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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.
Company Limited by Guarantee
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Company Limited by Guarantee
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.