Forms of Business Organization Joint Stock Companies and Banks

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Forms of Business OrganizationJoint Stock
Companies and Banks

• Dr. Attaullah Shah

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(No Transcript)
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Sole Proprietorships

• Business owned (and usually operated) by one
  person
• Simplest form of business ownership
• Most popular form of business organization
  72.2 of all
• Most common in
• Retailing
• Service
• Agriculture

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Sole Proprietorship -- Advantages

• Ease of Startup
• Little legal documentation
• No co-owners to consult
• Least expensive to start
• Pride of Ownership
• Retention of profits
• Flexibility
• No Business Income Tax

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Sole Proprietorship -- Disadvantages

• Unlimited Liability
• Limited Life Business ends when owner leaves
  the business
• Limited Access to Start-up Capital
• Limited Access to Credit
• Limited Management Expertise
• Difficulty in Hiring Employees
• Proprietor not considered an employee

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Partnerships

• Two or more owners
• Least numerous form 7.7 of all businesses
• Partnership Agreement
• Specifies rights and obligations of partners
• If written, called the Articles of Partnership
  (Articles of Co-partnership)

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Partnership -- Advantages

• Greater Access to Capital
• Greater Access to Credit
• Retention of Profits
• More Management Expertise
• No Business Income Tax

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Partnership -- Disadvantages

• Shared Profits
• Unlimited Liability for General Partners
• Each partner has Agency power
• Limited Life
• Business ends when any partner withdraws
• Management Disagreements
• Frozen Investment

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Types of Partners

• General Partner
• Unlimited Liability
• Assumes Management Role
• Limited Partner
• Liability limited to Investment
• May not take active managerial role
• Every partnership must have at least one general
  partner

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Types of Partners

• General Partnership
• All partners are general partners
• Limited Partnership
• One or more limited partners
• Master Limited Partnership
• Owned managed like a corporation
• Taxed like a partnership
• Shares may be sold

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Corporations

• Generally larger than other forms (Except for
  S-Corporation)
• 20.1 of all U.S. Businesses
• Account for 87.1 of all U.S. Business Income
• Considered a separate legal entity
• Owners called Stockholders or Shareholders
• Ownership evidenced by Stock Certificate
• Governed by Board of Directors

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Corporations -- Advantages

• Limited Liability
• Ease of Ownership Transfer
• Unlimited Life
• Greater Access to Capital
• Specialized Management Expertise

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Corporations -- Disadvantages

• More difficult costly to form
• Requires a Corporate Charter
• Subject to greater governmental scrutiny
• Diluted earnings
• Double taxation

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Corporations vs. Sole Proprietorships

• SP Corp
• Income 1,000,000 1,000,000
• Expenses 500,000 500,000
• EBT 500,000 500,000 (Assume
  Business Tax Rate 50)
• Business Tax 0 250,000
• Net Profit 500,000 250,000
• (Assume a 30 Personal Tax Rate)
• Personal Tax 150,000 75,000
• to Owners 350,000 175,000

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Corporate Charter

• Legal Permission to Operate as a Corporation
• Issued by state
• May not conduct business as a corporation without
  a charter

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Contents of a Corporate Charter

• Company Name Address
• Names addresses of Incorporators
• Purpose of the Corporation
• Maximum amount of stock Classes of Stock to be
  issued
• Rights Privileges of stockholders
• Length of time the corporation is to exist

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Stockholder Rights

• Common Stock
• Votes in corporate matters
• One vote per share owned
• Preferred Stock
• No voting rights
• Dividend claims are paid 1st
• Dividend
• Distribution of earnings to the stockholders of a
  corporation

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Organizational Chart
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Types of Corporations

• Government-Owned Corporation
• Public Corporation
• Owned operated by government
• Post al Corporation, NASA, FIDIC,SNGPL
• Quasi-Government Corporation
• Quasi-Public Corporation
• Privately owned, government controlled monopoly
• Public utilities, Fannie Mae, Freddie Mac, Sallie
  Mae
• Private Corporation
• Owned by individuals or other companies

