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TYPES OF BUSINESS ENTITIES -THE CHOICES

Introduction
All businesses are created for a reason or set of reasons it is often
the underlying purpose of the business that shapes the orporate
form that it adopts.

S. 1 of the Partnership Act defines business to include every trade,
occupation or profession.
There are many types of business units. These include the following:

There are mainly 4 business choices;

¦ Sole trader
¦ Partnership
¦ Private limited Companies by share Capital
¦ Public Limited company

Each of these business entities has its own particular benefits and
its own set of drawbacks.

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This is the default business form for an individual. If you operate a
business by yourself without taking formal steps to organize a
separate business entity, you are operating as a sole proprietorship.

There are no legal formalities involved in forming such a business,

though the requirements of revenue law necessities certain records
to be kept and returns to be made for taxation purposes. Otherwise,
the sole trader contributes all or most of the capital required by the
business, enjoys the profits and is personally liable for any losses
that the business incurs.

Note that 




Read the advantages and disadvantages of operating as a sole

trader?

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 are not seen within the law as separate from the
person or people who own the business as is the case with a limited
company.

The assets and liabilities of a 
 are therefore seen as

those of the person owning and running the business.

This not only effects the way in which the business is taxed, but also
the level of exposure of the owner has to the business' debts.

The debts of the business become the liabilities of the owner whose
personal property can be sought should the unincorporated
enterprise be unable to pay.


 do enjoy fewer formalities and regulations compared

to those imposed on a company.

There is no annual return to complete, no statutory records to

maintain, no statutory accounts to prepare and no separate
corporation tax return to submit. Each of these can produce cost
savings to the business and therefore its owner.





 has very few requirements.

There is certainly no requirement to inform the Companies Registry
about starting up the business. Revenue and Customs should
usually be contacted for the purpose of notifying them that the
person will now receive income from self employment (on which
they will pay income tax).

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Traditionally 
 have been small, local
suppliers such as corner shops, builders, plumbers and so on. Whilst
they are easy and inexpensive to set up, they do not enjoy limited
liability status of an incorporated business, nor, as some would
argue, the prestige of a registered company.


 

What is partnership?
Quick question
Write your own definition of partnership.

We will now look at what is meant by the term ³partnership´ and

a quote from Section
2(1) of the Partnership Act 2010 can give us one definition. it
defines partnership as:
a partnership is the relationship which subsists between
or among persons, not exceeding twenty in number, who carry
on a business in common with a view to making profit

There are two forms of partnership in Uganda, traditional

unincorporated partnerships and limited liability partnerships
(LLP).

The legal status of a traditional partnership is similar to that a

sole trader but instead of having one owner, there are two or
more proprietors involved in running the business, each having a
stake in the ownership of the that entity.

Limited Liability Partnerships vs. a Traditional Partnership

A Limited liability partnership is different from a traditional

one.LLPs are incorporated at Companies House, have a
registered office and as their name suggests, enjoy the
protections of limited liability.

Sec. 47.(2)A limited liability partnership shall consist of not more

than twenty persons, and shall have one or more persons called
general partners who shall be liable for all debts and obligations
of the firm.

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 Sec. 47.(2)A limited liability partnership shall, in addition to
general partners have one or more persons called limited liability
partners who shall contribute a stated amount of capital to the
firm, and shall not be liable for the debts or obligations of the
firm beyond the amount of capital so contributed.
we will focus on traditional partnerships.
Essential elements
Three essential elements must be present for a partnership to
exist. The partnership
must be:
‡ a business
‡ conducted for profit
‡ by or on behalf of partners.

As is the case with a sole trader, a partnership is an

unincorporated business. It is not (neither is it required to be)
registered at Companies House and has no obligations to
maintain statutory records, prepare and file statutory accounts or
to submit an annual return to the Registrar of Companies.

This kind of partnership structure is usually found within firms of

solicitors, surveyors and accountants; although in recent years
some practices within these professions have changed their
status to an LLP.

In addition, for purposes of trading, a partnership must conform to

legalities
concerning the naming of the firm and the number of partners
involved. In law the
terms ³partnership´ and ³firm´ are synonymous and can be freely
interchanged, but
the terms ³firm´ and ³limited company´ cannot be interchanged.

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A partnership is created as a result of a contract between two or
more parties. This
contract may be:
‡ in writing
‡ by oral agreement
‡ inferred from the facts and circumstances.

A partnership which is formed by oral agreement or by implication

may create problems for any third party dealing with the

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partnership and also for the partners themselves if there is a
dispute between them at a later date. It is usual, but not essential,
for the agreement to be in writing. This has the advantage of
providing a permanent record of the rights of the partners amongst
themselves. Where there is a simple handwritten agreement, the
document is known as the Articles of Partnership and where there is
a partnership agreement in the form of a deed, this is known as the
Deed of Partnership
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‡ A partner cannot be sued directly to a debt of the firm; creditors
must first sue the
firm.
‡ A debtor to the firm cannot plead compensation on a debt due by
an individual
partner.
‡ A partner sued for a private debt cannot plead compensation on a
debt due to the
firm.
‡ A partner suing for a private debt may be met with a counter-
claim pleading
compensation on a debt due by the firm.
‡ A firm sued may plead compensation on a debt owed, and due to
one of their
partners.
The basic principle is that a partner is not a creditor in debts due to
the firm, but is
a debtor in debts due by the firm.
The corporate status of a partnership in Scotland is really Quasi
Corporate. It
possesses many, but not all, of the privileges of incorporation. A
partnership in
Scotland:
‡ does not have perpetual succession
‡ cannot own heritable property (title is taken in name of the
partners or by
trustees for the firm)
‡ can be dissolved at the option of the partners.

