BUSINESS

An economic activity involving

regular production and distribution of
goods and services with the objective
of earning profits
 CHARACTERISTICS OF BUSINESS
• Business is an economic activity (Business is an
economic activity in which entrepreneur combines
the factors of production to produce goods &
services for profit)
• Business involves production and distribution of
goods and services
• Involves series of transactions
• Aims at earning profits
• Involves risk
• Creation of utilities
 OBJECTIVES OF BUSINESS

• Economic objectives
• Social objectives
• Human objectives
• National objectives
 ECONOMIC OBJECTIVES

• Profit earning
• Creation of markets
• Technological improvements
• Best possible use of resources
 SOCIAL OBJECTIVES

• Production & supply of quality goods &

services
• Avoidance of anti-social practices
• Welfare of society
 HUMAN OBJECTIVES

• Economic well-being of employees

• Social and psychological satisfaction of
employees
• Development of human resource
 NATIONAL OBJECTIVES

• To find out better & cheap substitute for

imports
• To help the country to become self
sufficient
• Business units should aim at increasing
exports
 COMPONENTS OF BUSINESS

Business activities are usually divided into

two parts.

• Industry
• Commerce.
 INDUSTRY
The term ‘industry’ refers to that part of
business activity which is concerned with
the extraction, - production or fabrication of
products.
 COMMERCE
Commerce is concerned with the
buying and selling of goods. It
includes all those activities, which
are related to the transfer of goods
from the place of production to the
ultimate consumers
 COMMERCE

• Trade
• Auxiliaries to trade/aids to trade.
 TYPES OF TRADE
• Internal Trade
(Wholesale Trade /Retail Trade)

• External Trade
 AUXILIARIES TO TRADE /AIDS TO
TRADE
• TRANSPORT
• WAREHOUSING
• INSURANCE
• BANKING
 Business Environment
Business environment refers to the conditions prevailing in
a society in which a business is to be operated.

• Economic Environment
• Social and Cultural Environment
• Technological Environment
• Political Environment
• Legal Environment
 Economic Environment
• Government Fiscal and Monetary Policy

• Price Levels and Inflation

 Social and Cultural Environment
• Language
• Social Attitudes and Beliefs
Businesses have to take into account the attitudes,
desires, beliefs, tastes, problems and customs of the
consumers.
• Age-Wise Composition
Different age groups have different demands. Young
people are interested in automobiles, musical
instruments, sport equipments etc. Older people may
be interested in medical care and health, food etc
• Education Standard
An illiterate population can be easily
deceived. Gone are the days of the sellers
society. The society where consumers are
educated is the buyers society. People can
well judge between good and bad.
 Political Environment

• Political uncertainty can lead to fall in

investment by businesses and influence
decisions on expansion and business
ventures.
• war/terrorism---create uncertainty
• Change in government can influence future
business strategy
 Technological Environment
• Any business that wishes to survive in a
changing world must be aware of the
modern technological changes and also use
technology to develop and modernize its
products or services, to meet cost
competition and to improve marketing.
 Legal Environment
• Every business is encircled by the laws,
regulations, and court decisions of the land.
• Almost each and every decision made by a
businessman should be within the
permissible limits of laws and regulations of
the country.
• all decisions and steps should be within the
framework of the law of the land.
FORMS OF BUSINESS OWNERSHIP

• SOLE PROPRIETORSHIP
• PARTNERSHIP
• COMPANY
 SOLE PROPRIETORSHIP
• Is a form of business enterprise which is
established, financed, owned, managed &
controlled by an individual entrepreneur
who has complete freedom of operation,
who bears all the risks and entitled to all the
profits.
Characteristics of sole proprietorship
• Ownership
• Management and control
• Finance
• Risk
• Unlimited liability
• Legal status
• No legal formalities
• Ease of dissolution
 ADVANTAGES OF SOLE PROPRIETORSHIP

• Ease of formation
• Sole authority
• Sole claim on profit
• Flexible and inexpensive management
• Minimum legal restrictions
• Tax advantage
• Ease to dissolve
• Development of personal qualities
• Credit Worthiness
DISADVANTAGES OF SOLE PROPRIETORSHIP

• Unlimited Liability
• Difficulties of Expansion
• Lack of Continuity
• Technological Progress
• Limited Finances
PARTNERSHIP
Partnership is a relation between persons
who have agreed to share the profits of a
business carried on by all or any one of
them acting for all.
Persons who have entered into partnership
with one another are called partners and
collectively a firm and the name under
which their business on is called the firm
name.
 ELEMENTS OF PARTNERSHIP

• Association of at least two persons

• Contractual relation
• Earning of profit
• Mutual agency
 FEATURES OF PARTNERSHIP

Formation

• There must be at least 2 persons and

maximum 20 to form a partnership.
• In case of banking business the
memberships should not be more than 10
persons.
Financing

• The capital is made available to the firm by the

partners as per terms of the agreement.