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Types of Corporations

• Not-For-Profit Corporation
• Organized to provide a social, educational,
  religious, or other service
• Habitat for Humanity, Red Cross
• For-Profit Corporation
• Closed Corporation
• Stock owned by relatively few people
• Stock not sold to general public
• Open Corporation
• Stock is bought and sold on security exchanges
• Can be purchased by any individual

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Types of Corporations

• S-Corporation (Subchapter-S Corporation)
• Corporate structure designed for small business
• Taxed as a partnership if there are 75 or fewer
  stockholders
• No non-resident alien stockholders
• Only one class of stock
• Limited-Liability Company (LLC)
• Combines the benefits of a corporation
  partnership
• Not limited to 75 stockholders

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Mergers Acquisitions

• Hostile takeover
• Types of mergers
• Horizontal Similar products / services
• Vertical Different but related firms
• Conglomerate Completely different industries
• Merger Trends
• Divestiture
• Leveraged Buyout (LBO)

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Franchising

• Franchise
• License to operate an individually owned business
  as though it were part of a chain of outlets or
  stores
• The business itself
• Franchising
• Actual granting of a franchise

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Franchising

• Franchisor
• Supplies a known advertised business name
• Supplies management skills
• Supplies training materials
• Supplies method of doing business
• Franchisee
• Supplies labor capital
• Operates the franchised business
• Agrees to abide by the franchise agreement

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Franchising Advantages

• Franchisor
• Fast, Selective Distribution
• Motivated Franchisee
• Franchisee
• Opportunity to start a business
• Business Experience of others
• Nationally recognized name
• National promotional campaigns

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Franchising Disadvantages

• Mainly from Franchisees Viewpoint
• Franchisors contract can dictate every aspect of
  the business
• Pay for security
• Long hours
• Competition from same company

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• Joint Stock Company
• The limitations of sole-proprietorship and
  partnership forms of ownership gave birth to
  joint stock company form of organisation.
• Two important limitations of earlier form of
  organisation were inadequacy of funds and
  unlimited liability.
• The earlier form of organisation could not meet
  the increasing demand for funds of organisation.
  The other limitation which hampered the growth of
  business was the unlimited liability of owners.
• Joint stock company was first started in ITALY in
  THIRTEENTH century.
• During 17th and 18th centuries, joint stock
  companies were formed in ENGLAND under ROYAL
  CHARTER or ACTS OF PARLIAMENT.
• DEFINITION-
• A company is a voluntary association of many
  individuals for profit having limited liability
  and contribute money or moneys worth to a common
  stock.

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• Characteristics of Joint Stock Co.
• ASSOCIATION OF PERSONS-
• A company is an association of persons joining
  hands with a common motive. A private limited
  company must have at least two persons and public
  limited company must have at least seven members
  to get it registered. Furthermore, the number of
  shareholders should not exceed 50 in private
  companies but there is no maximum limit in a
  public limited company.
• INDEPENDENT LEGAL ENTITY-
• The company is created under law. It has separate
  legal entity apart from its members. A company
  acts independently of its members. The company is
  not bound by the acts of its members. The company
  can sue and be sued in its own name.
• LIMITED LIABILITY- The liability of its
  shareholders is limited to the value of shares
  they have purchased. In case the company incurrs
  huge liabilities, the shareholders can only be
  called upon to pay the unpaid balance on their
  shares.

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• COMMON SEAL-
• A company being an artificial person cannot put
  its signatures. The law requires every company to
  have a seal and get its name engraved on it. The
  seal of the company is affixed on all important
  documents and contracts as a token of signature.
• TRANSFERABILITY OF SHARES-
• The shares of the company can be transferred by
  its members. Under ARTICLES OF ASSOCIATION, the
  company can put certain restrictions on the
  transfer of shares but it cannot altogether stop
  it.

