Forms of Business Ownership

Partnership Business

A partnership business is a form of business organisation in which two or more persons, called partners, agree to carry on a lawful business jointly with the aim of earning profit and share it among themselves in an agreed ratio. The relation between the partners is created by an agreement called a partnership deed. In Nepal, it is registered under the Partnership Act, 2020 (1964) and is governed by the provisions of that Act. The persons who have entered into partnership with one another are individually called partners and collectively a firm.

Features of a Partnership Firm

1. Formation by agreement: A partnership is not created by operation of law but by a voluntary agreement among the partners. The agreement may be oral or written; a written agreement is called a partnership deed. It contains the terms relating to capital, profit-sharing ratio, duties, and settlement of disputes. The firm must be registered with the concerned government office to enjoy legal rights.

2. Two or more persons: At least two persons are required to form a partnership. The maximum number of partners is fixed by law — generally 20 in the case of trading firms and 10 in the case of banking firms. The partners must be competent to enter into a contract.

3. Sharing of profit and loss: The main objective of a partnership is to earn profit. Profits and losses are shared among the partners in the ratio mentioned in the partnership deed. If no ratio is mentioned, they share equally. A partner cannot claim a fixed salary or interest on capital as a matter of right; such payments are made only as per the deed.

4. Unlimited liability: The liability of the partners is unlimited and joint and several. Creditors can recover the debts of the firm from the personal property of any partner. If one partner becomes insolvent, the remaining partners must bear the loss. This feature increases the risk of the partners but also strengthens the creditworthiness of the firm.

5. Mutual agency: Every partner is both an agent and a principal of the firm. As an agent, a partner can bind the firm and all other partners by his acts done in the ordinary course of business. As a principal, he is bound by the acts of other partners. This mutual agency is the true test of a partnership.

6. Utmost good faith: Partners must deal with one another honestly and truthfully. They must disclose all material facts relating to the business and must not earn secret profit. Any breach of this faith makes the partner liable to compensate the firm.

Conclusion

Thus, a partnership is a voluntary association of two or more persons who run a lawful business together, share its profit and loss, and are bound by mutual agency with unlimited liability.

(a) Public enterprise

A public enterprise is a business organization owned, financed and controlled wholly or partly by the government, which is established to provide goods and services for public welfare as well as to earn a reasonable return. Nepal Electricity Authority and Nepal Oil Corporation are examples.

(b) Types of public enterprise

1. Departmental undertaking: it is run as a department of a ministry, is financed from the government budget and is directly controlled by it. Its staff are civil servants. Examples are the postal service and the Department of Printing.
2. Public corporation (statutory corporation): it is created by a special Act of Parliament, with its own legal identity and independent management under a board, though it is owned by the government. Examples are Nepal Electricity Authority, Nepal Telecom (earlier), Nepal Rastra Bank and Nepal Airlines Corporation.
3. Government company: it is registered under the Companies Act, with the government holding at least 51 percent of the shares. It works like a company and can be run flexibly on commercial lines. Examples are Nepal Telecom and Hydropower companies where the state is the major shareholder.
4. Joint venture or mixed enterprise: ownership is shared between the government and private persons or foreign investors, so the combination of public purpose and private efficiency is sought.
5. Local-level (municipal) enterprise: it is run by a municipality or rural municipality, such as a local bus service or market, to meet community needs.

Sole trading concern

A sole trading concern is a business owned, financed and managed by one person who takes all the profit and bears all the losses and risks. The owner has unlimited liability, so personal property can be used to pay business debts. Examples are a small grocery shop, a tailor shop or a salon.

Process of registration

Registration is done at the concerned local level office or at the Department of Cottage and Small Industries / Office of Cottage and Small Industry, depending on the size and nature of the business. The usual steps are:

1. Selection of name: the owner chooses a name for the business that is not the same as, or confusingly similar to, one already registered.
2. Application: an application in the prescribed form is submitted to the registering office, stating the name, address, nature of business, capital and the owner's details.
3. Documents: copies of the owner's citizenship certificate, passport-size photographs, proof of the business location (rent agreement or land ownership paper) and, if required, the business plan are attached.
4. Fee payment: the prescribed registration fee is paid.
5. Verification and certificate: the office checks the documents and, if satisfied, enters the business in its register and issues a registration certificate.
6. PAN or VAT registration: the owner then registers at the Inland Revenue Office to obtain a Permanent Account Number (PAN) or VAT number for tax purposes.
7. Licence and renewal: any special licence needed for the particular business is obtained, and the registration is renewed every year as required.

