secrets are not leaked out. Outsiders cannot know the ins and outs of the firm.

19. Capital Formation:

Even people with limited resources can become the shareholders of

a big company. This tempts them to save something out of their income for future. This is a

green signal for capital formation in the country. Such a capital formation is not possible in the

case of a partnership.
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20. Dissolution:

A company, being a creature of law, can only be dissolved as laid down by

law. A partnership firm, on the other hand, is the result of an agreement and can be dissolved at

any time by agreement.

THE END.