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• SEPARATION OF OWNERSHIP AND MANAGEMENT-
• The shareholders of a company are widely
  scattered. A shareholder may like to invest money
  but may not be interested in its management. The
  companies are managed by the board of directors.
• PERPETUAL EXISTENCE- The company has a permanent
  existence. The shareholders may come or may go
  but the company will go on forever. The
  continuity of the company is not affected by
  death, lunacy or insolvency of its shareholders.
• CORPORATE FINANCE- A joint stock company,
  generally, raises large amounts of funds. The is
  divided into small shares of domination. A large
  number of persons purchase shares and contribute
  to the capital of the company.

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• CENTRALISED AND DELEGATED MANAGEMENT-
• A joint stock company is an autonomous and self
  governed body. The shareholders being large in
  number cannot look after the day-to-day
  activities of the company. They elect board of
  directors in general body meeting for managing
  the company. All policies of the company are
  decided by a majority vote. All decisions are
  taken in a democratic way.
• PUBLICATION OF ACCOUNTS-
• A joint stock company is required to file annual
  statements with the registrar of companies at the
  end of a financial year. They are available for
  inspection in the office.

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• Kinds of Companies ACCORDING TO INCORPORATION
• The companies may be divided into three
  categories according to incorporation.
• CHARTERED COMPANIES- These type of companies
  are incorporated under ROYAL CHARTER by the king
  or HEAD OF THE STATE. Under the charter, certain
  exclusive rights and privileges are granted to
  the company for undertaking certain commercial
  activities. If the company violates the rules,
  the head of the state can close such companies.
• STATUTORY COMPANIES- These companies are formed
  under special act of parliament or of a state
  legislature. These companies may or may not use
  the word limited. The EXAMPLES of such
  companies are State Bank of Pakistan THE
  INDUSTRIAL FINANCE CORPORATION OF Pakistan, STATE
  TRADING CORPORATION OF Pakistan, etc.
• REGISTERED COMPANIES- These are the companies
  formed and registered under the provisions of the
  companies act. Most of the companies in Pakistan
  are registered under the COMPANIES ACT 1956.
  these companies may be limited by shares, limited
  by guarantee or unlimited companies.

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• ACCORDING TO LIABILITY
• According to liability, the companies
  may be classified into three categories.
• COMPANIES LIMITED BY SHARES- The companies
  limited by shares have a share capital. The
  capital is divided into shares. The shareholders
  are not liable to pay anything more than the
  value of shares held by them, whatever be the
  liabilities of the company.
• COMPANIES LIMITED BY GUARANTEE- These companies
  are also formed under the companies act with a
  stipulation in the memorandum clause that members
  are guaranteed to pay a certain amount of money
  in case of its winding up. The amount which
  members undertake to pay is called the guarantee
  money.
• UNLIMITED COMPANIES- The companies registered
  without limiting the liability of members to the
  value of shares are called unlimited companies.
  All members are liable to meet the liabilities of
  the company to an unlimited extent.

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• ACCORDING TO TRANSFERABILITY OF SHARES-
• PRIVATE COMPANY- A private company can be formed
  with the association of at least two members but
  the maximum number of shareholders cannot exceed
  fifty. A private company restricts by its
  articles, a) the right of members to transfer its
  shares, b) limits the number of its members to
  fifty, and c) prohibits any invitation to the
  public to subscribe to is shares and debentures.
• EXEMPTIONS AND PRIVILEGES OF PRIVATE
  COMPANY
• A private company can be started with just two
  members whereas a public company requires at
  least seven members.A private company is not
  required to file a prospectus or a statement in
  lieu of prospectus with the registrar of
  companies.
• There is no restriction of minimum subscription
  as in the case of public company. It can directly
  allot the shares. It can work with just two
  directors. A private company is not required to
  hold a statutory meeting and filing a statutory
  report.
• 2. PUBLIC COMPANIES- Public company means
  that public at large is interested in those
  companies. A minimum of seven members are
  required to constitute a public company and to
  get it registered. There is no restriction on the
  maximum number of members. Public companies are
  required to issue a prospectus for inviting
  people to purchase their shares. A public company
  can start work only after getting CERTIFICATE OF
  COMMENCEMENT from the REGISTRAR OF COMPANIES.
  The shareholders are free to sell their shares in
  the market.

