Lecture # 06

(Chapter # 03: Business Environment and Entrepreneurship)

≡ Business Entity
A business entity is an entity that is formed and administered as per commercial law in order to engage
in business activities, charitable work or other activities allowable. Most often, business entities are formed to
sell a product or a service.

≡ Business Ownership and its Forms

 Once an entrepreneur makes a decision to launch a business, one of the first issues he or she faces is choosing a
form of ownership.
 Most of them have a tough time figuring out the right type of business entity for their business.
Before selecting the form of ownership for a new business venture, it is vital that an entrepreneur review the
types of legal ownership, and consult a lawyer or an accountant to verify which type of ownership will best
addresses the specific needs of the entrepreneur.
 Ownership is the state or fact of exclusive rights and control over property, which may be an object, land or real
estate, or intellectual property.

≡ Considerations in Choosing the Form of Ownership

 Tax Considerations
 Liability Exposure
 Start-up and Future Capital Requirements
 Managerial Ability
 Business Goals
 Management Succession Plan
 Cost of Formation etc.

≡ Forms of Business / Types of Business Organizations

1) Sole Proprietorship
2) Partnership
3) Joint Stock Company
4) Co-operative Society
5) State Enterprise / State-owned Business
6) Multinational Corporations
7) Joint Venture
8) Business Combination / Alliance
9) Trust
10) Holding company
11) Merger / Acquisition
12) Franchising
13) Syndicates
1) Sole Proprietorship
A sole proprietorship, also known as single proprietorship, a sole trader or simply a proprietorship, is the
most basic form of business ownership, where there is one sole owner who is responsible for
the business.
It is not a legal entity that separates the owner from the business, meaning that the owner is responsible
for all of the debts and obligations of the business on a personal level
Sole proprietor receives all profits and has unlimited responsibility for all losses and debts.

Characteristics of Sole Proprietorship Business

1) Ownership: Single individual; He is the owner.
2) Initiator and Manager: Same person. Here ownership and management is not separate.
3) Unlimited liability: Unlimited, liability for the business debt; Owner’s personal property is also
liable for the business debt.
4) Capital: Provided by the owner himself; If additional capital is required, such capital can be
increased by borrowing.
5) Termination / Easy dissolution: Can be easily terminated / dissolved as there are no legal
formalities.
6) Easy transferable: Can easily be transferred to another person/group without any formalities or
restriction.
7) Freedom in decision: Has full freedom in taking decisions or to take action.
8) Easy Formation: Easy as compared to other business, because it does not require any kind of
legal formality like registration.
9) No Separate entity: has no separate legal entity apart from sole traders.
10) Duration/Limited life: Depends on good health/ life/ death of the sole trader.
11) Tax treatment: Profits are taxed with other income of the owner at the personal rates.
12) Distribution of profit: Owner is the absolute possessor. No necessity of profit distribution.
13) Control: Strict control over the whole business.
14) Secrecy: Can maintain absolute secrecy of the business policies and strategies; No possibility of
information leakage.
15) Success of business: Fully depends on the ability of the owner.

2) Partnership: Meaning
 A partnership firm is governed by the provisions of the Partnership Act, 1932.
 A partnership is a form of business in which two or more persons who contribute resources, operate for
the common goal of making profit.
 Partnerships are created to pool talents, provide more financial resources which are not possible with a
sole proprietorship.
Partnership Business: Characteristics
1. Two or more members
2. Contractual relationship
3. Elements of contract
Capital ; Profit or loss sharing ratio; Salary: Salary or commission; Name and address; Name and address of the
partners and the firm; Duties and powers of the partners; Nature and place of business etc.

4. Lawful business
5. Competencies
> Individuals must be competent to enter into a partnership contract.
> Minors, lunatics and insolvent persons are not eligible to become the partners.
> However, a minor can be admitted to the benefits of partnership i.e. he/she can have a share in the
profits only.
6. Sharing of profit and responsibility
The partners of the business obtain profit or bear loss according to agreed proportion or in proportion to contributed
capital. In the absence of any agreement for the profit sharing, it should be shared equally

7. Unlimited liability
8. Voluntary registration
9. Separate entity
10. Transfer of interest
No partner can sell or transfer his interest to any one without the consent of other partners.

11. Continuity of business

A partnership firm comes to an end in the event of death, lunacy, or bankruptcy of any partner. At any time, the
partners may take a decision to discontinue the business and end their relationship.

12. Combined capital

The capital is contributed by all partners equally / agreed proportion.

13. Joint management and control

The partners make an assignment of duties and responsibilities among them to run the business.

14. Medium type business

Partnership can operate business, usually, larger than that possible by a proprietorship business.

