Forms of business organizations

1. PREPARED & PRESENTED BY:
ALI RASHID CHEEMA
1
FORMS OF BUSINESS ORGANIZATIONS
 Sole Proprietorship
 Partnership
 Corporation

2. PREPARED & PRESENTED BY:
ALI RASHID CHEEMA
2
SOLE PROPRIETORSHIP & PARTNERSHIP
A business owned by one person is called a ‘Sole
Proprietorship’.
A business owned by two or more persons is called a
‘Partnership’.
Owners of a partnership are called co-owners or
partners.

3. PREPARED & PRESENTED BY:
ALI RASHID CHEEMA
3
SOLE PROPRIETORSHIP & PARTNERSHIP
Proprietorships and Partnerships are business
organizations that do not have legal identities
distinct from their owners.
For most proprietorships and partnerships, owners
also manage the business.
The amount of a proprietor’s personal wealth and his
or her ability to borrow limit the size of a
proprietorship.

4. PREPARED & PRESENTED BY:
ALI RASHID CHEEMA
4
SOLE PROPRIETORSHIP & PARTNERSHIP
The profit of most proprietorships and partnerships
is not taxed.
The profit is income for the owners who pay income
taxes on the profit as part of their personal income
taxes.

5. PREPARED & PRESENTED BY:
ALI RASHID CHEEMA
5
SOLE PROPRIETORSHIP & PARTNERSHIP
ADVANTAGES
Easy to form
Inexpensive to form
Few government regulations
No corporate income taxes

6. PREPARED & PRESENTED BY:
ALI RASHID CHEEMA
6
SOLE PROPRIETORSHIP & PARTNERSHIP
DISADVANTAGES
Limited life of business
Difficult to obtain large sum of capital
Unlimited personal liability

7. PREPARED & PRESENTED BY:
ALI RASHID CHEEMA
7
CORPORATION
A business organized as a separate legal entity and
with ownership divided into transferable shares of
capital stock is called a ‘Corporation’.
A corporation is separate from its owners and
managers. Here, owners are not personally liable.

8. PREPARED & PRESENTED BY:
ALI RASHID CHEEMA
8
CORPORATION
ADVANTAGES
Unlimited life
Professional management
Easy transferability of ownership interest
Limited liability
Comparatively easy to raise large amounts of capital

9. PREPARED & PRESENTED BY:
ALI RASHID CHEEMA
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CORPORATION
DISADVANTAGES
Time consuming
Heavy taxation
High cost of formation
Subject to greater government regulations
Double taxation --- Corporate tax & Individual
income tax

10. PREPARED & PRESENTED BY:
ALI RASHID CHEEMA
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Sole Proprietorships
Corporations
Partnerships
Limited Liability
Corporate tax on profits +
Personal tax on dividends
Unlimited Liability
Personal tax on profits

11. PREPARED & PRESENTED BY:
ALI RASHID CHEEMA
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DOUBLE TAXATION -- Example
Earnings Before Income and Tax (EBIT) 10m
Less: Interest Expense (1m)
Earnings Before Tax (EBT) 9m
Less: Tax @ 40% (3.6m)
Earnings After Tax (EAT) or Net Income available to common
stockholders 5.4m

12. PREPARED & PRESENTED BY:
ALI RASHID CHEEMA
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DOUBLE TAXATION -- Example
It is assumed that company’s:
Dividend Payout Ratio = 50%
Retained Earnings Ratio = 50%
Outstanding Common Stock = 1m

13. PREPARED & PRESENTED BY:
ALI RASHID CHEEMA
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DOUBLE TAXATION -- Example
• EPS = Net Income available to common stock
holders/Outstanding common stock
= $5.4m/1m
= $5.4
• DPS = EPS x Dividend Payout Ratio
= $5.4 x 50%
= $2.7

14. PREPARED & PRESENTED BY:
ALI RASHID CHEEMA
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DOUBLE TAXATION-- Example
It is assumed that Mr. X owns 100,000 shares of this company;
• Dividend Income = $2.7 x 100,000 shares = $270,000
• If Personal Income Tax = 10%, then
Mr. X’s personal income = 270,000 – 10% of 270,000
= 270,000 – 27,000
= $243,000

15. PREPARED & PRESENTED BY:
ALI RASHID CHEEMA
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FORMS OF BUSINESS ORGANIZATIONS
In terms of numbers, 73% of businesses are operated
as sole proprietorships, 6% as partnerships and 21%
as corporations.
In terms of dollar value of sales, 91% of all business is
conducted by corporations, 5% by sole
proprietorships and 4% by partnerships.