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MERITS OF JOINT STOCK COMPANY

• ACCUMULATION OF LARGE RESOURCES - a company can
  collect large sum of money from large number of
  share holder. need for more fund arise, the
  number of shareholder can be increased .
• LIMITED LIABILITY-The liability of members in a
  company is limited to the nominal value
  the shares
• CONTINUITY IN EXISTENCE-The member of a company
  may go on changing from time
• to time but that does not affect the
  continuity of a company. The death or insolvency
  of members does not in any way affect the
  corporate existence of company.
• EFFICIENT MANAGEMENT - In the company form of
  organization, ownership is separate
• from management its enables the company to
  point expert and qualified person for managing
  various business function.
• ECONOMIES OF LARGE SCALE PRODUCTION-The
  availability of large resources, the
• company can organize production on a big
  scale .The increase in scale and size of
  business bill result in economics in production,
  purchase , marketing and management , etc.

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• 6. TRANSFERABILITY OF SHARES- A share holder
  can dispose of his share at any time when the
  market condition are favorable or he is in need
  of money, the facility of transferring shares
  encourages many person to invest.
• DIFFUSED RISK - In company form of organization,
  the number of contributors is large so risk is
  shared by a large number of persons.
• 8. DEMOCRATIC SET UP - Every individual has
  an opportunity to become a shareholder.
  Secondly, the board of directors is elected by
  the members. So members have a say indicating
  the policies of the company. The Company form
  of organization is democratic from ownership
  and management side.
• 9. SOCIAL BENEFITS - The company form of
  organization mobilizes scattered saving of
  the community. These saving can be better used
  for productive purposes. Large scale
  production enjoy a number of economics enabling
  low cost of production

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DEMERITS OF JOINT STOCK COMPANY

• 1.DIFFICULTY IN FORMATION- There is no. of
  stages is involved in company promotion. It is
  both expensive and risky.
• 2.SEPARATION OF OWNERSHIP AND MANAGEMENT-.The
  ownership and management of a public company is
  in different hands . The management may indulge
  in speculative business activities.
• 3.EVILS OF FACTORY SYSTEM- The stock company
  are attribute the evils of factory system like
  insanitation ,air pollution ,congestion of
  cities.
• 4.SPECULATION IN SHARES- The joint stock company
  facilitate speculation in the shares at stock
  exchanges.
• 5.FRADULENT MANAGEMENT- The promoters and
  director may indulge in fraudulent practices due
  to not invested much in the company.
• 6.LACK OF SECRECY- Every thing is discussed in
  the meeting of board of directors
• 7.DELAY IN DECISION MAKING- There is no single
  individual can make a policy decision.

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Types of Banks

• On the basis of ownership
• On the basis of domicile
• On the basis of Function

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Types of Bank on the basis of Ownership

• The banks are classified on the basis of
  ownership into two categories.
• 1. Public sector banks
• 2. Private sector banks

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Types of Bank on the basis of Ownership

• 1. Public sector banks
• The banks owned and controlled by the Government
  are called Public sector bank. e.g national Bank
  of Pakistan
• 2. Private sector banks
• The banks owned by corporations are called
  private sector banks. e.g Habib Bank, Bank
  Alfalah etc.

