An Economic Activity Involving Regular Production And

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BUSINESS

An economic activity involving

regular production and distribution ofgoods and services with the objective

of earning profits


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CHARACTERISTICS OF BUSINESS

Business is an economic activity (Business is aneconomic activity in which entrepreneur combines

the factors of production to produce goods &

services for profit)

Business involves production and distribution ofgoods and services

Involves series of transactions

Aims at earning profits Involves risk

Creation of utilities


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OBJECTIVES OF BUSINESS

Economic objectives

Social objectives

Human objectives

National objectives


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ECONOMIC OBJECTIVES

Profit earning

Creation of markets

Technological improvements

Best possible use of resources


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SOCIAL OBJECTIVES

Production & supply of quality goods &

services

Avoidance of anti-social practices

Welfare of society


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HUMAN OBJECTIVES

Economic well-being of employees

Social and psychological satisfaction of

employees

Development of human resource


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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


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COMPONENTS OF BUSINESS

Business activities are usually divided into

two parts.

Industry

Commerce.


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INDUSTRY

The term industry refers to that part of

business activity which is concerned with

the extraction, - production or fabrication ofproducts.


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COMMERCE

Commerce is concerned with thebuying and selling of goods. It

includes all those activities, whichare related to the transfer of goodsfrom the place of production to the

ultimate consumers


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COMMERCE

Trade

Auxiliaries to trade/aids to trade.


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TYPES OF TRADE

Internal Trade

(Wholesale Trade /Retail Trade)

External Trade


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AUXILIARIES TO TRADE /AIDS TO

TRADE TRANSPORT

WAREHOUSING

INSURANCE

BANKING


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Business Environment

Business environment refers to the conditions prevailing ina society in which a business is to be operated.

Economic Environment

Social and Cultural Environment Technological Environment

Political Environment

Legal Environment


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Economic Environment

Government Fiscal and Monetary Policy

Price Levels and Inflation


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Social and Cultural Environment

Language

Social Attitudes and Beliefs

Businesses have to take into account the attitudes,desires, beliefs, tastes, problems and customs of theconsumers.

Age-Wise Composition

Different age groups have different demands. Youngpeople are interested in automobiles, musicalinstruments, sport equipments etc. Older people may

be interested in medical care and health, food etc


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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.


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Political Environment

Political uncertainty can lead to fall in

investment by businesses and influence

decisions on expansion and businessventures.

war/terrorism---create uncertainty

Change in government can influence futurebusiness strategy


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Technological Environment

Any business that wishes to survive in a

changing world must be aware of the

modern technological changes and also usetechnology to develop and modernize its

products or services, to meet cost

competition and to improve marketing.


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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 thepermissible limits of laws and regulations ofthe country.

all decisions and steps should be within the

framework of the law of the land.


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FORMS OF BUSINESS OWNERSHIP

SOLE PROPRIETORSHIP

PARTNERSHIP

COMPANY


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SOLE PROPRIETORSHIP

Is a form of business enterprise which is

established, financed, owned, managed &

controlled by an individual entrepreneurwho has complete freedom of operation,

who bears all the risks and entitled to all the

profits.


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Characteristics of sole proprietorship

Ownership Management and control

Finance

Risk

Unlimited liability

Legal status

No legal formalities

Ease of dissolution


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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


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DISADVANTAGES OF SOLE PROPRIETORSHIP

Unlimited Liability Difficulties of Expansion

Lack of Continuity

Technological Progress Limited Finances


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PARTNERSHIP


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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.


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Persons who have entered into partnershipwith one another are called partners and

collectively a firm and the name under

which their business on is called the firmname.


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ELEMENTS OF PARTNERSHIP

Association of at least two persons

Contractual relation

Earning of profit Mutual agency

FEATURES OF PARTNERSHIP


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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.


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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 shouldcontribute equally to the partnership.

A person who has special skill or ability can beadmitted to the partnership without any capitalcontribution.


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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.


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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.


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Unlimited Liability of Partners The liability of the partners of a firm is

unlimited.

If the business suffers losses and the assetsof the partnership are not sufficient to meetits obligations, then the creditors maychoose to sue any one or all of the partnersto satisfy the debt.


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DurationThe partnership can come to an end, if a

partners leaves, dies, declared bankrupt or

insane


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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.


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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 firmor the act of all the partners.


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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.


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KINDS OF PARTNERS

GENERAL PARTNERS

SPECIAL PARTNERS

OTHER PARTNERS


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SLEEPING PARTNER Contributes Capital, Shares Profits and

Losses of the Firm

Takes No Part in the Day to DayManagement of the Firm

A Sleeping Partner Is Liable for the

Liabilities of the Business Like OtherPartners


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SPECIAL PARTNERS Special partners are partners whose liability

is limited

The special partners cannot take part in themanagement of the business of the firm


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OTHER PARTNERS

SECRET PARTNER

NOMINAL PARTNER

MINOR PARTNER

PARTNERS IN PROFIT ONLY

PARTNER BY ESTOPPEL


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SECRET PARTNER

Who takes active part in the affairs of a

business

But is not known to the public as a partneris called secret partner.

Shares profits according to the agreement

signed. Unlimited liability


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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


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MINOR PARTNER

Can be admitted to the benefits of a firm

with the consent of other members

Liability remains limited to the extent of hisshare in the capital.

On attaining majority, he has to choose

whether he has to continue as a partner ornot.


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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.


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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.


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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


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DISADVANTAGES OF PARTNERSHIP

Unlimited liability of partners

Limited life of firm

Frozen investment

Disputes among the partners

Misuse of resources

Implied authority Divided control


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PARTNERSHIP DEED

Partnership agreement in writing is calledpartnership 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 tobe valid in the court against any dispute.

