Business Entity and Financial Environment

Depository institutions accept deposits from the public and lend or invest them. In Nepal the main types are:

1. Commercial banks. Largest group; accept deposits, give loans for trade, industry and consumption, and offer remittance, foreign exchange and card services (for example Nepal Bank Limited, Nabil Bank).
2. Development banks. Collect deposits and mainly give medium and long-term loans for development projects such as industry, agriculture and energy.
3. Finance companies. Smaller institutions that accept deposits and provide hire purchase, housing, leasing and other loans, mostly outside the largest cities.
4. Microfinance institutions. Accept small deposits and give small collateral-light loans to low-income households, especially women and rural people.
5. Savings and credit cooperatives. Member-owned organisations that collect savings from members and lend to them at reasonable interest.

All of these are licensed and supervised by Nepal Rastra Bank, except cooperatives, which are regulated under the cooperative laws and their regulator.

(b) The liability of the sole proprietor is unlimited, extending to his personal assets.

A sole proprietorship has no separate legal entity, so the proprietor is personally liable for all business debts without any limit — his private property can be used to pay them.

A joint stock company is a voluntary association of persons formed for profit, registered under the Companies Act, in which the capital is divided into transferable shares and the liability of members is limited. Its main features are explained below:

1. Separate legal entity A company is a legal person distinct from its members. It can own property in its own name, enter into contracts, sue and be sued. The members and the company are two separate entities in the eyes of law. For example, a shareholder can enter into a contract of employment with the company.

2. Limited liability The liability of shareholders is limited to the face value of the shares held by them (or to the amount guaranteed in case of a company limited by guarantee). Their personal property is not used to pay off the company's debts. This limits the risk of investors and encourages people to invest in companies.

3. Perpetual succession A company has a continuous existence independent of its members. Death, insolvency, insanity or retirement of members does not affect its existence. It continues to exist until it is wound up by law. This gives stability and security to the business.

4. Transferability of shares Shares of a public company are freely transferable. A shareholder can sell or transfer his shares to others without the consent of other members, subject only to the rules of the company and the securities law. This makes investment liquid and easy to convert into cash.

5. Separation of ownership and management The shareholders are the owners of the company, but they do not manage it directly. They elect a Board of Directors to manage the company. Thus ownership (shareholders) and management (directors) are separated, which allows professional and expert management of the company's affairs.

Other features (may be mentioned): artificial legal person, common seal, capacity to raise large capital, diffusion of ownership, and legal regulation under the Companies Act.

Financial Environment

Meaning

The financial environment refers to all the external and internal factors, institutions, systems and forces that influence the financial decisions, financial performance and financial stability of a business entity. It includes the financial system of the country — financial markets (money market and capital market), financial institutions (banks, insurance companies, finance companies), financial instruments (shares, debentures, bonds, loans), regulatory bodies (Nepal Rastra Bank, SEBON, Insurance Board) and the overall economic conditions such as interest rates, inflation, exchange rates and government fiscal policy. In short, it is the total setting within which a firm raises, manages and invests its funds.

Importance for a Business Entity

1. Source of funds: The financial environment provides access to both short-term and long-term funds through banks, financial institutions and capital markets. A favourable environment enables the firm to raise capital easily and at low cost.

2. Determines cost of capital: Interest rates, inflation and the availability of credit in the environment directly affect the cost of borrowing. A sound financial environment keeps the cost of capital low and improves profitability.

3. Investment decisions: The environment provides information about available investment opportunities, market conditions and expected returns, which helps the firm select profitable projects and allocate funds efficiently.

4. Risk management: A stable financial environment (stable interest rates, exchange rates and prices) reduces financial risk. It also offers instruments like insurance and hedging to protect the firm against various risks.

5. Financial planning and budgeting: Knowledge of the financial environment helps management forecast funds requirements, plan capital structure and prepare realistic budgets.

