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Forms of Business Ownership

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13 views7 pages

Forms of Business Ownership

Uploaded by

2petermaina
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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FORMS OF BUSINESS ORGNISATIONS

1) Sole Proprietorship
This is a business owned by one person.

A sole proprietorship is generally the simplest way to set up a business. A sole


proprietor is fully responsible for all debts and obligations related to his or her
business.

Advantages
a) There are so few legal formalities are required to operate the business.
b) The owner is his own boss, and has total control over the business.
c) The owner gets 100% of profits.
d) Motivation because he gets all the profits.
e) The owner has freedom to change working hours or whom to employ, etc.
f) He has personal contact with customers.
g) He does not have to share information with anyone but the tax office, thus he
enjoys complete secrecy.

Disadvantages
i. Nobody to discuss problems with.
ii. Unlimited liability.
iii. Limited finance/capital, business will remain small.
iv. The owner normally spends long hours working.
v. Some parts of the business can be inefficient because of lack of specialists.
vi. Does not benefit from economies of scale.
vii. No continuity, no legal identity.
2. Partnership
 A partnership is a group consisting of 2 to 20 people who run and own a
business together.
 They require a Deed of Partnership or Partnership Agreement, which is a
document that states that all partners agree to work with each other, and
issues such as who put the most capital into the business or who are entitled
to the most profit. Other legal regulations are similar to that of a sole trader.

Types of Partnership

General Partnership
All members share the management of the business and each is personally liable
for all the debts and obligations of the business. This means that each partner is
responsible for and must assume the consequences of the actions of the other
partner(s).

Limited Partnership
 Some members are general partners who control and manage the business
and may be entitled to a greater share of the profits, while other partners are
limited and contribute only capital, take no part in control or management
and are liable for debts to a specified extent only.
 A legal document, setting out specific requirements, must be drawn up for a
limited partnership.

Advantages
a) More capital than a sole trader.
b) Responsibilities are split.
c) Any losses are shared between partners.

Disadvantages
i. Unlimited liability.
ii. No continuity, no legal identity.
iii. Partners can disagree on decisions, slowing down decision making
iv. If one partner is inefficient or dishonest, everybody loses.
v. Limited capital, there is a limit of 20 people for any partnership.

3. Private Limited Companies


 Private Limited Companies are separate legal entities from their owners, and
thus their owners have limited liability.
 The company has continuity, and can sell shares to friends or family,
although with the consent of all shareholders. This business can now make
legal contracts.

Advantages

i. The sales of shares make raising finance a lot easier.


ii. Shareholders have limited liability, therefore it is safer for people to invest but
creditors must be cautious because if the business fails they will not get their
money back.
iii. Original owners are still able to keep control of the business by restricting share
distribution.

Disadvantages
i. Owners need to deal with many legal formalities before forming a private
limited company:
ii. The Articles of Association: This contains the rules on how the company
will be managed. It states the rights and duties of directors, the rules on the
election of directors and holding an official meeting, as well as the issuing of
shares.
iii. The Memorandum of Association: This contains very important information
about the company and directors. The official name and addresses of the
registered offices of the company must be stated. The objectives of the
company must be given and also the amount of share capital the owners
intend to raise. The number of shares to be bought b each of the directors
must also be made clear.
iv. Certificate of Incorporation: the document issued by the Registrar of
Companies that will allow the Company to start trading.
v. Shares cannot be freely sold without the consent of all shareholders.
vi. The accounts of the company are less secret than that of sole traders and
partnerships.
vii. Public information must be provided to the Registrar of Companies.
viii. Capital is still limited as the company cannot sell shares to the public.

4. Public Limited Companies


Public limited companies are similar to private limited companies, but they are
able to sell shares to the public. A private limited company can be converted into a
public limited company by:
i. A statement in the Memorandum of Association must be made so that it says
this company is a public limited company.
ii. All accounts must be made public.
iii. The company has to apply for a listing in the Stock Exchange.
iv. A prospectus must be issued to advertise to customers to buy shares, and it
has to state how the capital raised from shares will be spent.

Advantages
a. Limited liability.
b. Continuity.
c. Potential to raise limitless capital.
d. No restrictions on transfer of shares.
e. High status will attract investors and customers.

Disadvantages
a. Many legal formalities required to form the business.
b. Many rules and regulations to protect shareholders, including the
publishing of annual accounts.
c. Selling shares is expensive, because of the commission paid to banks
to aid in selling shares and costs of printing the prospectus.
d. Difficult to control since it is so large.
e. Owners lose control, when the original owners hold less than 51% of
shares.
f. Control and ownership in a public limited company:

5. Co-operatives
Cooperatives are a group of people who agree to work together and pool their
money together to buy "bulk".
Characteristics of Cooperative Society

a) Free membership: An individual of the age of majority of the same locality,


or class may be member of a cooperative society on the basis of consent of
the members
b) Objective: The objective of cooperative society is not earning profit, but to
achieve economic welfare through mutual cooperation.
c) Entity: A cooperative society has a society, independent form its member
d) Democratic Leadership: A cooperative society is run in democratic way.
Every number has one vote irrespective of number shares purchased. The
board of directors is elected in democratic way
e) Separate Legal Entity- A cooperative society is required to be registered
under the Co-operative Societies Act. Registration provides it a separate
legal entity. Its existence is quite different from its members
f) Distribution of Surplus- Members are paid dividend and bonus out of the
profits of the co-operative society. The bonus is given according to the
volume of business transacted by each member with the co-operative
society.
g) Organization of the poor: Theoretically, the cooperative society has no
scope for the membership of the rich. In fact, the major function of a
cooperative society is to provide credit facilities to the peasants for
productive purposes only. It does not give credit for fulfilling social
obligations. Thus, a cooperative society is an association of the poor
peasants for meeting their productive needs.
h) Education and training: Apart from the characteristics, discussed above, a
co-operative society also exhibits the feature of education and training to its
members with the purpose of developing co-operation into a well-organized
movement.

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