• It is not necessary that all the partners should

contribute equally to the partnership.

• A person who has special skill or ability can be

admitted to the partnership without any capital
contribution.
Management

• In a partnership business, every partner has

a right to take part in its management.

• The important business decisions are taken

with the consent of all other partners.
Restriction on Transfer of Interest

• No partner can transfer his share to any

other person without the prior consent or
willingness of all other partners.
 Unlimited Liability of Partners

• The liability of the partners of a firm is

unlimited.

• If the business suffers losses and the assets

of the partnership are not sufficient to meet
its obligations, then the creditors may
choose to sue any one or all of the partners
to satisfy the debt.
Duration

The partnership can come to an end, if a

partners leaves, dies, declared bankrupt or
insane
Taxation
• If a firm is registered under the Income Tax
Act, the profit of the firm is first divided
among the partners and then assessed
separately.
• In case, it is not registered within the
meaning of Income Tax Act, the firm will
be assessed on total profit.
Implied Authority

• Each partner is an agent of the other

partners and at the same time of the firm.
This is an implied authority.

• The regular acts of business such as buying,

selling of goods, hiring of employees etc.
by a partner is considered the act of the firm
or the act of all the partners.
• Each partner thus is both an agent and a
principal.

• As agents he has the capacity to bind other

partners by his acts done.

• Each partner is principal in the sense that he

is bound by the acts of other partners.
 KINDS OF PARTNERS
• GENERAL PARTNERS

• SPECIAL PARTNERS

• OTHER PARTNERS
 GENERAL PARTNERS
ACTIVE PARTNERS
• Takes active part in the day to day management of
the business
• Also called working partner
• Rewarded as per agreement between the partners
• May work in different capacities such as manager,
organizer, adviser, controller
 SLEEPING PARTNER

• Contributes Capital, Shares Profits and

Losses of the Firm
• Takes No Part in the Day to Day
Management of the Firm
• A Sleeping Partner Is Liable for the
Liabilities of the Business Like Other
Partners
 SPECIAL PARTNERS

• Special partners are partners whose liability

is limited
• The special partners cannot take part in the
management of the business of the firm
 OTHER PARTNERS
• SECRET PARTNER
• NOMINAL PARTNER
• MINOR PARTNER
• PARTNERS IN PROFIT ONLY
• PARTNER BY ESTOPPEL
 SECRET PARTNER
• Who takes active part in the affairs of a
business
• But is not known to the public as a partner
is called secret partner”.
• Shares profits according to the agreement
signed.
• Unlimited liability
 NOMINAL PARTNER
• Nominal partner lends his name for the
goodwill and credit worthiness to the firm

• Neither contributes capital nor takes active

part in the management of business
 MINOR PARTNER

• Can be admitted to the benefits of a firm

with the consent of other members
• Liability remains limited to the extent of his
share in the capital.
• On attaining majority, he has to choose
whether he has to continue as a partner or
not.
 PARTNERS IN PROFIT ONLY

• If a partner is entitled to receive certain

share of profit and is not held liable for the
losses

• He is not allowed to take part in the

management of the business.
 PARTNER BY ESTOPPEL
• Styles the character of a partner in a
business before a third party (outsiders) by
words or in writing or by his act
• He is not entitled to any right like other
partners in the business.
 ADVANTAGES OF PARTNERSHIP
• Easy to form
• Favorable credit standing
• Large capital
• Greater management ability
• Advantages to secrecy
• Special protection to minor
• Tax advantage
• Ease of dissolution
 DISADVANTAGES OF PARTNERSHIP

• Unlimited liability of partners

• Limited life of firm
• Frozen investment
• Disputes among the partners
• Misuse of resources
• Implied authority
• Divided control
 PARTNERSHIP DEED
• Partnership agreement in writing is called
partnership deed

It is, therefore, advisable that the articles of

partnership should be drawn up through the
lawyer.