6. Regulatory compliance and protection: Regulatory bodies lay down rules for the protection of investors and the sound functioning of business. The firm must comply with these rules, which ensures transparency, credibility and public confidence.

7. Growth and competitiveness: A sound financial environment provides capital for expansion, modernization and diversification, enabling the firm to grow and compete effectively in the market.

8. Economic stability: A healthy financial environment maintains price stability, smooth flow of credit and confidence in the economy, which creates a favourable climate for the survival and growth of business.

Conclusion

Thus, the financial environment is the backbone of every business entity. It supplies funds, determines their cost, guides investment and risk decisions, and provides the regulatory framework within which a firm operates. A business can succeed only when it properly understands and adjusts to its financial environment.

Sole Proprietorship

A sole proprietorship is a business organization owned, financed, and managed by a single individual. The owner is the sole proprietor, who alone bears all risks and receives all profits. It is the oldest, simplest, and most common form of business organization, requiring no legal formalities for its formation.

Partnership

A partnership is a business organization in which two or more persons agree to carry on a business and share its profits and losses. It is formed under the Partnership Act, 2020 B.S. of Nepal, through an agreement called the partnership deed. The persons who own the business are called partners, and collectively they are known as a firm.

Joint Stock Company

A joint stock company is a voluntary association of persons formed for carrying on a business with a capital divided into transferable shares. It is an artificial legal person created by law, having a separate legal entity distinct from its members. It is registered under the Companies Act (Nepali Companies Act, 2063 B.S.) and may be a private or public limited company.

Comparison

Most Suitable Form for a Large-Scale Industry

The joint stock company is the most suitable form of business organization for a large-scale industry. The reasons are:

1. Large capital: A company can raise huge capital by issuing shares and debentures to a large number of investors, which a sole proprietor or a few partners cannot do.
2. Limited liability: The liability of shareholders is limited to the face value of their shares, which encourages people to invest in large amounts without risking their personal property.
3. Perpetual succession: The company has a separate legal entity and continues to exist irrespective of the death, insolvency, or withdrawal of its members, giving stability to large industries.
4. Professional management: A large-scale industry needs expert and specialized management, which a company can secure by appointing qualified directors, managers, and technicians.
5. Transferability of shares: Shares can be easily transferred, which attracts investors and provides liquidity to their investment.
6. Economies of scale: A company can operate on a large scale and enjoy economies of production, marketing, and finance, reducing the average cost of production.

Thus, for a large-scale industry requiring huge capital, limited liability, stable existence, and expert management, the joint stock company form is the most suitable.

Financial intermediary. A financial intermediary is an institution, such as a bank, insurance company or cooperative, that stands between savers and borrowers: it collects funds from those with surplus and lends or invests them for those who need money, earning a margin for its service.

Depository vs non-depository institutions

Financial institutions mobilise savings and supply funds to the economy. They are mainly of two types.

A. Depository institutions (accept deposits)

1. Commercial banks. Accept deposits, grant loans, and provide payment, foreign exchange and remittance services.
2. Development banks. Provide medium and long-term finance for industry, agriculture and infrastructure.
3. Finance companies. Offer deposits and loans such as hire purchase, leasing and housing finance.
4. Microfinance institutions. Provide small loans and savings services to low-income people.
5. Cooperatives. Member-owned institutions that collect savings from members and lend to them.

B. Non-depository institutions

1. Insurance companies. Provide protection against risks of life, property and business in return for premium.
2. Provident funds and pension funds, such as the Employees Provident Fund and Citizen Investment Trust. They collect contributions for old age and invest them.
3. Mutual funds. Pool investors' money and invest in a portfolio of securities.
4. Stock exchange and securities firms, such as NEPSE, brokers and merchant bankers. They provide a market and services for securities.

Regulators and central bank. Nepal Rastra Bank is the central bank which licenses and supervises banks, development banks, finance companies and microfinance institutions; Nepal Insurance Authority regulates insurers; and SEBON regulates the securities market.