Chapter no: 1

Introduction To Commerce And Business

Objective

After completing this chapter, you will be able to know the

following:

 Concept of Business, Commerce, Profession

 Trade and its types, Aids to Trade
 Industry and its types
 Scope/Importance/Functions of Commerce
 Distinguish between Commerce and Business
 Distinguish between Business, Trade and Profession
 Qualities of a Good Businessman
 Short Questions

Q1. Define Business, Commerce and Profession.

BUSINESS:

Literally the word "business" means busyness or the state being busy It can be defined:

"Business includes those legal all activities, which are related with earning profit."

OR

"Investment of money to make more money".

Other Definition:

"Business includes all those activities which are engaged in reduction and distribution of goods and
services for profit."

E.g: cement industry, departmental stores, textile mills, restaurants etc.

COMMERCE:

According to EVYLYN THOMAS:

"Commerce means distribution and exchange of goods and services."

OR

"Trade and aid to trade is called commerce

PROFESSION:

Profession refers to the activity which requires special knowledge and skills to be applied by an
individual in his work to earn a living.

OR

According to Oxford Dictionary:

"It is a paid occupation, especially one that requires advanced education and training"

The persons who are engaged in profession-ace called professionals. E.g: doctors, Engineers, Teachers,
Accountants.

Q2. a) Define Trade and its types.

b) Define Aids to Trade, List them.

Trade:

According to Concise Oxford Dictionary:

Trade is an activity of buying and selling of goods for money or other goods"
 OR

"Buying and selling (Exchange) of goods and services is called trade".

Types of Trades:

1. Foreign Trade:

Foreign trade is a trade or exchange of goods and services between two or more independent countries
for these mutual advantages. It has following types:

a) Import Trades
b) Export Trades

2. Home Trade:

In home trade, exchange of goods is conducted within the boundaries of particular country. It is also
called "Domestic, local or internal trade”. It has the following types:

a) Wholesale Trade

b) Retail Trade

Auxiliaries/Aids to Trade:

“The activities which facilitates the exchange of goods and services until they are reached to the final
consumer are called Aids to Trade”.

OR

"The elements which help in organizing commercial activities are called Auxiliaries to trade”

So, in organizing commercial activities following elements are involved:

 Transportation
 Banking/Finance
 Storing/Warehousing
 Insurance (Risk)
 Advertisement
 Grading and Standardization
 Packing

Q3. Define Industry. Discuss its different kinds

Industry:

"Industry is a systematic economic activity and a component of business which is connected with the
production of goods and services."

OR

"Industry is a commercial-undertaking where raw/material is converted into finished goods"

Types of Industry:

1. Heavy Industry:

They are the industries which produce heavy goods and machinery which in return develops light
products, e.g: Steel, Coal-mining etc. This industry produces industrial goods.

2.Light Industry:

These industries produce light goods which are mostly consumer goods. e.g Electronic, Glassware, Paper
Industries etc.

3. Extracting Industry

This industry includes drilling process through which different minerals are extracted. Taking things out
of the sea is also a part of extracting industry.

4. Analytical Industry:

Under this process, a product is broken down into parts. By the anatomy of oil, we produce diesel,
different qualities of petrol, kerosene etc.

5.Synthetic Industry:

In this type of industry, two or more elements are combined to produce a new product. e.g: Iron, Glass,
Yarn etc.

6. Fabricating Industry:

It is the industry where cutting, weaving, treating, pressing. and dyeing takes place. Steel and textile
industries are the example of fabricating industries.

Q4. Briefly describe the scope of commerce.

Scope of Commerce:

Scope of commerce can be studied under two heads:

1.Trade:

Exchange of goods and services is called Trade. It includes all the selling and buying activities either
within the country or across the boundaries of the countries. It has following types:

a) Home Trade

b) Foreign Trade

2.Auxiliaries to Trade:

a) Banking/Finance:

Businessmen need funds to carry on their business, Banks and other financial institutions provide
required credit and moreover safe and quick means for the remittances of money.

b) Transportation:
Transport refers to the conveyance of goods and passengers from one place to another. It facilitates
trade by transferring and distributing goods. It creates place utility.

c)Storing/Warehousing:

This function is performed by wholesalers. It is a valuable function to fill the time gap between
production and sale. They generally store goods in one season and continue their supply to retailers
throughout the year.

d)Advertisement:

Advertising informs the consumers about the availability of various products and services. It removes
the hindrance of knowledge.

e) Insurance (Risk);

Insurance removes the hindrance of risk. With the help of insurance, a businessman can save himself
from several types of risks.

f) Grading and Standardization:

Standards are used for industrial and man-made goods, and grades are used for classifying agricultural
products.