A partnership deed on stamp paper is considered to

be valid in the court against any dispute.
 Contents of Partnership Deed
• Name and location of business
• The nature of the business.
• The amount of capital to be contributed by each partner.
• Provisions of reinvestment in business.
• The duties, powers and obligations of all the partners.
• Length or life of business.
• The method of distribution of profit and sharing of the
losses.
• Method of admitting a new partner.
• Procedure for withdrawal of a partner.
• Method of valuation of goodwill on admission,
retirement or death of a partner.
• Method of revaluation of assets or liabilities on
admission, retirement or death of a partner.
• Arrangements to be followed in case a partner
becomes insolvent.
• The method of preparing accounts and
arrangement for audit.
• Arbitration in case of disputes among partners
• Operation of bank account.
 REGISTRATION OF A FIRM
Advantages of a Registered Firm

• The terms of agreement are made clear to each partner in writing which are mostly
drawn by an expert lawyer
• If an issue arises among the partners in the form of statement, it becomes a basic
legal document for decision.
• A registered partnership can file suits against the outsiders. If can also file suits
against the partner.
• A new or incoming partner get compete information of the registered firm from the
Registrar’s office. He can decide properly whether to join the firm as partner or not.
• If a firm is registered with income tax authority also, the profit of the firm is divided
among the partners. The tax is charged on the income of the partners individually.
In case of unregistered firm, it is the firm which pays the tax. The partners of the
registered firm, therefore, get the privilege of lower assessment.
 DISSOLUTION OF A PARTNERSHIP
FIRM
DISSOLUTION BY AGREEMENT
• All the partners give consent or
• As per the terms partnership agreement

DISSOLUTION BY NOTICE :
In case of partnership at will, the firm may
be dissolved if any one of the partner
gives a notice in writing to the other
partners.
• COMPULSORY DISSOLUTION

• CONTINGENCY DISSOLUTION

• DISSOLUTION BY COURT
A court may order a partnership firm to be
dissolved in the following cases:
• When a partner becomes of unsound mind
• When a partner becomes permanently incapable
of performing his/her duties as a partner
• When a partner transfers his/her interest in the
firm to a third party
• Breach of agreements
COMPANY FORM OF ORGANIZATION
 JOINT STOCK COMPANY
A voluntary organization which is an
artificial person created by law, having
limited liability of its members and a
perpetual succession with its capital divided
into transferable shares and which has
common seal
 CHARACTERISTICS
• Voluntary Association
• Artificial Person Created By Law
• Separate Legal Entity
• Limited Liability
• Ownership Is Separate From Management
• Perpetual Existence
• Common Seal
• Transferability Of Shares
• Double Taxation
 CLASSIFICATION OF COMPANIES

1) Chartered Company
2) Statutory Company
3) Registered Company
• Company Limited by Shares
(Private Limited Company & Public Company)
• Company Limited by Guarantee
• An Unlimited Company
• Association Not for Profit
• Holding Company & Subsidiary Company
 CHARTERED COMPANY
A company created by the grant of a Royal Charter
is called a chartered company

STATUTORY COMPANIES
The companies which are incorporated by a special
act of legislative or under an ordinance

REGISTERED COMPANY
A company which is registered under the
Companies Ordinance, 1984 is known as a
registered company.
 COMPANY LIMITED BY SHARES

• It is a company which keeps the liability of

its members limited up to the value of the
shares purchased by them
• Use the word “limited” at the end of their
names.
 Private limited company
• Is an association of at least 2 members but
the maximum number of them cannot
exceed 50.
• Restricts the right of its members to transfer
their shares in the company
• Prohibits any invitation to public to
subscribe to its shares or debentures.
 Public Company
• A public company must have at least 7
members to form it. There is no restriction
to the maximum number of members.
• The shares of public company are freely
sold and purchased in the stock market.
• Liability is limited to the value of shares
purchased by them.
 Company Limited by Guarantee
• A guarantee company does not usually have
shareholders, but instead have members
who act as guarantors.
• Non profit organization
• Company’s limited by guarantee use the words
“(Guarantee) limited”
• Liability of the members is limited
• Clubs, NGO’s, Charitable Institutions,
Trade & Research Associations
 An Unlimited Company

• Unlimited liability of the members

• Due to great risk, Unlimited Companies do
not exist in Pakistan
Association Not for Profit
• Is is a limited company
• Registered without the addition of the word
“limited” to its name
• It is formed for promoting commerce, art,
science, religion, & charity
 Holding Company