Contents of Partnership Deed


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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.


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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 partnerbecomes insolvent.

The method of preparing accounts and

arrangement for audit.

Arbitration in case of disputes among partners

Operation of bank account.

G S A O O A


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REGISTRATION OF A FIRM

Advantages of a Registered Firm

The terms of agreement are made clear to each partner in writing which are mostlydrawn by an expert lawyer

If an issue arises among the partners in the form of statement, it becomes a basiclegal 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

Registrars 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 dividedamong 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 theregistered firm, therefore, get the privilege of lower assessment.


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COMPULSORY DISSOLUTION

CONTINGENCY DISSOLUTION

DISSOLUTION BY COURT

A court may order a partnership firm to bedissolved in the following cases:

When a partner becomes of unsound mind

When a partner becomes permanently incapableof performing his/her duties as a partner

When a partner transfers his/her interest in the

firm to a third party

Breach of agreements


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COMPANY FORM OF ORGANIZATION


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JOINT STOCK COMPANY

A voluntary organization which is an

artificial person created by law, having

limited liability of its members and aperpetual succession with its capital divided

into transferable shares and which has

common seal


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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


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CLASSIFICATION OF COMPANIES

1) Chartered Company2) 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


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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.


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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.


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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.


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Public Company

A public company must have at least 7members to form it. There is no restriction

to the maximum number of members.

The shares of public company are freelysold and purchased in the stock market.

Liability is limited to the value of shares

purchased by them.



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A guarantee company does not usually have

shareholders, but instead have members

who act as guarantors.

Non profit organization

Companys limited by guarantee use the words

(Guarantee) limited

Liability of the members is limited

Clubs, NGOs, Charitable Institutions,

Trade & Research Associations

An Unlimited Compan


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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


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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


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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


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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


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Demerits of Company of Organization

Double taxation Lack of secrecy

Stock exchange speculation

Separation of ownership from control

Complex legal formalities


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TYPES OF CORPORATE SECURITIES

Corporations create two kinds of securities:

1. Bonds ( representing debt)

2. Stocks (representing ownership or equity

interest in their operations)


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STOCKS

Two of the biggest stock types are:

Preferred Stock

Common Stock


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COMMON STOCK

A security that represents ownership in acorporation

Holders of common stock exercise control

by electing a board of directors and votingon corporate policy.

Common stockholders are on the bottom of

the priority ladder for ownership structure.


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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 preferredstock shares have been paid their dividends.


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PREFERRED STOCK

A class of ownership in a corporation thathas a higher claim on the assets andearnings than common stock.

Financial instrument thathas characteristics of both debt and equity

Preferred stock generally has a dividendthat must be paid out before dividends to

common stockholders and theshares usually do not have voting rights.


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Preferred shareholders have priority overcommon stockholders on earnings and

assets in the event of liquidation and theyhave a fixed dividend (paid before commonstockholders)

The dividends of preferred stocks aredifferent from and generally greater thanthose of common stock. The dividends ofare paid at regular intervals. This is not

necessarily the case for common stock, asthe company's board of directors will decidewhether or not to pay out a dividend.


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BONDS

A bond is a debt security. When you purchase abond, you are lending money to a government,municipality, corporation, federal agency or otherentity known as an issuer.

In return for that money, the issuer provides youwith a bond in which it promises to pay a specifiedrate of interest during the life of the bond and torepay the face value of the bond (the principal) when

it matures, or comes due.


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Types Of Bonds

Government Bonds

Municipal Bonds

Corporate Bonds

Zero Coupon Bonds

Foreign Currency Bonds


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Government Bonds

A government bond is a bond issued by a nationalgovernment denominated in the country's own

currency.

Common types of bonds include:

Treasury bills, Treasury notes, and Treasury bonds

Savings Bonds


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Corporate Bonds

A corporate bond is a bond issued by acorporation. It is a bond that a corporation issuesto raise money in order to expand its business. Itincludes:

Mortgage bonds

Debentures

Commercial papers Convertible bonds

Junk bonds


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DEBENTURES

A type of debt instrument that is not secured

by physical asset or collateral. Debentures

are backed only by thegeneral creditworthiness and reputation of

the issuer.


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Commercial Papers

Commercial Paper is a money-marketsecurity issued (sold) by large banks andcorporations

Unsecured short term debt instruments

Commercial paper is usually sold at adiscount

Maturities on commercial paper rarelyrange any longer than 270 days.


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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.


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DIVIDENDS


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Dividends are payments made by a corporation toits shareholder members.

It is the portion of corporate profits paid out tostockholders.

When a corporation earns a profit or surplus, thatmoney can be put to two uses: it can either be re-

invested in the business (called retained earnings) orit can be paid to the shareholders as a dividend.

Many corporations retain a portion of their earningsand pay the remainder as a dividend.

Dividends should be paid out of the profits of thecompany and not out of the capital.

Underwriting


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Underwriting

The process by which investment bankers raise

investment capital from investors on behalf ofcorporations and governments that are issuing securities(both equity and debt).

OR

The procedure by which an underwriter (An intermediarybetween an issuer of a security and the investing public,usually an investment bank) brings a new security issueto the investing public in an offering. In such a case, theunderwriter will guarantee a certain price for a certain

number of securities to the party that is issuing thesecurity (in exchange for a fee). Thus, the issuer is securethat they will raise a certain minimum from the issue,while the underwriter bears the risk of the issue.

An Economic Activity Involving Regular Production And

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