Q5: Distinguish between Commerce and Business.

COMMERCE BUSINESS
1- Commerce means distribution and 1. Business includes all those legal
exchange of goods and services. activities which are related with
earning of profit.

2- It is a branch of business. 2. It is a wider term and includes

commerce and trade.

3- its scope is narrower than the 3. It has a wider scope as it includes all
business. It includes trade and kinds of trade, auxiliaries to trade,
auxiliaries to trade. production, extraction and farming as
well.

4- It is connected with the exchange of 4. It is connected with the exchange and

goods. production.
Q6: What is meant by E-Business and E-Commerce?

E-Business:

E-Business allows a company to do its business after through internet and extranet and its use makes
easier placing of orders, sending reminders, making payments, complaints, and promotional activities. It
is used to create a link between management, employees, buyers and sellers, producers and consumers.

E-Commerce:

E-Commerce is related to buying and selling and related activities. It includes E-marketing, E-buying and
E-selling. It is doing business online, e.g: OLX, E-Bay,

E-Commerce is used by four groups as under.

1. Business to Business

2. Consumer to Business

3. Business to Consumer

4.Consumer to Consumer
 Long Questions

Q1. Describe the qualities of a good business man?

QUALITIES OF A GOOD BUSINESSMAN:

Due to scientific and technological advancement, it is necessary that a good businessman should possess
the basic skills and knowledge about his business.

1. MAN OF PRINCIPLES:

A good businessman must follow the basic standards and principles of morality and ethics in business
dealing. This strategy helps to expend the business.

2. FORESIGHT:

A good businessman should be careful about the future expectation and has the ability of foreseeing. If
he fails to anticipate demand for his goods, then he may suffer a loss.

3. HONESTY:

A good businessman should be honest and sincere in public dealings. Goodwill of the business depends
on his honesty. There should be no fraud or deceit in transacting business.

4. COURTEOUS:

A good businessman must have the ability of courtesy. It means that he must be polite with his
employees and customers in any personal or business dealing. In this way he can win their trust and
increase the business profitability.

5. LEADERSHIP:

A man who wants to get success in business must have the quality of leadership, the workers and sub-
ordinates work whole-heartedly if they have the favorable influence of the owner (businessman) in their
minds.

6. CONFIDENT:

A good business man must be confident. This personal quality puts the businessman a position where he
can work with great determination even in unfavorable circumstances.

7. HARD-WORKING

A good business man must be industrious and hard working. He should be well balanced and cool
minded and have the ability to work for long hours. A lazy businessman can be harmful for the business.

8. EXPERIENCED:

Experience in managing business affairs and dealing is necessary to run the business successfully. An
experienced businessman can earn more profit as compare to an inexperienced one.
9. DESIRE OF PROGRESS:

A good business man always desires to earn huge profit by expanding his business activities. This desire
of businessman puts the business on the path of progress and prosperity.

10. TECHNICAL SKILLS:

A good business man should have adequate technical skill required for the business He should have
concerned specialized knowledge so that he can run his business efficiently and make it profitable.

11. CO-ORDIΝΑΤΙΟΝ:

Coordination is necessary for business. A businessman should be able to co-ordinate the various
sections of business with the help of employees to make the activities as connected whole for the
benefits of business.

12. SOCIAL RESPONSIBILITY:

A good business man tries to provide quality products at low prices to his customers. Because he thinks
that it is his social responsibility to earn profit with reasonable margin.
 Chapter no: 2
ESSENTIALS OF ESTABLISHING A BUSINESS HOUSE

Objective

After completing this chapter, you will be able to know the

following:

 The fundamental considerations required to form a business

Q1. What challenges you have to face, when you start a business? OR

What are the fundamental considerations in starting a new business?

OR Describe the essentials of establishing a business house (Business Problems)?