• Owns more than 50% of the share capital of

the other company
• It has a majority of the voting power
• Holds a sufficient amount of shares of that
company and has the power to appoint the
majority of directors
 Subsidiary Company
A company is said to be the subsidiary of the other
company when one of the following conditions are
fulfilled:
• Formation of board of directors is controlled by another
company
• The other company controls more than half of the
voting rights of the company
• The other company owns more than 50% share capital
of the company
 Advantages of Company of Organization
• Greater permanency
• Limited liability
• Easy to transfer ownership
• Attraction of huge capital
• Benefits of large scale production
• Greater management ability
• Recognized legal entity
 Demerits of Company of Organization

• Double taxation
• Lack of secrecy
• Stock exchange speculation
• Separation of ownership from control
• Complex legal formalities
 TYPES OF CORPORATE SECURITIES

Corporations create two kinds of securities:

1. Bonds ( representing debt)

2. Stocks (representing ownership or equity
interest in their operations)
 STOCKS
Two of the biggest stock types are:

• Preferred Stock
• Common Stock
 COMMON STOCK

• A security that represents ownership in a

corporation
• Holders of common stock exercise control
by electing a board of directors and voting
on corporate policy.
• Common stockholders are on the bottom of
the priority ladder for ownership structure.
• If the company goes bankrupt, the common
stockholders will not receive their money until
the creditors and preferred shareholders have
received their respective share of the leftover
assets.
• Common stock shares receive dividends, but
only if the corporation earns money, and
common share dividends are paid after any
obligations to debt are paid and preferred
stock shares have been paid their dividends.
 PREFERRED STOCK
• A class of ownership in a corporation that
has a higher claim on the assets and
earnings than common stock.
• Financial instrument that
has characteristics of both debt and equity
• Preferred stock generally has a dividend
that must be paid out before dividends to
common stockholders and the
shares usually do not have voting rights.
• Preferred shareholders have priority over
common stockholders on earnings and
assets in the event of liquidation and they
have a fixed dividend (paid before common
stockholders)
• The dividends of preferred stocks are
different from and generally greater than
those of common stock. The dividends of
are paid at regular intervals. This is not
necessarily the case for common stock, as
the company's board of directors will decide
whether or not to pay out a dividend.
 BONDS
A bond is a debt security. When you purchase a
bond, you are lending money to a government,
municipality, corporation, federal agency or other
entity known as an issuer.
In return for that money, the issuer provides you
with a bond in which it promises to pay a specified
rate of interest during the life of the bond and to
repay the face value of the bond (the principal) when
it matures, or comes due.
 Types Of Bonds
• Government Bonds
• Municipal Bonds
• Corporate Bonds
• Zero Coupon Bonds
• Foreign Currency Bonds
 Government Bonds
A government bond is a bond issued by a national
government denominated in the country's own
currency.

Common types of bonds include:

• Treasury bills, Treasury notes, and Treasury bonds

• Savings Bonds
 Corporate Bonds
A corporate bond is a bond issued by a
corporation. It is a bond that a corporation issues
to raise money in order to expand its business. It
includes:

• Mortgage bonds
• Debentures
• Commercial papers
• Convertible bonds
• Junk bonds
 DEBENTURES
A type of debt instrument that is not secured
by physical asset or collateral. Debentures
are backed only by the
general creditworthiness and reputation of
the issuer.
 Commercial Papers
• Commercial Paper is a money-market
security issued (sold) by large banks and
corporations
• Unsecured short term debt instruments
• Commercial paper is usually sold at a
discount
• Maturities on commercial paper rarely
range any longer than 270 days.
 Junk Bonds
• High yield bond
• Non-investment grade bond
• These bonds have a higher risk of default
• Pay higher yields than better quality bonds
in order to make them attractive to
investors.
DIVIDENDS
• Dividends are payments made by a corporation to
its shareholder members.
• It is the portion of corporate profits paid out to
stockholders.
• When a corporation earns a profit or surplus, that
money can be put to two uses: it can either be re-
invested in the business (called retained earnings) or
it can be paid to the shareholders as a dividend.
• Many corporations retain a portion of their earnings
and pay the remainder as a dividend.
• Dividends should be paid out of the profits of the
company and not out of the capital.
 Underwriting
The process by which investment bankers raise
investment capital from investors on behalf of
corporations and governments that are issuing securities
(both equity and debt).
OR
The procedure by which an underwriter (An intermediary
between an issuer of a security and the investing public,
usually an investment bank) brings a new security issue
to the investing public in an offering. In such a case, the
underwriter will guarantee a certain price for a certain
number of securities to the party that is issuing the
security (in exchange for a fee). Thus, the issuer is secure
that they will raise a certain minimum from the issue,
while the underwriter bears the risk of the issue.