Thursday, April 24, 2008


A sole proprietorship is a business which legally has no separate existence from its owner. Hence, the limitations of liability enjoyed by a corporation do not apply. All debts of the business are debts of the owner. It is a "sole" proprietor in the sense that the owner has no partners. A sole proprietorship essentially means a person does business in his or her own name and there is only one owner. Since the business is really just an extension of that person and not a new entity (like a corporation) any business debts are also personal debts. If the business were to get a judgment filed against it, it would be a problem for the owner. As a sole proprietorship is not a corporation, it does not pay corporate taxes, but rather the person who organized the business pays personal income taxes on the profits made, making accounting much simpler. A sole proprietorship need not worry about double taxation like a corporation would have to.

A business organized as a sole proprietorship will likely have a hard time raising capital since shares of the business cannot be sold, and there is a smaller sense of legitimacy relative to a business organized as a corporation or limited liability company. Hiring employees may also be difficult. This form of business will have unlimited liability, therefore, if the business is sued, it is the proprietor's problem.

Most sole proprietors will register a trade name or "Doing Business As". This allows the proprietor to do business with a name other than his or her legal name and also allows the proprietor to open a business account with banking institutions.

The main advantages that differentiate the sole proprietorship from the other legal forms are as follow:
-Low start-up costs
-Greatest freedom from regulation
-Owner is in direct control of decision making
-Minimal working capital required
-Tax advantages to owner
-All profits to owner

And the disadvantages are as follow:
-Unlimited liability
-Lack of continuity in business organization in absence of owner
-Difficulty in raising capital
-No name protection


Indian Partnership Act 1932 defines Partnership as:
“The relation between persons who have agreed to share profits of a business carried on by all or any of them acting for all.” Then, a partnership is an agreement in which you and one or more people combine resources in a business with a view to making a profit. It contains three basic elements: agreement, share of profit, business.

However, it is advisable to have a written partnership agreement that will spell out the specifics of the agreement. This should state (1) each partner's rights and responsibilities, (2) the amount of capital each partner is investing in the business, (3) the distribution of profits, (4) what happens if a partner joins or leaves the business, and (5) how the assets are to be divided if the business is discontinued. Things have a way of changing and people forgetting over time, so it is essential that there be a signed document that all abide by.

A partnership is a type of business entity in which partners (owners) share with each other the profits or losses of the business undertaking in which all have invested. Partnerships are often favored over corporations for taxation purposes, as the partnership structure does not generally incur a tax on profits before it is distributed to the partners (i.e. there is no dividend tax levied). However, depending on the partnership structure and the jurisdiction in which it operates, owners of a partnership may be exposed to greater personal liability than they would as shareholders of a corporation.

Advantages and disadvantages of Partnership:

There are a number of advantages and disadvantages that we should keep in mind when deciding whether to operate business as a Partnership. The advantages of Partnership are as follow:
-Ease of formation
-Low start-up costs
-Additional sources of investment capital
-Possible tax advantages
-Limited regulation
-Broader management base

And the disadvantages are as follow:
-Unlimited liability
-Divided authority
-Difficulty in raising additional capital
-Hard to find suitable partners
-Possible development of conflict between partners
-Partners can legally bind each other without prior approval
-Lack of continuity
-No name protection


Company is described as a body of persons associated for the purpose of business. It has some features, such as: Voluntarily Association, Separate Legal Entity, Limited Liability, Limitation of Activities, Transferability of Shares, Separate Management, Company is not a citizen, One Share One Vote.

In the legal field, a company is specifically a corporation (or less commonly, an association, partnership, or union) that carries on a commercial or industrial enterprise. Generally, a company may be a corporation, partnership, association, joint-stock company, trust, fund, or organized group of persons, whether incorporated or not.


A corporation differs from the other legal forms of business, it possess the same rights and responsibilities as a person. Unlike sole proprietorships or partnerships, it has an existence separate from its owners. It has all the legal rights of an individual in regards to conducting commercial activity: it can sue, be sued, own property, sell property, and sell the rights of ownership in the form of exchanging stock for money.

As a result, the corporation offers some unique advantages:
a. Limited liability: owners aren’t personally responsible for the debts of the business,
The ability to raise capital by selling shares of stock,
b. Easy transfer of ownership from one individual to another,
It has "unlimited life" and thus the potential to outlive its original owners

And the disadvantages are:
-Corporations utilize specialists.
-Corporations are taxed twice.
-Corporations must pay capital stock tax.
-Starting a corporation is expensive.
-Corporations are closely regulated by government agencies. []


Law Dictionary, by Mian Asad Hakim, Mansoor Book House, Lahore, 1999
Partnership Act 1932, Mansoor Book House, Lahore

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