Starting a New Business

While planning and constructing an idea of-a-new-business, following factors should he kept in
mind. The successful running and establishment of business entirely depends on them.

"with a view to do business”

Most commonly faced problems under. essentials of establishing a business house are as under:

1.Nature of Business:

Before starting a new business, its nature is always decided because a business may be engaged in
trading, manufacturing or rendering services.

2.Government Restrictions:

It must be taken into consideration before the establishment of business that the government
imposes no restriction on the type of business. If license is necessary for starting the business, the
businessman must first get the required license.

3.Size of Business:

It is important to decide the volume, scale or size of the business before its establishment. A
business may be of small, medium or large scale, however, following factors help in this connection:

 Amount of capital
 Quality of production
 Demand for the goods
 Market conditions

4. Organizational Structure

The form of business organization may be sole proprietorship, Partnership, or joint stock company.
A suitable organizational structure must be chosen before starting the business.

“with a view to run business":

5.Management

It must be decided before the start of business that how the affairs or working of business shall be
managed. The policy of hiring employees and distributing work should be framed. Moreover, it is
also decided that either owners will take part in management or not.
6.Availability of Raw Material:

Availability of standard and cheap raw material is essential to produce the goods of better quality at
lower cost. Sometimes, raw-material has to be imported for this purpose. Hence its proper planning
should be made accordingly.

7.Availability of Capital:

In present modern scientific era, success and prosperity of business depends on availability of
finances. Every business transaction or activity depends on it. E.g. purchase of land, building,
machinery, raw material and payment of wages etc. No business can be started or run without
adequate finances.

8. Power Resources:

Power resources like water, coal, gas and electricity must be easily available according to the needs
and nature of business.

9. Means of Transportations

Fast and cheap means of transportation play vital role in making the raw materials available and to
send the goods to the markets. Means of Transportation help increase the profitability and
prosperity of business.

10.Selection of Distributor:

The trader has to select distributors before the start of business for the distribution of produced
goods. The goods can be easily transferred to Consumers through middleman.

“With a view to do result”

11.Chances of Loss:

In business, there is always an element of uncertainty or risk. Though, it is inventible for business yet
factors involving chances of loss should be kept in mind to avoid the chances of loss in future.

12.Chances of Expansion:

All the aspects of business growth and expansion must be taken into consideration before the
establishment of business. So all these factors should be paid proper attention.
 Chapter no: 3
SOLE PROPRIETORSHIP

Objective

After completing this chapter, you will be able to know the

following:

 CONCEPT OF SOLE PROPRIETORSHIP BUSINESS

 POPULARITY OF SOLE PROPRIETORSHIP IN PAKISTAN

 ADVANTAGES AND DISADVANTAGES OF SOLEPROPRIETORSHIP

 SHORT QUESTIONS
Q1: Why sole proprietorship is popular in Pakistan?
POPULARITY OF SOLEPROPRIETORSHIP IN PAKISTAN:
A majority of population in Pakistan is Muslims and in their opinion “service is slavery”. On the other
hand, they consider business a SUNNAH. Since they have normally limited amount of capital therefore
they establish small shops for selling goods and making profit. In this way the sole proprietorship
business gain ground and become popular in Pakistan. Also, it is human nature that everybody wants to
be free and independent in performing all activities particularly in business. A sole-proprietor enjoys
freedom of action and decision in all his business matters.
Other Reasons:
Further, there are some other reasons due to which sole proprietorship is the most common form of
business organization in Pakistan which are follows:
1. Easy Formation
2. Minimum Legal Constraints
3. Secrecy
4. Quick Decisions
5. Personal Interest
6. Flexibility
7. Inexpensive Management
8. Ease in Dissolution
Q2: Differences between Sale proprietorship and Partnership?
Sole proprietorship Partnership
1. There is one owner. There must be more than one Owners and
maximum 20 for general partnership and 10 for
banking partnership.

2. No contract is needed because of single Contract document is essentially prepared

owner. because of involvement of a number of persons.
3. The owner being single, there arise no There are always chances of disputes due to
disputes or differences. difference of opinions between partners.

