Forms of Business Organization Joint Stock Companies and

Forms of Business Organization Joint Stock Companies and Banks Dr. Attaullah Shah

Legal Forms of Business Sole Proprietorships Partnerships Corporations General Partnership Regular Corporation Limited Partnership Subchapter S Corporation (S-Corporation) Master Limited Partnership

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

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

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

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)

Partnership -- Advantages Greater Access to Capital Greater Access to Credit Retention of Profits More Management Expertise No Business Income Tax

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

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

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

Corporations Generally larger than other forms (Except for SCorporation) – 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”

Corporations -- Advantages Limited Liability Ease of Ownership Transfer Unlimited Life Greater Access to Capital Specialized Management Expertise

Corporations -- Disadvantages More difficult & costly to form – Requires a “Corporate Charter” Subject to greater governmental scrutiny Diluted earnings Double taxation

Corporations vs. Sole Proprietorships SP Corp Income $1, 000, 000 Expenses 500, 000 EBT $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

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

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

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

Organizational Chart Owners/ Stockholders/ Shareholders Chief Executive Officer (CEO) Board of Directors President Senior Vice President Finance Vice President Production Vice President Marketing Vice President Human Resources

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

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

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

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)

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

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

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

Franchising Disadvantages Mainly from Franchisee’s Viewpoint: – Franchisor’s contract can dictate every aspect of the business – Pay for security – Long hours – Competition from same company

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. ØJoint stock company was first started in ITALY in THIRTEENTH century. ØDuring 17 th and 18 th 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 money’s worth to a common stock.

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.

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.

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.

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.

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

ACCORDING TO LIABILITY= According to liability, the companies may be classified into three categories. 1. 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. 2. 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. 3. 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.

1. A. B. 2. 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. 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

MERITS OF JOINT STOCK COMPANY 1. 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. 2. LIMITED LIABILITY: -The liability of members in a company is limited to the nominal value the shares 3. 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. 4. 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. 5. 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.

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. 7. 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

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.

Types of Banks On the basis of ownership On the basis of domicile On the basis of Function

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

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.

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

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

Classification of Banks on the basis of Function 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 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

Classification of Banks on the basis 1. Central Bank: of Function 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

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

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

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 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

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 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

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.

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)