INTRODUCTION

In Zambia and elsewhere in every modern society, business has been recognized as a driver of
every successful economy. For commerce to flourish however there is need for an established
and vibrant set up that enhances the smooth and easy operation of commercial activities. For
instance in Zambia, the law provides that the establishment of any business entities be registered
with the specific institution given the mandate to do so depending on the nature of the business
and also their existence, whether they are a profit making or a non-profit organization. This
mandate has been given to institutions like Pacra and the Registrar of Societies which has been
established under Acts of Parliament. Associations can be a positive force for a small business.
Many join local or regional chambers of commerce as a means of providing service such as
health insurance to their employees. But all associations are not created equal. Some are poorly
organized, poorly attended, and offer little benefit to ambitious entrepreneurs. Moreover, some
entrepreneurs, already struggling to find time to attend to both business and family needs, are
simply unable to invest the necessary time to make association membership worthwhile for them
or their company. Speaking of dong it is important to know the necessary documents which will
be needed in the establishment of the said. And the requirements may differ from state to state
depending of their legislature on the formation and establishment of such business associations.

This essay therefore highlights the types of business entities, their advantages and disadvantages.
And for the purpose of this discuss, the focus will only be mainly on those which are common
and effective in Zambia.

TYPES OF BUSINESS ENTITIES

SOLE TRADER

A sole trader business is established by registration with the Registration of Business names
defined under section (2) of Cap 389 of the Law of Zambia. The provisions for registration are
contained under section (5). The term ‘sole’ may mean one and only; belonging exclusively to
one person and, ‘trade’ may mean business of a particular kind, buying and selling; exchange of
goods. The term sole trader therefore simply means one person business. This type of business is
engaged on by persons on their own account. Unlike other business entities, a sole trader
business is merged with the person meaning, there is no distinction between the ownership and
management of the business. The sole trader is the only owner of the business and as such, he
can make any decisions concerning the business without consulting or requiring the approval of
others. Therefore, the benefits of the sole trader kind of business are as follows;
1. The fact that there is no need for a constitution in a sole trader business since the
proprietor is all by him/herself, the running of the business is somewhat made simpler
than otherwise would be where there are more people.
2. Since the management and ownership of the company is in one and the same person, the
proprietor gets to enjoy all the profits ensuing from the business.
3. The hassles that always accompany other types of businesses such as financial reporting
requirements under the Companies Act, do not exist in sole traders save for compliance
with provisions under statute for purposes of taxation.2
While sole proprietorships must comply with various laws, including tax laws and licensing
legislation, the only mandatory provisions that they ought to comply with prior to starting a
business are those contained in the Registration of Business Names Act Chapter 389 of the Laws
of Zambia. The said Act directs that any person, firm or corporation carrying on business under
any name other than the true Christian name and surname of the owner thereof must register the
business entity under the Act. This requirement for registration is set out in section 3 and it

1
Prof. Munansangu M.M. Business Associations. (2007) ZAOU.
2
section 2 of Cap 389 of the Law of Zambia
captures individuals, firms and corporations. It is also clear that section 3 applies to partnerships
as well. Section three reads:

“Subject to the provisions of this Act-

(a) every firm having a place of business in Zambia and carrying on business under a
business name which does not consist of the true surnames of all partners who are
individuals and the corporate names of all partners who are corporations without any
addition other than the true Christian names of individual partners or initials of such
Christian names;
(b) every individual having a place of business in Zambia and carrying on business under a
business name which does not consist of his true surname without any addition other than
his true Christian names or the initials thereof;
(c) every individual or firm having a place of business in Zambia, who, or a member of
which, has either before or after the commencement of this Act changed his name, except
in the case of a woman in consequence of marriage;

shall be registered in the manner directed by this Act: Provided that-

(i) where two or more individual partners have the same surname, the addition of an "s" at
the end of that surname shall not of itself render registration necessary; and
(ii) where the business is carried on by a trustee in bankruptcy or a receiver or manager
appointed by any court, registration shall not be necessary; and
(iii) a purchase or acquisition of property by two or more persons as joint tenants or tenants
in common is not of itself to be deemed carrying on a business, whether or not the owners
share any profits arising from the sale thereof.”3

However, the sole trader has his own drawbacks some of which are as follows;

1. The most common mistake which can be deemed a disadvantage is the very fact that

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Section 3 of Cap. 388 of the Laws Zambia
 Where only one mind makes business and financial decisions, the decision may not
always be correct but where there is no objection, they are implemented and in most
instances, only when the damage has been caused does it come to the realization of the
sole proprietor of the wrong decisions made.

2. Expansion is also one other factor that eludes the sole trader. Where there is not enough
profit to reinvest in the business, there cannot be any meaningful expansion of the
business. Borrowing for whatever reason be it expansion or otherwise, seriously expose
the sole trader’s personal assets to the lender as the sole trader usually has to mortgage
personal assets for purposes of security.