15. Dissolution
> A partnership may be dissolved any time.
> Any conflict between or among partners may cause an end to partnership and / or business also by notice.
> Partnership will automatically be terminated at the death of any partner

≡ Limitations of Partnership Business

i) Uncertainty of duration
ii) Risks of additional liability
iii) Lack of harmony
 iv) Difficulty in withdrawing investment
v) Lack of public confidence
vi) Limited resources
vii) Unlimited liability
viii) A loss of autonomy
ix) Emotional issues
x) Conflict and disagreements
xi) Future selling complications
xii) Higher taxes
xiii) Splitting profits

≡ Types of Partners
~ Active Partner is one who participate in all the affairs of the business.
~ Silent Partner is one who do not participate in all the affairs of the business. He has no active role in
managing the firm, but he may be known to the general public as a partner. Why such partner--To earn
income and No time or skills to contribute to management.
~ Secret Partner is one who has invested in the business but he/she is not known to general public as a
partner. He / she may be an active manager but does not want his or her identity revealed to the general
public. A parent who gives financial support to a son's or daughter's business but prefers that the public
be unaware of this involvement.
~ Sleeping Partner is one who is not very active in the affairs of the business. A dormant or sleeping
partner is a partner who is both secret and silent. This person is only interested in investing funds in the
company for financial profit.
~ Nominal Partner is an individual who is neither a part owner of the partnership nor an active participant
in the firm's affairs. A well-known person who lends a famous name to the company. If a nominal
partner misleads or deceives outsiders into thinking that he or she is a genuine partner, the true owners
(and possibly the nominal partner) could be liable for debts and other commitments that the nominal
partner makes. Nominal partners' responsibilities should be defined clearly.
~ Senior Partner is one who has invested the maximum amount in the business.
~ Junior Partner is one who has invested the minimum amount in the business.

3) joint stock company

 A joint stock company is a voluntary association or an organization of many persons who contribute money
or moneys worth to a common stock and employ it in some trade or business and who share the profit or loss
arising there from.
 A joint stock company is a legal form of business organization created by the government and considered an
entity separate and apart from its owners.
 It is also called as Company / Corporation.

Joint Stock Company: Characteristics / Features

1) Legal formation / Law created concern
2) Artificial entity / Distinct personality / Separate legal entity.
 3) Capital
4) Capital borrowing
5) Perpetual existence / Perpetual succession / Long life
6) Limited liability
7) Number of shareholders: For private co. 2-50; public co. 7- no limit (limited by the quantity of shares mentioned in
M/A)

8) Large scale business

9) Transferability of shares: Easily can transfer; No restriction.
10) Common seal / Own seal
11) Democratic management: Democratic way
12) Profit distribution
13) Tax system
14) Trade agreement
15) Statutory responsibility
16) Number of directors
17) Statutory meeting
18) Statutory report : minimum before 21 days, the co. must sent the statutory report which must have signed
by minimum 2 directors and auditor.
4) Co-operative Societies: Meaning
> Co-operative societies are group of people who form the business to co-operate with each other.
> The main purpose of co-operative societies is to co-operate with each other through self help.
> People join these organizations as volunteers.
> It is an action of persons voluntarily united for utilizing reciprocally their own forces and resources.
> Cooperative society is setup mainly for cooperation – not for competition.
> The motto of a society is self help, without dependence on other business units.

Co-operative Societies: Characteristics / Features

1) Objectives
2) Formation
3) Registration
4) Voluntary organization
5) Number of members
6) Nature of members
7) Quality for membership
8) Collection of capital
9) Limit of share purchase
10) Transfer of share
11) Distribution of profit
12) Separate entity
13) Nature of liability
 14) Voting right
15) Management
16) Loan from members
17) Value of shares
18) Audit
19) Winding up
20) Intervention and cooperation by the govt.

5) State Enterprise / Public Enterprise

> “The term public enterprise refers to such industrial and commercial enterprise which are owned and
controlled by the central and or state government” – C B Gupta.

> “Public enterprise are autonomous or semi-autonomous corporations and companies established, owned
and controlled by the state and engaged in industrial and commercial activities” - N N Mallya.

> The enterprise which is formed by the government or by the ordinance of president is called state
enterprise. It is operated and controlled by the government

Characteristics of State Enterprises

1) Formation
2) Purpose
3) Ownership
4) Legal entity
5) Supply of capital
6) Liability
7) Distribution of profit
8) Stability
9) Management and administration
10) Risk bearing
11) Size
12) Public accountability
13) Bureaucratic management
14) Winding up

> Reasons behind the Establishment of State Enterprises

> Advantages of State Enterprises/Arguments in favor of state enterprises
> Do you think that state enterprise is essential for Bangladesh?
> ‘In the market economy, to run the state enterprise is essential’ – Do you agree? Why?
1) Public welfare
2) Preventing monopoly business
3) Industrialization
4) Removal of regional disparity
 5) Price stability
6) Controlling money market
7) Removal of economic difference
8) Create employment opportunity
9) Developing of defense industry
10) Creating well-established monetary and banking system
11) Control of foreign trade
12) Creating socio-economic infrastructure
13) Maintaining safety and secrecy
14) Proper use of natural resources
15) Reducing profit motive
16) Proper distribution of wealth
17) Research and innovation’