What then are the advantages and disadvantages of operating

under a partnership?

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According to Osborn¶s Law Dictionary, a corporation is a legal

person created by Royal Charter, Act of Parliament, International
treaty, Registration under a statutory procedure, e.g. under the
Companies Act. A corporation is a distinct legal entity, separate
from such persons as may be members of it, and having legal rights
and duties and perpetual succession. It may enter into contracts,
own property, employ people and be liable for torts and crimes.
(Salomon v Salmon & Co Ltd [1897] A.C. 22





The word ³company´ is derived from the Latin word ³Com Panis´
meaning, ³people sharing together´. It refers to a group of people
associating together for the purpose of some business undertaking
carried on in the company¶s name.

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According to , a company has three functions and all
companies are formed to pursue along these functions:
1)For companies formed other than profits (Non-profit ventures)
e.g. Rural/community based organizations. Also some NGOs
that are registered but limited by Guarantee.
2)Companies formed by a small body of persons. They are
referred to technically as ³private companies, e.g. Groceries,
hardware shops, light industries, hotels, family ventures, e.t.c.
3)Companies formed to involve the public investments and to
share profits without necessarily being involved in
management. They are referred to as ³public companies´ e.g.
Uganda clays, British-American Tobacco, Kenya Airways,
Stanbic Bank, e.t.c.
 ! for categories 2 and 3, these companies are limited by
shares and their primary objective is to carry on business for
profits.
The participants in the company structure:

The Owners (Members) ± Members are the people who each

have a share in the ownership of the company which entitles
them to participate in the company¶s profits in proportion to
the size of their shareholding.

The Company ± The company is the vehicle which actually

owns and conducts the business.

The Directors ± The directors of a company are the people to

whom the members of the company have entrusted the
management of the company.



The Companies Act under S.3 provides for the types of
companies which include the following:

a) Private Limited companies by share capital, its working capital

will be contributed by members known as share holders and in
case of any business failure or financial problems, the creditors
will be compensated from the capital contribution. Financinb
bk pg 31

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 b)Private c0. Limited by guarantee, a company ltd by guarantee,
the person undertakes to indemnify up to an event. Financinb
bk pg 33

c) Public limited companies, is unlimited in the number of its

members. It is open to a public company to raise capital by
offering its shares to the general public. Financinb bk pg 34

Corporate Personality:
alomon v alomon & Co Ltd [1897] AC 22
Ref. Bakibinga pg 4

When can the veil of incorporation be lifted?

Lifting the veil of incorporation-Exceptions Bakibinga p8

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The process of forming the company is technically referred to as
incorporation. This process takes a number of steps, e.g.
provisional meetings; you have to draft relevant documents,
paying o f statutory fees as provided for in the Companies Act
and the Stamps Act.

Factors put into account to ascertain whether a company is

private or public
1. Membership.
S.3 (1) of the Companies Act, provide that the minimum
membership for a private company is two and the maximum is
fifty well as for a public company, the minimum is seven and
has no maximum.
NB: however, the limitation to membership does not include
employees of the company.

2. Shares or rising of capital.

A public company may invite the public to subscribe for its
shares and also its shares are freely transferable at the stock
exchange or on issuance, well as in a private company, some
Articles may restrict the transfer of shares. In addition, a
private company is prohibited by law from inviting the public
to subscribe for its shares or debentures.

3. Commencement of business.

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 A private company, immediately upon issuance of a certificate
of incorporation can commence business well as for a public
company, mere registration per say is not enough, you must
satisfy with the requirements as set out in the Capital Markets
Authority Act Cap 84. Some of the requirements include:
a) A public company must issue out a document called
prospectus limiting the public to subscribe for shares,
giving a detained position of the company.
b)Need to obtain a certificate of commencement of
business from the registrar of companies.

4. Directors appointments
In a private company, a company can not have directors well
as a public company must be with a minimum of two directors.
Further, in a public company, directors must at least own
shares and they are referred to as qualification shares, well as
in a private company, a director need not to own shares.

After ascertaining the type of company to be registered, then one

goes to the process of drafting the relevant documents. These
documents are;
a) The Memorandum of Association
S. 4 of the Companies Act Cap 110 provide that every
company shall present in memorandum of association printed
in English indicating the name of the company with the word
³limited´ as the last word of the name. The memorandum
must indicate whether the company is limited by shares or
guarantee. The memorandum must also indicate the
registered office, e.g. in Uganda. Must indicate the
objects/purpose of the company, it must be dated, signed by
the promoters, indicating their occupation, addresses and
must be witnessed. A witness must be an advocate, clergy,
banker or civil servant.

b)The Articles of Association

It has the same requirements except that it is not a
compliancy for a private company to register the articles of
association. Articles of association are the constitution of the
company.

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A trust is a relationship in which one party (called a µtrustee¶) hold s
legal or equitable property either on behalf of another person(s)
(called a beneficiary) or for the accomplishment of another
particular purpose.
(1) Trustee
There must be one or more trustees. A trustee can be a natural
person or a corporation. You must have someone who has the legal
capacity to own property.
(2) Beneficiary
There must be at least one beneficiary.
If there is no beneficiary you must have a charitable purpose. By
charitable purpose, the law means a trust to intend the relief of
poverty, the advancement of education, the advancement of religion
or other purposes beneficial to the community.
(3) Trust Property
You must have property which is capable of being held on trust.
(4) A personal obligation annexed to the trust property
A trustee holds property for the beneficiaries and for the benefit
of the beneficiaries only.

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