THE PARTNERSHIP

A Partnership is a business carried on by two or more people, aimed at making a profit as

(a)Partnership of all property- This type of partnership is not very common in Zambia. It
is a type where the partners agree to contribute to their partnership all the property which
they own as well as the property which they may own in future. This type of partnership
comprises all the property of the partners, whether acquired through trading as partners or
otherwise. It is usually common in instances where a married couple has opted to enter
into business as it provides better equitable remedies where the laws of the marriage do
not bring about the desired patrimonial results of the married partners.5

(b)Partnership of all profit- This type of partnership is where all the profits derived from
all the business conducted by the partners during the existence of the partnership.
4
Partnership Act of the 1890
Fisher, William. "The Value of Professional Associations." Library Trends. Fall 1997.
5
 Partnerships of all profits are only limited to profits. Property acquired through
inheritance or donation does not form part of the partnership. In this type of the
6
partnership, the partners do not limit the partnership activities to one type of business.
They agree to trade as partnership and to share all profits which the partners make
whatever the business during the existence of the partnership.

2. Extraordinary/ Limited Partnership

This type is rather different from the where partnership partners are not protected against
liability. The extraordinary partnership has one or more of the partners protected against
liability to third parties for the partnership debts. The extraordinary partners are partners
in so far as their partners are concerned and not to third parties hence no legal
relationship between these partners and creditors or debtors of the partnership.
The extraordinary partners are not allowed to participate actively in the business of the
partnership and neither are they allowed to act or be held out as ordinary partners to
outsiders. For as long as they do not act as ordinary partners, they enjoy their protection.
Where therefore they start to be actively involved in the management of the partnership,
they lose their special protection and would be liable to third parties to be treated as
ordinary partners.
In an extraordinary partnership, there always has to be two types of partners, the
extraordinary/limited and the ordinary who has to act on behalf of the partnership and
who can be liable to the partnership creditors without limitation. The fact that the
partnership of the extraordinary partner in a partnership becomes public would not affect
his protection in the partnership. Third parties may become aware that the person is a
partner, his protection is only affected when he starts to act as an ordinary partner in the
sense explained above.
The benefits of the partnership therefore are that;
1. A Partnership is tailor- made to meet the commercial and personal requirements of the
partners and the business.
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Pro. Munansangu M.M (2007) Business Association, Lusaka Zambia, ZAOU Press
 2. It allows efficient management of the business as it is prepared to ensure for the smooth
running of the business as the partners may see fit.
3. The agreement further regulates the working relationship between the partners and
between the business and the outside world and it also prevents some provisions in the
1890 Act which may not necessarily be in the interest of the smooth running of the
partnership. Such exclusions can be made by expressly stating in the partnership
agreement.
Therefore, a combination of the Partnership Act and the Partnership Agreement is equivalent to
the Article and Memorandum of Association for Companies as they regulate partnership’s
activities internally and in dealing with third parties. 7

The drawbacks of partnerships

1. The principal drawback relates to separate legal personality. Although the commercial
view of partnership is that the firm exists as a business organization separate from its
partners, the aggregate theory which is followed in Zambia views the partnership as a
contractual association of specific persons. In this theory, the association does not possess
legal personality. The partnership is not an entity which exists independently of the
partners. The rights and obligations of the partners and the assets of the partnership
usually belong to the partners jointly in undivided shares.
2. With the perception that a partnership is an association of specific persons, it dissolves
whenever the composition of its members change and such changes occur in a variety of
ways, for example by the death or retirement of a partner or by the admission of a new
partner. On dissolution of the partnership, the whole enterprise can be liquidated or a new
partnership comprising the new members can take over and continue the business of the
previous partnership.
3. The partnership can never be the owner of the assets of the partnership, nor be legally
entitled to the rights or liable for the responsibilities of the partnership. It is the partners
themselves that are entitled to the assets and rights of the partnership, hence liable for the

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Pro. Munansangu M.M (2007) Business Association, Lusaka Zambia, ZAOU Press
 responsibilities of the partnership. In principle therefore, a creditor of the partnership can
recover the debts of the partnership from the partners in their personal capacity.
4. A partner’s liability for new debts incurred on the firm’s behalf lasts for as long as other
partners (as agents) have authority to bind that partner. Nonetheless, third parties are
entitled to assume that other partners remain as agents until they are notified to the
contrary. This means that partners withdrawing from a firm should notify clients of their
withdrawal.8
5. Where a partnership is dissolved and its affairs require to be wound up, the former partners
can co-operate to dispose of the business as a going concern or to break up the business and
sell off its assets. The major problem in winding up a partnership is the mechanisms for
winding up partnership businesses where the former partners are unable to co-operate. The
basic problem is the lack of an officer who could take over the property and rights of the
dissolved partnership and exercise adequate powers to wind up its affairs in an independent
way. When a partnership is dissolved in acrimonious circumstances its affairs are often
complicated by a lack of adequate information and by incomplete financial accounts.
Expense and delay are common complaints. The complexity of much dissolution makes
some expense and delay inevitable.