4. No kinds of owner are there Various kinds of owners like nominal partner,
sleeping partner etc.
5. There is no government Act of registration of Act of 1932 is in force for the registration of
sole proprietorship. partnership.
6. Auditing of accounts is not considered Auditing of accounts is considered as essential for
essential because of direct supervision of the satisfaction of various partners and is also
owner in recording of accounting transactions required by the registrar government of Pakistan.
 in the books of accounts of sole
proprietorship.

7. Low amount of income tax is to be paid to the Large amount of income tax is to be paid to the
government because of low amount of government because of large amount of earnings
earning.
8. Decisions are quickly taken. Decisions are delayed due to consultation of
partners.
9. The periodic net income is that of the owner The periodic net income is to be distributed
alone. among the partners according to the agreed
ratio.

DETAIL QUESTIONS
Q1. Define Sole proprietorship? Describe the advantages and disadvantages of sole proprietorship?
Sole Proprietorship:
"It is the simplest form of business which is owned by a single owner”.
OR
"Sole proprietorship is a type of business organization which one person owns and operates a business”
OR
"Sole proprietorship is a business operated by one owner or a person to earn profit"
Advantages of Sole Proprietorship:
1. Ease of Formation.
It is quite easy to form a sole-proprietorship because neither requires any legal permission from the
government nor any excessive resources.
2.Free from Legal Restrictions:
Sole proprietorship is exempted from many rules and regulation, that are otherwise applied to the
partnership and the Company.
3.Personal Interest:
In sole proprietorship, the owner takes his personal interest and puts in maximum efforts and energy for
the growth of his business
4.Maintenance of Secrecy:
In sole proprietorship, the owner is not required to disclose any financial information to anyone except
him, so complete secrecy is maintained throughout the life of the business.
5.Quick Decisions:
In case of situations where quick decisions are required, the owner of sole proprietorship has the ability
to make quick decisions.
6.Flexibility:
Flexibility of sole proprietorship allows it to change according to the trends in the external environment,
in order to maintain its distinct advantage.
7. Direct Motivations:
Since a single owner enjoys the entire profit or bears entire losses so, there is a direct motivation for him
to work even harder and to earn more income and avoid losses.
8.Direct Relationship with Customers:
Because of limited scope, personal relations between owner and the customers are developed in sole
proprietorship business.
9.Harmonious Relation with Employees:
In sole proprietorship, the owner heads all the departments of the Business, so maintaining good
relations with the employees is necessary for the business success.
10.Inexpensive Management:
In sole proprietorship, the owner manages all the business activities, so there is no need for hiring
managers which saves a certain amount.
11. Development of Personal Qualities:
Since the owner heads all the operations, there is a chance of developing his personal qualities of
leadership, management and other skills as the business progress.
12.Tax Savings:
Sole proprietorship business enjoys the benefit of tax saving because sole proprietorship has to give
income tax only once and in the case of company, there is double taxation.
13.Ease of Dissolutions:
It is quite easy to dissolve sole proprietorship. No time at no cost is required to bring it to an end.
Disadvantages of sole proprietorship:
1. Burden of Unlimited Liability:
The major disadvantage of a sole proprietorship business is unlimited liability of the owner. If the assets
of the business become insufficient to discharge its liabilities, then the personal property of the owner
will be used to fulfill the deficiency in meeting his business obligations.
2.Limited Capital:
The business usually does not grow to a high level because of limited amount of capital and non-
availability of highly qualified personnel.
3. Limited Managerial Ability:
Since this form of business organization cannot afford the costly services of highly Qualified personnel,
so its management remains in the hands non-qualified personnel.
4.Uncertain Duration:
The life of business depends on the efficiency or life of the single owner. So the whole life of owner will
be considered as the life of business.
5. Limited Area of Operation:
The operations of sole proprietorship business are geographically confined and also their customer base
is limited.
6. Absence of Specialization:
Sole proprietorship business organization cannot afford the costly services of qualified personnel, so the
management is not in the hands of specialized people.
7. Chances of Wrong Decision:
Sole Proprietorship business does not have specialized personnel so wrong decisions may be taken by
the owner as he has limited skills.
8. Loss of absence:
Since the firm is entirely dependent upon the supervision of the owner, there is a strong possibility of
suffering a loss in his absence.
9. Entire Burden of loss:
In sole proprietorship, the sole owner bears the entire burden of business losses alone because he
himself performs almost all the business tasks and has unlimited liability.
 Chapter no: 4
PARTNERSHIP

