Welcome in the series of F4 notes, In this article we will discuss about all necessary points and sub topic of “Types of Business Organization”.

Business Organizations

Sole trader

A business which is run by a single or an individual person, the liability is unlimited in this organization and no legal setup is necessary for sole trader. There is high risk and high profit.

Partnership, Partner types and Partnership types

Partnership: Two are more person joint together and start a business.

Partner types

1. General partner: active and involved in day to day operations.

2. Sleeping partner: These are not involve in day to day operation but is liable for debts in the business.

3. Limited partner: Contribute a limited amount of capital

4. Salaried partner: Work on salary base, receive income but it is not a real partner until it has some shares in the business.

Partnership types

1. General or ordinary partnership:

Limited Partnership: In a limited partnership one or more partners may have limited liability as per their capital.

  1. Limited partnership Act 1907 says that it will happen if there is one partner whose liability is unlimited.
  2. Partnership business should be registered from registrar of companies as partnership limited.
  3. partners who is limited can not take part in the management
  4. Limited partner can not do any contract from third parties

Limited liability Partnership: A legal entity which has limited liability according to their capital or investment.

Characteristics of Partnership

Partnership is only exist under the view of making profit means business take place for making profit and if loss occur the all the partners are liable for that loss as well.

Following are the not necessary for creating partnership:

  • Jointly ownership for a property
  • Gross return should distribute equally among the partners
  • Expense are divided equally to the partners

Note: It is not necessary that partnership is based on contract but yeah once the operation in a business starts then partnership starts as well. “NO” documentation is necessary to start the business in the general partnership. Partnership Act 1890 is applies on every partnership whether it is oral or written. Partners are bound with each other as per their agreed term whether it conflicts in partnership Act 1890.

Authority of Partners

Agency Relationship

If there is three partners in the business then they all have equal right, power and authority to take or sign the contract.

If there is an express contract then maybe one or two partners who has permission to take or sign the contract or if there is no express contract then they will deal according to partnership act 1890 and it tells that every partner has equal right to accept or sign the business contract to third parties.

Implied Authority of a partner

He can:

  • Sell the firm’s products
  • Buy needful good for the business
  • Receive payments from debts
  • Hire the employees
  • He can hire advocate if there is any case on the business

Liability for Partnership debts

The firm is liable for the contract if the partner is authorized to accept the contract. The firm will not bound if:

  • Third party knows there is no express authority or
  • Third party does not believe that he is a partner

Note: If there is anyone who represent himself as a partner of a company whether he is not then he is liable for partnership and this refers as “Holding Out”.

Liability in Tort

If any partner commit something in a business which he was authorized and that cause of loss of a client then partners are jointly liable for the client loss.

Misapplication of money or property

If during the business third party’s money or property is misused or misapplied then partners are liable for the loss.

Partners are liable or not

General RuleEvery partner is liable for the debts and contract in the partnership business
New PartnerNew partner is not liable for the debts which is already taken, before he joining
Retiring PartnerHe is liable for whatever incurred before the retirement notice and after retirement notice he will be liable for everything which has done before his retirement.
Change in PartnersOld partners will remain liable whether partner change or not
NovationIf a creditor has some due on company partners are liable to pay even a new partner as well
IndemnityIncoming partner may offer outgoing partner for his debts incurred and post retirement

Note: If a Partnership company or a firm is going to close or end their business operations this term is refer as “Dissolution“.


Dissolution without Court Order

Partnership will automatically dissolute in following conditions:

  • The expiry or fixed term for business
  • Partner gives notice for leaving business
  • Death or bankruptcy
  • If business becomes illegal

Dissolution with Court Order

According to Partnership Act 1890, Court can close the business in following situation:

  • Partner mental disorders or incapacity
  • If partner breach the contract
  • If only loss occurs

Distribution of Asset

If the company is going to close then how or whom to distribute the money. Following will be paid first:

  • Outside debts
  • If partner gives loan in the business
  • Partners contribution

You have already studied about “Types of Business Organization” in F1 but in F4 there is some other main points has given according to “law” term. “Types of Business Organization” is one of the most important topic in F4 paper so very carefully study and understand the “Types of Business Organization” also make sure to attempt the practice questions for whole F4 syllabus. Every topic of F4 is provided with practice question and solution on the site.

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Corporate and business law Notes

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