Sole proprietorship

“It is the simplest form of business which is owned and controlled

by one man”.
(D.W.T Stafford)

Formation
There is no law or legislation for the formation of such business. It does not require any
kind of legal formality like registration etc. as well.

Legal Entity
In sole proprietorship, the business has no legal entity apart from its owner.

Legal restriction
Generally, there are no legal restrictions for a sole trader to set up a business.

Easily transferable
Such business can easily be transferred from one person to another or its nature can easily
be changed without any legal restriction or permission.

Easy dissolution
It can be dissolved at any time without any legal formalities.
 Partnership
“The relation between persons who have agreed to share the profits
of a business carried on by all or any one them acting for all”.
(Section 4 of Partnership Act 1932)

Characteristics of Partnership

1) Agreement

Agreement is necessary to form a partnership. It is not compulsory, but it is better to

have a written agreement to avoid future dispute.

2) Number of partners

In partnership, minimum number of partners is 2. There can be maximum 20

partners in an ordinary business and 10 in banking business.

3) Object

Only that business is considered as partnership, which is established to earn to earn

profit.

4) Unlimited liability

In partnership, the liability of each partner is in limited i.e. in case of loss, private
property of partners can also be used or sold to pay the business debts according to
the provisions of the partnership deed.

5) Transfer of rights

In partnership, no partner can transfer his share or rights to another person without
the consent of other partners. If any partner does so with the consent of other
partners then partnership agreement shall be revised.

6) Legal entity
If the partnership business is not registered, it has no legal entity. In this case, the
partnership business has no separate entity apart from its members.
7) Payment of tax

Every partner is bound to pay income tax to government individually on his share
of profit received from firm.

8) Partnership Act

In Pakistan, all partnership businesses are established and perform their functions
under Partnership Act 1932.

9) Share in capital

According to agreement every partner contributes his share of capital. Some

persons may also provide there skills and abilities to become a partner of the
business and earn profit.

10) Agent

In partnership, every partner acts as an agent as well as principal of other partners.

In the position of an agent, one can do contracts with other parties (firms) on behalf
of other partners. [Section 18, 19 & 20]

11) Registration

It is not necessary, but it is better to get a firm registered to avoid the problems that
a firm may face, if it is not registered.

12) Profit and loss distribution

Profit and losses are distributed among the partners as per mentioned in the
agreement.

13) Dissolution

Partnership is a temporary form of business. In the absence of partnership

agreement, the partnership is dissolved if any partner leaves, dies or declared
bankrupt etc. [Section 40, 41, 42, 43 & 44]
 Partnership Deed

“Partnership deed is a document which contains all the necessary

rules and regulations required to run the partnership business”.

Forms of Partnership Deed

Partnership agreement may be
• Oral
• Written
• Written & registered

Contents of Partnership Deed

i. Name xvi. Dealing with bank

ii. Nature of business xvii. Division of work
iii. Duration xviii. Deficiency of capital
iv. Capital xix. Amendment in agreement
v. Profit & loss sharing ratio xx. Drawings
vi. Date xxi. Minor partner
vii. Name of partners xxii. Revaluation
viii. Location xxiii. Type of partnership
ix. Salary xxiv. Death of partner
x. Rights and duties of partners xxv. Insolvency of partner
xi. Entry and exit of partners xxvi. Determination of goodwill
xii. Ways of dissolution xxvii. Audit and accounts
xiii. Arbitration xxviii. Settlement in case of
xiv. Witnesses dissolution
xv. Loan and interest
 Rules Applicable in the Absence of
Partnership Deed
According to clause 9 of Partnership Act 1932, in the absence of partnership agreement
following rules will be applied to settle the partnership affairs.

1. Management

Every partner will have the right to participate in the affairs of business.

2. Majority decision

Any dispute among the partners will be solved with the decision of majority. But
the nature of business can not be changed without the consent of all partners.

3. Inspection of books

Any partner can inspect the books of account at any time.

4. Administration affairs

If any partner participates in the affairs of business, he will not be given any
remuneration in this regard.

5. Profit & loss

Profit and loss will be divided among all the partners.

6. Interest in loan / additional capital

If any partner advances loan or invests additional capital to the firm then he will be
entitled to receive interest at the rate of 6% per annum.