Objective

After completing this chapter, you will be able to know the

following:

 CONCEPT OF SOLE PARTNERSHIP

 ADVANTAGES AND DISADVANTAGES OF PARTNERSHIP
 KINDS OF PARTNERS
 KINDS OF PARTNERSHIP
 PARTNERSHIP DEED AND ITS CONTENTS
 RIGHTS AND DUTIES OF PARTNERS
 DISTINGUISH BETWEEN SOLE
 PROPREITORSHIP AND PARTNERSHIP
 DISSOLUTION OF PARTNERHIP
 DISSOLUTION OF FIRM
Q1: What are the different kinds of partners?
KINDS OF PARTNERS:
1. Active Partner:
The partners who take active part in the business are called Active Partners. They invest capital and
share in profit or loss. They have participation in decision making and have unlimited liability for the
debts of the firm.
2. Sleeping/Silent / Dormant Partners:
The partners who invests capital but do not take active part in management. They have all the
liabilities and rights which an active partner has. They also share profit or loss.
3. Secret Partners:
The partner who is unknown to the public is called Secret Partner. He invests capital in the business
and enjoys profit and shares losses. He may also take part in decision making.
4. Nominal Partners/Quasi Partners:
This partner has no Investment in business. He does not share profit or loss and is not responsible
for the debts of the business. The firm uses his name and he takes money for his goodwill and
responsibility for credit investment.
5. Minor Partners:
A Minor partner means a partner who has not attained the age of majority. A minor may become a
partner of the partnership business with the consent of all other partners to the benefit of
partnership business, He has limited liability to the extent of share in the capital of the firm. He is
not allowed to take part in the management but he can inspect the books of accounts.
6. Senior Partners:
The partner who has invested the capital and is playing an important role in the management
according to his ability and experience is called Senior Partner.
7. Junior Partners:
The partner who has invested small capital and has limited experience of business is called Junior
Partner.
Q2: What are the different kinds of partnership?
KINDS OF PARTNERSHIP:
1. Limited Partnerships:
Limited partnership is formed under Limited Partnership Act 1907, but such type of partnership
does not exist in Pakistan. In this partnership, at least one person's liability is limited and other
persons' liability is unlimited or at least there should be one member with unlimited liability. The
person with limited liability cannot Interfere in the management but can only give his suggestion.
2. Registered Partnership:
In accordance with the Partnership Act, every partnership should be registered with the registrar of
firms. The registration form should be signed by all the partners. The registration form includes the
name of the firm, the names and addresses of partners, the place and address of the business.
3. Unregistered Partnerships
The firms which have not been registered with the registrar of the firms are known as unregistered
firms. The registration of the firm is not compulsory and hence enjoys a legal status.
4. General Partnership:
a) Partnership for Fixed Period:
When partnership is formed for a limited period of time, it is called partnership for a fixed period.
b) Partnership at Will:
When there is no provision regarding the duration of partnership, it is called Partnership at Will.
c) Particular Partnership
When the partnership is formed to conduct a particular business, it is called Particular Partnership.
Q3: What are the contents of a partnership deed?
PARTNERSHIP DEED/PARTNERSHIP AGREEMENT:
"Partnership deed means a signed agreement about the ownership or legal rights and duties among
the partners”
OR
"Partnership deed is a document which contains all necessary rules and regulations required to run
the partnership business"
OR
"The document, which contains all the provisions of administering and managing the partnership
business, is called partnership agreement"
Contents of Partnership Agreement:
The contents of partnership deed are as follows:
1. Name of the firm
2. Duration
3. Capital
4. Profit/ Loss sharing Ratio
5. Date of commencement of business
6. Names of partners
7. Rights and duties of partners
8. Ways of dissolution
9. Arbitration
10. Loan and interest
 11. Type of partnership
12. Determination of Goodwill
Q4. What are the rights of a partner?
RIGHTS OF A PARTNER:
1. Right to share profit:
Every partner has a right to share the profit according to the agreed ratio. At the time of agreement,
a certain profit sharing ratio is worked out. Share in profit may be based on the ratio of partners’
capital or any other basis.
2. Participation in Management:
Every partner has a right to take part in management irrespective their capital investment or profit
sharing ratio. This right is stated in the partnership Agreement.
3. Interest on Capital:
Interest on capital to partners is allowed only when agreement permits. In this case capital happens
to be basis for distribution of profit.
3. Inspection of Business Records:
Whether the partner is active or dormant, he has a right to access to the partnership accounting and
other records.