A joint stock company is a voluntary association of persons who contribute capital by buying shares and which is a separate legal person with limited liability. In Nepal, companies are formed under the Companies Act, 2063 B.S. Its importance in Nepal is shown below:

1. Large-scale capital mobilization: by selling small-value shares to many investors, it collects the huge funds needed for banks, hydropower, cement, airlines and other big projects that individuals cannot finance.
2. Encouragement to savings and investment: people can invest small savings in shares, which turns idle money into productive use and gives them dividends.
3. Limited liability: shareholders risk only the unpaid value of their shares, so they are ready to invest and take business risks.
4. Employment generation: companies create many direct and indirect jobs in Nepal, where unemployment and foreign migration are major problems.
5. Industrial development: it supports the growth of manufacturing, hydropower, tourism and finance, which raises production and reduces dependence on imports.
6. Economic growth and government revenue: companies pay income tax, VAT, customs duty and royalty, which finance public development works.
7. Professional management: because ownership is separate from management, expert managers and directors can run the company efficiently.
8. Permanent existence: the company continues despite death or exit of shareholders, so long-term projects can be planned.
9. Development of capital market: the trading of shares in NEPSE (Nepal Stock Exchange) provides liquidity and deepens the capital market.
10. Wider ownership and wealth distribution: shares held by the public, including small investors, spread ownership and income.
11. Foreign investment and technology: joint ventures with foreign firms bring in capital, technology and skills.

Meaning of co-operative

A co-operative is a voluntary association of persons who unite to meet their common economic, social and cultural needs through a jointly owned and democratically controlled enterprise. Its main aim is service to members rather than profit. In Nepal it is formed and registered under the Cooperatives Act, 2074 B.S.

Features of a co-operative organization

1. Voluntary association: anyone who shares the aim can join or leave freely; no one is forced to become a member.
2. Open membership: membership is open to all irrespective of caste, sex, religion or politics, subject to the rules of the cooperative.
3. Minimum members: a primary cooperative needs at least 25 members to form (as required by the Act).
4. Separate legal entity: after registration it has its own name, can hold property, sue and be sued, and continues despite changes in membership.
5. Democratic control: each member has one vote regardless of the shares held ("one member, one vote"), and the general assembly elects the management committee.
6. Service motive: the main purpose is to serve members by providing credit, goods, marketing or other services at fair cost.
7. Limited liability: members are liable only to the extent of the share capital they have subscribed.
8. Mutual help: members cooperate and help one another to solve common problems.
9. Capital from members: capital is raised by selling shares to members, and returns on capital are limited.
10. Distribution of surplus: the surplus is shared among members as dividends or patronage refund, according to the use they make of the cooperative, after setting aside reserve funds.
11. Cash trading and education: many cooperatives follow cash dealing, and they give training and education to members and the community.
12. Government support and control: the cooperative is registered, audited and supervised by the government, which also gives some tax concessions.

Joint stock company

A joint stock company is a voluntary association of persons formed under law to carry on business, whose capital is divided into small units called shares. It is a separate legal person, and its owners (shareholders) have limited liability. In Nepal, it is registered under the Companies Act, 2063 B.S. at the Office of the Company Registrar, and it may be a private or a public company.

Characteristics of a joint stock company

1. Voluntary association: it is formed by persons who agree to join; they can leave by selling their shares.
2. Separate legal entity: in law it is distinct from its members; it can own property, enter into contracts, and sue or be sued in its own name.
3. Incorporation: it comes into existence only after it is registered and receives a certificate of incorporation. Registration is compulsory.
4. Limited liability: the liability of shareholders is limited to the unpaid amount on the shares they hold; their personal property is safe.
5. Perpetual succession: the company continues despite the death, insolvency or retirement of members, and ends only through legal winding up.
6. Share capital divided into shares: capital is raised by issuing small-value shares, so many people can invest.
7. Transferability of shares: shares of a public company can be freely sold and bought, including on the stock exchange. A private company restricts the transfer.
8. Number of members: a public company needs at least 7 members with no upper limit; a private company can have 1 to 101.
9. Common seal and name: the company has its own name and a common seal that is its official signature (the name ends with "Limited" or "Private Limited").
10. Separation of ownership and management: shareholders own the company, but the board of directors elected by them manages it, with professional managers.
11. Democratic control: shareholders vote at the annual general meeting, usually one share carrying one vote.
12. Public participation: a public company invites the public to buy shares and debentures, whereas a private company cannot.
13. Legal regulation and disclosure: the company must follow the Companies Act, hold meetings, keep books, get its accounts audited, and submit reports to the Registrar.
14. Large capital and large-scale operation: it can collect huge funds, so it is suited to big projects.
15. Dividend: profits are distributed to shareholders as dividend in proportion to shares, after deducting reserves and taxes.