PRIVATE LIMITED COMPANY

The term “company” has been defined by the oxford dictionary of law as an association formed
to conduct business or other activities in the name of the association. 9 Other authors have
indicated that; a company is a legal entity formed by a group of individuals to engage in and
operate a business enterprise. A company may be organised in various ways for tax and financial

8
Bovet, Susan Fry. "Leading Companies Turn to Trade Associations for Lobbying." Public Relations Journal. August-
September 1994.

9
Oxford Dictionary of law (1997) edited by Elizabeth A. Martin, Oxford: OUP
liability purposes depending on the corporate law of its jurisdiction. 10 The line of business the
company is in will generally determine which business structure it chooses, for example
a partnership, a proprietorship, or a corporation are established by way of registration by the
registrar of companies pursuant to the Companies Act Cap 388 of the Laws of Zambia which
makes provisions for the establishment or incorporations of companies. Individuals intending to
establish or incorporate a company are required to register following provisions under Part II
section 6 (1) of the Act. Once the relevant documents indicated in section 6 of the Act have been
lodged with the registrar of companies, the registrar would then issue a certificate indicating that
the company has been incorporated in accordance with section 11 of the Act. Depending on
whether the company has any share capital, the registrar is further required to issue a share
certificate indicating the amount of share capital of the company and the division of the share
capital into shares of a fixed amount.11 Furthermore, it is an incorporated body with separate
legal personality,12 which is an association of persons formed for the purpose of some business or
undertakings carried on in a company’s name.
The Benefits of a Private Limited Company
The most important benefit of a Private Limited Company is that a company becomes a legal
person distinct from its members. In Solomon v Solomon and Co. 13 Solomon formed a limited
company with the other members of his family, and sold his business to the company. He held
most of the shares which had been issued by the company and some debentures (documents
acknowledging that Solomon was a secured lender entitled to priority of repayment in
liquidation). The balance was payable in cash. About a year after its formation the company was
wound up. The assets at that time were just sufficient to discharge the debentures, but nothing
was left for unsecured creditors with debts of about 7500 Pounds. The creditors claimed that they
should have priority because S and the company was in effect one and the same person. The
House of Lords however held that S and the company were separate legal entities, the company
had been validly formed, and there was no fraud on the members and creditors. S was therefore
entitled to the remaining assets.

10
www.investopedia.com/terms/c/company.asp
11
Companies Act Cap 388
12
Concise Law dictionary 2009
13
Solomon v Solomon and Co. (1897)
Solomon’s case was very important because it finally established the legality of companies
where one person holds the vast majority of the shares. It also showed that incorporation was
also available to small businesses as well as to large enterprises.14

Conclusion
Therefore, it very important that as one thinks of embarking on the progress of setting up of a
business venture, it is cardinal to ensure that the necessary need are put in place and also to
choose the type of business entity which best suites the nature and composition of the business.
As discussed in the essay, there are a number of business entities to choose from but the most
important thing to ensure is that, such must be cover by the legislature of the state where such a
business is to be set up.
The most common business entities in Zambia as identified are the Sole Trader, Partnership and
Company. All these are covered and enshrined in various acts of parliament, such that they give
legal effect to the establishment of such. Nevertheless, due to the globalization of the economy
and the world at large, it is imperative that other types of business entities mighty be considered
to be useful. Although caution must be taken to ensure that they do not conflict with the existing
legislature of the land.

Holding, Robert L. "Leveraged Investment—Your Association Advantage." Appliance Manufacturer. April 1998.

BOOKS

Bovet, Susan Fry. "Leading Companies Turn to Trade Associations for Lobbying." Public
Relations Journal. August-September 1994.

Davis, Robert. "Look Before You Leap." Black Enterprise. September 1992.

Fisher, William. "The Value of Professional Associations." Library Trends. Fall 1997.

Holding, Robert L. "Leveraged Investment—Your Association Advantage." Appliance

needy, small firms." Crain's New York Business. 1 August 2005.

Pro. Munansangu M.M (2007) Business Association, Lusaka Zambia, ZAOU Press

CASES

Darmouth v Warword 4 Wheat (US) 518,

Salomon v Salomon & Co. (1897) ACC 22

STATUTES

Business Names Act Chapter 389 of the Laws of Zambia

The English Partnerships Act of 1890

The Companies Act Chapter 388 of the Laws of Zambia

WEB SITES

https://www.investopedia.com/terms/c/company.asp