5. Emergency retirement:
Every partner has a right to retire from the partnership. In such a case, he has to inform other
partners as agreed upon.
6. Free from liability before joining:
A partner is not liable to any dues or commitments that were made before joining the partnership.
Such dues are commitments of old partners.
Z. Payment of capital and profit after separation:
Every partner has a right to take back his capital and profit when he leaves partnership for any of
the following reasons: retirement, death, bankruptcy, insanity etc.
8. No new partner to be admitted:
No partner has the night to admit a new one without the prior consent of the other partners. It can
be done only when the partnership deed makes a provision for this.
Q6: What are the duties of a partner?
DUTIES OF A PARTNER:
1. To act within the jurisdictions:
Every partner is bound to perform his duties within the specified limits of action. If any partner
violates this rule and because of which partnership suffers a loss, this loss should be compensated
by that partner alone.
2. Not to transfer ownership:
No partner has a right to transfer his share of capital to any other person without permission of the
other partners. A partner, however, may transfer his share of capital to any other person if it does
not affect the rights and interests of other partners.
3. To be honest and sincere:
Every partner is required to act fairly and honestly in the conduct of business. He should not do any
act which would bring a bad name to the firm.
4. To furnish true accounts:
The partners actively participating in the business are bound to maintain fair and true accounting
records. The business activities should be recorded truly and fairly in the interest of the firm.
5. To disclose all the information:
It is the duty of each partner to keep other partners informed of all partnership matters, no matter
how small or insignificant it may be. It is not desirable to use any information in personal interest by
any partner.
6. Use of firm's Asset:
It is the duty of every partner to use the assets only in the interest of the firm not for personal use
and if used then it must be disclosed to other partners.
7. Responsible for losses:
Every partner has to share profit or loss according to the agreed ratio. No partner can go against the
agreed ratio in case if the partnership suffers a loss.
Q.7: Write a note on dissolution of a partnership?
Dissolution of a partnership:
Partnership may be dissolved under the following ways
1. When the specified time is expired e.g. partnership was formed on 1 Feb, 2010 with the
condition to continue it up to Dec, 31 2011, so this partnership will be automatically dissolved
on the specified date, that is, Dec,31 2011 whether the partnership task is completed or not.
The partners may prepare a new partnership on Jan 1 2012 if they are interested in continuing
the partnership and completing the task.
2. When the specified task is completed, e.g. If a partnership was formed to construct an
overhead bridge at nursery Shahrah-e-Faisal, it will continue to function till the completion of
the bridge. No matter its completion takes months or years, the partnership will continue to
exist and operate until the completion of the task that is the construction of the bridge.
3. When any partner is expired. The remaining alive partners may form a new partnership
consisting of existing partners or including a new partner or excluding any of the existing
partners.
4. When any of the partner becomes insane or insolvent, the partnership is dissolved.
5. When a partnership is at will, so any of the partners may give notice in oral or in writing for
dissolution of partnership.
 6. When any of the creditors file a suit in a court of law against the partnership, the court may,
after hearing both the parties, order for dissolution of firm.
7. When any of the partner pray the court for dissolution of partnership.
Q.8: When a sole proprietorship is converted into partnership?
CONVERSION OF SOLE PROPRIETORSHIP INTO PARTNERSHIP
1- Expansion of Business
A huge amount of capital is required for expansion of business activities, so the sole proprietor
considers it more feasible to invite financial investors to become his partners in the business. The
sole proprietor no doubt considers that after conversion of his business into partnership, he will
have to share the business profit with other partners, also he will not be in a position to decide
business matters according to his will but simultaneously he considers earning of more amount of
profit due to expansion in business activities which will be shared by him as well as by other
partners.
Fame and good reputation
2- Availing goodwill:
Sometimes, a sole proprietor thinks to utilize goodwill, fame and good reputation of other persons
and therefore, he converts his sole proprietorship into partnership.
3- To avoid bankruptcy:
If a sole proprietor becomes bankrupt, he may convert business into partnership. If possible, in
order to pay off his financial debts.
4. Long illness and complicated disease:
If a sole proprietor suffers from long illness or complicated disease, he invites other person or