Sole trading and partnership are both simple forms of business organization, but they differ in the following ways:

(c) Private limited company

Under the Nepal Company Act, 2063, a private limited company may have a minimum of 1 and a maximum of 101 shareholders (i.e., about 100 members), whereas a partnership firm is limited to 20 partners and a public limited company has no upper limit.

Sole proprietorship (also called sole trading concern or individual proprietorship) is the oldest and simplest form of business organization in which a single individual owns, manages, and controls the entire business. The owner invests all the capital, bears all the risks, and enjoys all the profits alone. The business and the owner are not separate legal entities — the owner is personally liable for all debts of the business. It is suitable for small-scale businesses such as retail shops, tailoring, and small trading concerns.

Merits of sole proprietorship:

1. Easy formation and closure: It is the easiest form of business to start. No legal formalities, registration, or lengthy procedures are required. The owner simply needs some capital and a business idea. Similarly, the business can be closed at any time at the owner's will, making it highly flexible.

2. Sole ownership of profit: The owner is the single recipient of all profits earned by the business. There is no sharing of profit with partners or shareholders, which provides strong motivation to work hard and expand the business.

3. Quick decision-making: Since the owner alone takes all decisions, there is no need to consult others. This ensures quick decisions and prompt action, giving the business a competitive advantage in responding to market changes.

4. Business secrecy: The owner can maintain complete secrecy about business operations, techniques, profits, and future plans. Since no accounts need to be published or shared with others, confidential information remains protected, which helps maintain a competitive edge.

Other merits include personal contact with customers, direct incentive, and independence in operation.

Joint Stock Company

A joint stock company is a voluntary association of persons formed for carrying on a business with the object of earning profit, whose capital is divided into transferable shares, and which has a separate legal entity distinct from its members. It is registered under the Companies Act and is managed by a board of directors elected by the shareholders. The liability of each shareholder is limited to the face value of the shares held by them. The company is an artificial legal person created by law, having a perpetual succession and a common seal.

Advantages of a Joint Stock Company

1. Limited liability: The liability of shareholders is limited to the unpaid amount on the shares they hold. Their personal property is not at risk for the debts of the company. This encourages people to invest without fear of losing everything.

2. Large capital: Because shares are of small denomination and are transferable, a large number of people can invest. A company can thus raise huge amounts of capital, which is not possible in sole trading or partnership firms.

3. Perpetual succession: A company is created by law and can be dissolved only by law. The death, insolvency or insanity of shareholders or directors does not affect its existence. It continues to exist as a separate legal entity.

4. Transferability of shares: Shares of a public company can be freely bought and sold in the stock market. This gives liquidity to the investment of shareholders and makes investment attractive.

5. Professional management: A company is managed by a board of directors and trained managers. Ownership and management are separated, so business affairs are handled by experts, leading to efficient and professional management.

6. Economies of large scale: Large-scale operations enable the company to enjoy economies in production, purchase, marketing and finance, which reduces cost per unit and increases profit.

Disadvantages of a Joint Stock Company

1. Difficulty in formation: The formation of a company is a long and complicated process. It requires registration, preparation of several documents such as the Memorandum of Association and Articles of Association, and compliance with many legal formalities. It is also costly.

2. Lack of secrecy: A company must maintain many records and publish its accounts and reports. Information about its operations, profits and policies is available to the public. Business secrets cannot therefore be kept confidential.

3. Separation of ownership and management: Shareholders are the owners but they do not take part in day-to-day management. The directors and managers may work for their own interest rather than the interest of the shareholders, which can harm the company.

4. Delay in decision-making: Decisions in a company require the approval of the board of directors or the general meeting. This makes the decision-making process slow, and the company may lose opportunities that need quick action.

5. Lack of personal interest: Since the company is an artificial person and managers are salaried employees, there is often a lack of personal interest and devotion to work, unlike in a sole proprietorship.

6. Heavy taxation and legal restrictions: Companies have to pay several taxes such as corporate tax and dividend tax, and they must follow many legal rules. Non-compliance attracts penalties. These restrictions increase the cost and reduce flexibility of operations.

