We shall recollect and look at certain basic things that you might have learnt earlier. This we shall do to be clear about the context in which we will be dealing with the subject ‘Corporate Finance’. Business is the activity with the object of earning an income through profit. As you know, business activities can be production and sale of goods & services or purchase & sale of goods & services. Now you can group these activities into: Commerce, Industry and Service.
• Commerce involves the activities in the movement of goods and services from the producer to the consumer. It includes procurement, grading, storing, transporting commodities through the wholesalers, retailers etc.
• Industrial activities involve manufacture or some definite treatment of materials from which marketable commodities can be manufactured.
• ‘Services’ involve intangibles. It can be professional services like in case of doctors, lawyers etc. or it can be other services like transport etc.
Forms of Business Organizations
Having understood the overall view of business activities, you need to relate these activities with how people organize these activities. It will lead to a better understanding if you relate the circumstances in your family business or with the other real life situations where you may be having at least minimum interactions.
A business unit may start as a sole proprietorship (one man ownership) and gradually expand into partnership firm and then into private limited company and into a big public limited
company and finally into a giant business house having a number of subsidiary companies. A particular form of business adopted by a business unit at a particular point of time depends upon the various factors like tax advantages, capital requirements, owners’ preferences etc.
You may try to visualize each organizational form of business & relate to the business unit known to you, as I explain them one by one. First the overall picture:
You might have heard people talking about business of a person or a person being a partner in a business. When a business owned by a person or co-owned by few persons we may call it as Proprietary concerns. Full ownership & control of the business under this category remains with one or few individuals. The business or firm’s name does not have any legal status or existence.
This form of business is fully owned by one person and this single person runs the show, may be with the help of family members or relatives or may be employing one or more persons to assist.
Any person who is competent to enter into contract can start a sole proprietary concern. As per law a person, who has attained the age of majority, of sound mind and who is not disqualified (for a period) by insolvency law or any other law, can enter into a contract.
The sole proprietor is entitled for all the profits and shall also bear all the risks and losses.
1. Easy formation with formal license only
2. Freedom available to the sole proprietor to take action enables quick decisions and prompt action. There is no need to consult anyone.
3. Personal contacts with customers & employees
4. Business secrecy can be maintained and hereditary business is enabled
5. There is direct relationship between the economical & efficient effort and rewards. Hence costs are also controlled effectively.
6. Since the business is conducted alone or with a tight family structure, there is no necessity for formal organizational structure and hence absolute flexibility is there.
1. The capital structure (capital and borrowings) of the business is limited to personal wealth and credit standing of the proprietor.
2. Limited managerial and technical skills
3. The owner is responsible for all the debts and the liability is unlimited dipping into personal assets like house property, vehicles, furniture, appliances etc.
4. Since the business is dependent upon the health & wealth and life of the owner, there is no continuity. This form of business is suitable where personal skills & contacts are important