persons to continue business activities as partner, or partners because he cannot himself devote
time or to play an active role in the business.
 DETAIL QUESTION
Q1: Define partnership and what are the advantages and disadvantages of partnership business?
PARTNERSHIP-DEFINITION:
Prof. Hanty says
"Partnership is the relation existing between persons competent to make the contracts who agree
to carry lawful business on common with a view to earn profit”
According to partnership Act 1932:
“Partnership is the relationship between person who have agreed to share profits of the business
carried by all or any of them acting for all”
Partnership in U.S.A:
"An association of two or more persons who carry on its co-owners, a business for profits."
According to English Partnership Act 1890
It is the relation which subsists between persons carrying on a business in common with a view of
profitability."
Advantages of partnership:
1- Facility of formation:
Like a sole trading business, a partnership business can be formed. All that is required for its
formation is to form a firm. Thus initial expenses are not much considerable.
2- Union of business ability and Skill:
Partnership combines business ability and skill of many persons. Partners among themselves provide
various sorts of talents necessary for handling the problems of the firm. There is an old saying that
"two heads are always better than one”.
3- Collection of greater capital and credits:
This is an important relative advantage of partnership over sole trading concerns. The combined
resources or savings of many individuals would be certainly larger than the limited capital of a sole
trader. Because a firm requires more resources, more partners can be admitted.
4- Flexibility:
A partnership is formed by an agreement, so, the line of business can be changed easily in case of
need.
5- Protection from Unnecessary Risk:
The burden of unlimited liability checks the partners not to take undue risks. Thus, partnership may
be saved from dangerous speculations.
6-Incentive to work hard:
Like sole trading business ownership and risk go together in the partnership as well. The whole
profit or loss is borne by the partners. This act is and incentive to the partners to work hard to
increase profit and avoid losses. It is rightly said, "The magic of proprietorship turns sand into gold"
7-Spreading of Risk:
A partnership firm enjoys the advantages of distributed risks over the sole trading concerns. All
partners share the losses, if any, suffered by the firm, are shared by the partners and hence the
burden of loss on each partner is lower as compared to proprietorship.
8-Tax advantage:
A partnership firm is subjected to taxation as an individual assessor, if it is registered under the
Taxation Act. In the case of unregistered firms also, the partnership is not subjected to the double
taxation.
9- Personal supervision:
Partners look after the business personally besides the staff can be supervised more effectively by
the partners.
10-Increase in the spirit of Co-operation:
The success of the business depends upon mutual trust and confidence. This is the spirit of working
together. They know that a slight difference may cause the end of partnership.
Disadvantages of partnerships
1- Uncertain duration:
Partnership suffers from the uncertainty of the existence. It may come to an end on the death,
insolvency, insanity etc. of a partner.
2- Possibility of disagreement among partners:
It is generally observed that there is fiction and harmony among the partners after the firm has
worked for some time. Mutual conflicts and lack of team spirit among partners may lead to loss of
reputation and finally to the closure of business.
3- Lack of secrecy:
This happens because all partners know business secrets, while in case of sole proprietor, the
secrets remain confined to the single individual. As the proverb says that anything conveyed to more
than one person does not remain a secret.
4- Loss of business opportunity:
Delaying decision making due to difference among the partners may result into missing of the
business opportunities particularly those which have arisen suddenly.
5- Possibility of fraud:
Non-registration of the partnership firm increases the possibilities of fraud, being committed by the
partners committed against each other.
6- Risk and Implied authority:
Each partner binds other partners by his act done on behalf of the firm. Thus, the other partner may
have to pay for the dishonesty of a fellow partner.
7- Non-Transferability of Interest:
A partner cannot transfer his interest in the firm to outsider without the unanimous consent of all
other partners. Thus, this is a serious handicap for investment in partnership business.
8- Lack of public confidence:
The affairs of the firm are not legally controlled. Its accounts are needed not to be published. As a
result, public does not have much confidence in such firms.
9- Possibility of Misuse of resources:
This possibility arises due to the fact that resources are owned jointly. A partner may incur
unnecessary expenses, knowing that the payment will be made from the partnership funds.