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Classification of banks on the basis of domicile

• The banks are divided on the basis of domicile
  into two categories.
• 1. Domestic banks
• 2. Foreign banks

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Classification of banks on the basis of domicile

• 1. Domestic banks.
• The banks registered and incorporated within the
  country are called domestic banks. e.g. Bank of
  Punjab, MCB Bank etc
• 2. Foreign Banks
• The banks which have their origin and head
  offices in the foreign countries are called
  foreign banks. e.g. Citi bank, Standard Charted
  Bank etc

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Classification of Banks on the basis of Function

• Central Bank
• Commercial Banks
• Exchange Banks
• Saving Banks
• Agriculture Banks
• Industrial Banks
• Co-operative Bank
• Mortgage Bank
• Investment Bank
• Merchant Bank
• Consortium Bank
• Export-Import Bank
• School Bank
• Labour Bank

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Classification of Banks on the basis of Function

• 1. Central Bank
• Central Bank is the bank of banks. Every
  civilized country now has its own central bank.
• The primary function of the central bank is to
  regulate the flow of money and credit in order to
  promote efficiency, stability and growth in the
  country.
• In Pakistan State Bank of Pakistan is the
  central bank (in England it is Bank of England
  and in America it is The Federal Reserve
  System).
• Functions of central bank are
• Sole right of note issue
• Banker, agent and advisor to the government
• Banker to commercial banks
• Controller of credit
• Clearing agent
• Lender of last resort
• Custodian of foreign exchange reserves
• Development Role
• Other Functions

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Classification of Banks on the basis of Function

• 2.Commercial Banks
• Commercial banks are those banks which are
  engaged in performing the routine duties of
  banking business.
• They collect surplus money and make loans and
  advances in the form of overdrafts, cash credit
  and discounting bills of exchange.
• They also provide special financial services and
  agency services.
• Commercial banks in short are considered the life
  blood of the economic society.
• Functions of commercial banks are
• Basic Functions
• Secondary Functions

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Classification of Banks on the basis of Function

• 3. Exchange Banks
• Exchange banks are mainly deal with international
  trade. These banks takes the responsibility of
  settlement of foreign exchange and arrange the
  foreign businesses.
• In Pakistan commercial banks have been allowed to
  do the business of Exchange Bank.
• American Express bank, Rupali bank, bank of Oman
  are some examples of exchange banks.
• There functions are
• Currency exchange
• Providing information for international business
• Providing finance for international business
• Bank drafts and Bill of exchange
• Letter of credit

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Classification of Banks on the basis of Function

• 4. Saving Banks
• Saving banks are those banks which collect and
  keep the small savings of the public. They are
  called thrift promoting institutions.
• The Saving banks invest the funds in the safest
  government securities and offer reasonable rate
  of profit on saving accounts.
• Students, government employees and household
  women are usually opening such accounts.
• A prior notice to bank is necessary for
  withdrawal of huge amount (More than Afs 15000)
• National Saving bank in England and Post office
  saving bank in Pakistan are examples of saving
  banks.
• There Functions are
• Accepting deposits of people for saving
• Investing the money of people in safe means of
  investment

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Classification of Banks on the basis of Function

• 5. Agriculture Banks
• The bank is responsible for the development of
  agriculture sector of the country.
• Agriculture banks are set up to provide financial
  assistance to the agriculturists and agro-based
  industries.
• Agricultural Development bank of Pakistan,
  Agricultural Mortgage Corporation in England and
  Federal Land Bank of USA
• There functions are
• Providing long term advances for buying tractors
  etc
• Short term loan for purchasing seeds and
  fertilizers
• Introducing modern techniques in farming
• Making awareness in farmers by seminars
• Medium term loans for construction of tube wells

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Classification of Banks on the basis of Function

• 6. Industrial Development Banks
• The Industrial banks provide medium and long term
  credit to the industries. The growth of
  industries depends on these banks.
• There functions are
• Granting loans to set up new companies
• Long term loans for machinery and construction of
  building
• Loans for modernization and replacement of
  business units
• Short term loan for purchase of raw material and
  payment of daily expenses.

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Assignment

• Compare and contrast the various forms of
  business forms in terms of their advantages and
  disadvantages. ( Group-1)
• Explain the role of Joint Stock Companies in the
  capital formation. Describe five major joint
  stock companies of Pakistan. (Gp-2)
• Describe the role of State Bank in the monetary
  control of Pakistan economy.(Gp-3)