Classification of state enterprises

1) Govt. departmental organization
2) Statutory corporation
3) Govt. joint stock company
4) Govt. Board managed enterprise

6) Multinational Corporations
 Multinational Corporation (MNC), also called Transnational Corporation, any corporation that is
registered and operates in more than one country at a time. Generally the corporation has its
headquarters in one country and operates wholly or partially owned subsidiaries in other countries.
 A multinational corporation (MNC) is a company that has business operations in at least one country
other than its home country. It is one that has business offices and operations in two or more countries in
the world. Simply exporting goods for sale abroad does not make a business a multinational company.

7) Joint venture
 A joint venture is a partnership established by two or more persons to carry out a specific
“adventure” or undertaking. It usually is dissolved after the objective has been achieved. Each
partner has unlimited liability.
 A joint venture is an arrangement in which two or more businesses agree to combine their resources for
some definable undertaking.
 Joint ventures also are used by firms that want to do business in a foreign country.

8) Business Combination / Strategic Alliance

• Two or more than two organizations collaborate for mutual profit.
• A strategic alliance is an arrangement between two companies to undertake a mutually
beneficial project while each retains its independence. The agreement is less complex and
 less binding than a joint venture, in which two businesses pool resources to create a separate
business entity.
• Decision involved in Strategic Alliance
* Profit Sharing * Client Handling * Product Producing * Region Selecting

9) Trust
• A trust is a fiduciary arrangement that allows a third party, or trustee, to hold assets on behalf of a
beneficiary or beneficiaries. Trusts can be arranged in many ways and can specify exactly how and
when the assets pass to the beneficiaries.
• A trust is a business structure that doesn't have an owner or owners in the traditional sense. The trust
imposes an obligation on the trustee – a person or a company – to hold and operate the business assets
for the benefit of others, the beneficiaries.

10) Holding Company

• Many businesses organize themselves as holding company structures. Our holding company
definition: a corporate structure or legal body created to hold stock in many companies. The holding
firm owns a controlling interest in one or more other businesses. Essentially, a holding firm is a
company that owns other companies.
• The holding company works like a parent corporation that owns the business assets or shares of other
businesses. These other businesses are known as subsidiaries. If the parent owns 100% of the shares
or interests of the other business, then the other business is known as a “wholly owned subsidiary.”

11) Merger and Acquisition

 The merger means the fusion of two or more than two companies voluntarily to form a new company.

 When one entity purchases the business of another entity, it is known as Acquisition. The mutual
decision of the companies going through mergers.

 Mergers and acquisitions (M&A) is the area of corporate finances, management and strategy dealing
with purchasing and/or joining with other companies. In a merger, two organizations join forces to
become a new business, usually with a new name.

≡ Merger
• Two or more organizations combine together and form a new organization.
• Horizontal Merger - Two companies that are in direct competition and share the same product lines
and markets.
≡ Acquisition
 Business acquisition is the process of acquiring a company to build on strengths or weaknesses of the
acquiring company.
 An acquisition is when one company purchases most or all of another company's shares to gain
control of that company. Purchasing more than 50% of a target firm's stock and other assets
12) Franchising
• An agreement between two parties in which one party passes some rights to the other party.
 • Arrangement where one party (franchiser) grants another party (franchisee) the right to use its
trademark / trade-name.
• A franchise, is a business opportunity that allows the franchisee to start a business by legally using the
franchisor's expertise, ideas, and processes.
The franchisee pays the franchisor a fee.
– There are two parties to Franchise Agreement: Franchiser and Franchisee
• Franchiser is one who sells the rights to franchisee.

13) Syndicates
 A group of individuals or organizations combined or making a joint effort to undertake some specific
duty or carry out specific transactions or negotiations:

 The local furniture store is individually owned, but is part of a buying syndicate.
 A combination of bankers or capitalists formed for the purpose of
carrying out some project requiring large resources of capital, as the
underwriting of an issue of stock or bonds.
Temporary association of two or more individuals or firms to carryout a specific business venture or
project such as large scale real estate development.

≡ Stakeholders
• People who are interested in the affairs of the business in one way or the other.
• Stake holders include:
• Customers * Employees
• Suppliers * Bankers
• Government * Citizen-action Publics
• Law enforcing authorities * Society at large
• Law enforcing authority * Investors

₪ Stakeholders of Accounting Information/ Business Affairs

 Shareholders * Investors * Suppliers
 Employees * Competitors * Customers
 Citizen-action Publics * Government * Regulatory/ Law Enforcing Authorities
 Creditors * Managers * Investment Analyst
 Researchers * General Public