Conclusion

The joint stock company form is suitable for large-scale business because it provides limited liability, large capital and continuity. However, it suffers from problems of complicated formation, lack of secrecy, slow decisions and separation of ownership from management. Hence, it should be adopted only when the scale of business justifies its cost and legal formalities.

A multinational company (MNC) is a large company that is owned and controlled from its home country but carries out production and business in two or more other countries through branches or subsidiaries, for example Unilever and Coca-Cola.

Two public companies registered in Nepal are Nepal Telecom and Nabil Bank Limited (other examples are Nepal Investment Mega Bank and Chilime Hydropower).

Two duties of a partner are (i) to act honestly and in good faith for the benefit of the firm and to give true accounts and information to the other partners, and (ii) to carry on the firm's business diligently, share losses as agreed and not make a secret profit.

Sole trading is a business owned, financed and managed by one person. People start it for the following reasons:

1. Easy to start: it needs few legal formalities, only registration with the local authority or the Department of Cottage and Small Industries, so a person can begin quickly and cheaply.
2. Small capital: it can be started with the owner's own savings and a small loan, which suits people with limited funds.
3. Independence: the owner is his or her own boss, makes decisions freely and is not answerable to partners or shareholders.
4. Full profit: all profit belongs to the owner, which is a strong incentive to work hard.
5. Quick decisions and flexibility: since only one person decides, changes in products, prices or location can be made fast to suit customers.
6. Personal contact and secrecy: a close relationship with customers builds loyalty, and business secrets and accounts need not be disclosed.
7. Suitable nature of business: services and small retail shops, such as tailoring, a grocery or a salon, are best done on a small scale with personal attention.
8. Self-employment: it provides a livelihood to people who cannot find a suitable job.

Choosing a form of business organization (sole trading, partnership, company or cooperative) is an important decision. The main factors are:

1. Nature and size of business: a small shop or personal service suits sole trading, while a large manufacturing or banking business needs a company.
2. Capital requirement: where a lot of funds are needed, a partnership or a company that can pool money from many people is preferred.
3. Liability: if the owner wants to protect personal property, a limited company is better because liability is limited, whereas sole traders and ordinary partners have unlimited liability.
4. Control and management: a person who wants full control chooses sole trading; shared control suits a partnership; a company separates ownership from management.
5. Legal formalities and cost: sole trading is easy and cheap to form, but a company needs registration, a memorandum and articles, and more expense.
6. Continuity: a company has perpetual succession, while a sole trader or partnership may end on the death or insolvency of the owner or partner.
7. Risk and secrecy: a person who wants to keep affairs private avoids a public company, which must publish its accounts.
8. Tax and government policy: differences in tax rates, laws and incentives for each form also influence the choice.

(a) Partnership firm

A partnership firm is a business owned by two or more persons who agree by contract to carry on a lawful business together and to share its profits and losses. Under the Partnership Act, 2020 B.S. of Nepal, the partners are jointly responsible for the firm's business.

(b) Registration of a partnership firm in Nepal

A partnership firm must be registered at the Office of the Company Registrar (or the designated registration office). The steps are:

1. Partnership deed: the partners prepare a written agreement stating the name, address, business, capital, profit-sharing ratio, duties and duration.
2. Name approval: the proposed firm name is submitted and checked so that it does not duplicate an existing name.
3. Application: an application in the prescribed form is filed with the partnership deed, citizenship certificate copies and passport-size photographs of the partners, and the address of the firm.
4. Fee payment: the prescribed registration fee is paid.
5. Certificate: after verification, the office enters the firm in the register and issues a registration certificate.
6. Further registration: the firm then obtains PAN or VAT registration and any licence needed from the local level.

Any later change in the partners or terms must be notified to the registrar.

Both are companies registered under the Companies Act, 2063 B.S., but they differ as follows:

A cooperative is a voluntary association of persons who join to meet their common economic, social and cultural needs through a democratically controlled enterprise, working on the principle of "one member, one vote". Nepal's Constitution recognizes the cooperative sector as one of the three pillars of the economy, with the public and private sectors. Unlike private firms, cooperatives put service and member welfare before profit, so their role in economic development is different in the following ways:

1. Mobilizing savings and capital: savings and credit cooperatives collect small savings from villagers and lend them to members at reasonable interest, which reduces dependence on moneylenders.
2. Employment and self-employment: they create jobs and help people, especially women and rural youth, to start small enterprises.
3. Support to agriculture: dairy, vegetable, tea and coffee cooperatives provide inputs, collect produce, and give farmers fair prices and a market, which increases income and production.
4. Reduction of middlemen and exploitation: consumer cooperatives sell goods at fair prices and farmers deal directly with the market, so profit goes to members rather than traders.
5. Equitable distribution of wealth: the surplus is shared among members as dividend or patronage refund, which narrows the gap between rich and poor.
6. Inclusion and empowerment: open membership gives women, Dalits and disadvantaged groups a role in decision making and builds leadership skills.
7. Rural and local development: they invest in local infrastructure, such as drinking water and small hydropower, and run health and education programmes.
8. Social values and cooperation: self-help, mutual aid and democratic practice strengthen community spirit and responsibility.