7. New partner

New partner can be admitted with the consent of all the partners.

8. Death of a partner

The partnership comes to an end with the death of any partner.

9. Termination

No partner will be terminated without the consent of all partners.

10. Compensation of loss

If the business suffers a loss due to the negligence of any partner then he will be
liable to compensate the loss.

11. Personal use

No partner can use the property of business for his personal use.

12. Interest on capital

Interest on partners’ capital will be given only from out of profit.

13. Change in partnership

The type of partnership will be changed with the consent of all partners.
 Registration of Firm
Registration is not necessary for a partnership firm. However, to avail the incentives
provided by government to a registered firm, a firm may get registered.

Procedure

For the registration of firm, following procedure will have to be adopted.

1. Application for Registration

According to section 58 of Partnership Act 1932, the application of registration is to
be submitted to the registrar of that region. The partnership deed and challan form
should be submitted to registrar’s office along with the application or registration
form.
The detail of these documents is given below:

i. Registration Form

Its basic contents are as under:

a) Name of firm
b) Head office of the firm
c) Name of sub office
d) The names of partners
e) Permanent address of partners
f) Date of joining of each partner.
g) Nature of business.
h) The duration of the firm.

ii. Partnership Deed

Partnership deed is a document, which contains all necessary rules and regulations
required to run the partnership business.

iii. Challan Form

Challan form is that particular form which is used to deposit specified registration fee
fixed by the government. This form is also sent to the registrar’s office after
depositing the registration fee.
2. Verification
On the receipt of application form and prescribed registration fee, the registrar
examines and verifies the provided information. He tries to get proof of existence of
firm and believes that the firm will work in the best interest of the country.

3. Registration certificate
If the registrar is satisfied with the information provided then after recording the
name of the firm, he will issue the certificate of registration.
[Section 59 of the Act]
 Company
“It is an incorporated association which enjoys the advantage of
having a large number of members who contribute money to a
common pool for running large undertakings. The interest or share
of each member can be purchased, sold and transferred without the
consent of other members”.
(Companies Ordinance 1984)

Formation of Company
Following are the important stages or steps of the formation of a company:

1. Promotion stage
It includes following steps.

i. Idea

Before starting the business, promoters have to think about the nature of company’s
business.

ii. Preliminary investigation

After deciding the nature of business, promoters conduct preliminary investigation

and make out plans as regard to the availability of capital, means of transportation,
labor, electricity, gas and water etc.

iii. Assembling of resources

If the promoters find preliminary investigation satisfactory then they try to

accumulate different factors of production. For this, they also take help o several
specialist persons and enter into agreement with them.

iv. Estimation of preliminary expenses

The promoters also work out the preliminary expenses, which are necessary to start
and run the business.
 v. Financial sources

The promoters also decide the financial sources of the company. Public company can
raise its finance by issuing shares and debentures or by making agreement with
underwriters.

vi. Name of the company

Then the name of the company is decided by the promoters. For the name the
permission of the registrar should be received in advance.

vii. Sanction for capital issue

For the maximum issue of share capital or debentures, promoters have to take
permission from central government in advance.

viii. Preparation of essential documents

In addition to above discussed matter, the promoters also prepare following essential
documents for the formation of company.

2. Incorporation Stage
For registration or incorporation of a company, promoters have to perform
following formalities.

i. Filing of documents

Following documents have to be submitted by the promoters in the office of

registrar of the area in which the company is to be established.
a) Memorandum of association
b) Articles of association
c) List of directors
d) Written consent of directors
e) Declaration of qualifying shares
f) Prospectus
g) Statutory declaration

ii. Payment of registration fee

For the registration of the company, the registration fee is also paid to registrar,
which can be divided into following three parts.
 • Application and document filing fee
• Registration fee (varies with the amount of authorized capital of
the company)
• Stamp fee on memorandum and articles.

iii. Certificate of incorporation

If the registrar finds all the documents right and think that all the formalities have
been done then he issues the certificate of incorporation to promoters. After this the
private company can start its business.

3. Certificate of commencement
After getting certificate of incorporation, every public company has to obtain the
certificate of commencement to start the business activities, which require the
fulfillment of following conditions.

i. Arrangement of capital
ii. Issuance of prospectus
iii. Minimum subscription
iv. Allotment of shares