Conclusion

By combining social purpose with business operation, cooperatives spread the benefits of growth to ordinary people, particularly in rural Nepal, which private companies seeking profit often do not reach. Weak governance and misuse of savings in some cooperatives show that regulation and honest management are needed.

(a) Definition

A sole trading concern is a business owned, financed and managed by one person, who receives all the profit and bears all the risk and liability of the business.

(b) Characteristics

1. Single ownership: one person owns and controls the business, so decisions are quick.
2. Easy formation: it requires few legal formalities, only basic registration and a licence.
3. Limited capital: capital comes mainly from the owner's own savings and borrowing, so the scale of operation is usually small.
4. Unlimited liability: the owner is personally liable for all debts, and private property can be used to pay them.
5. Entire profit and loss: the owner enjoys all profit and also bears all loss.
6. Direct control and management: the owner manages the business personally, with direct contact with customers and workers.
7. No separate legal entity: the owner and the business are legally one, and the business ends with the owner's death, insolvency or retirement.
8. Secrecy: business matters are known only to the owner, and no public disclosure is required.
9. Flexibility: changes in products, prices and place of business can be made easily as conditions change.

Dissolution of a partnership firm means the end of the partnership relationship between all the partners. This is different from the retirement of one partner, where the firm may continue. Under the Partnership Act, 2020 B.S. of Nepal, a firm may be dissolved in the following ways:

1. Dissolution by agreement

All partners agree to end the partnership, or the firm is dissolved according to a term in the partnership deed.

2. Dissolution by expiry of term

Where the firm was formed for a fixed period, it dissolves when the period ends unless it is renewed.

3. Dissolution by completion of purpose

Where the firm was formed for a particular venture or project, it dissolves when the work is completed.

4. Dissolution by notice

In a partnership at will (no fixed period), any partner may dissolve the firm by giving written notice to the others of his or her intention.

5. Dissolution by insolvency of a partner

If a partner is declared insolvent, the firm may be dissolved unless the others agree to continue.

6. Dissolution by death or incapacity of a partner

Death or mental unsoundness of a partner can dissolve the firm, unless the agreement provides that the remaining partners continue.

7. Dissolution by court order

The court may order dissolution if a partner is guilty of misconduct, repeatedly breaches the agreement, or the business can only be run at a loss or has become unlawful.

8. Compulsory dissolution

The firm must be dissolved if the business becomes illegal or all partners except one become insolvent.

After dissolution the firm's assets are sold, outside liabilities are paid first, then partners' loans, then partners' capital, and any balance is shared among the partners in the profit-sharing ratio.

A multinational company (MNC) is a large company with headquarters in one country that operates through branches or subsidiaries in several other countries.

(a) Importance of MNCs

1. Capital inflow: they bring foreign investment, which fills the shortage of capital in developing countries like Nepal.
2. Technology transfer: they introduce modern technology, machinery and management methods, which local firms can learn from.
3. Employment creation: their branches provide direct jobs, and indirect ones through suppliers and service providers.
4. Foreign exchange and exports: they can raise exports and earn foreign currency.
5. Better goods and competition: consumers get quality goods and a wider choice, and local firms are pushed to improve.
6. Government revenue: they pay taxes, duty and fees, which increases government income.
7. Infrastructure and skills: they train workers and sometimes develop roads, power and communications.

(b) Demerits of MNCs

1. Threat to local industries: their large resources can drive small local firms out of the market.
2. Profit outflow: much of the profit is sent back to the home country instead of being reinvested.
3. Political interference: their economic power can be used to influence government policy.
4. Cultural impact: foreign brands and lifestyles may weaken local culture and habits.
5. Exploitation and environmental harm: they may use cheap labour and natural resources and cause pollution.
6. Unsuitable technology: capital-intensive technology may create few jobs and increase dependence on the foreign company.
7. Tax avoidance: transfer pricing can be used to reduce the tax paid in the host country.