LEGAL PROCEDURES

FOR OPERATING A
BUSINESS
FORMS OF A BUSINESS

• The first decision when starting a business is selecting

the form of ownership. There are three basic legal
forms that can be adopted depending on the
circumstances and the objectives of the owners.
These include:- - sole proprietorship
- partnership
- corporation.
• However, there is no single best form of business
ownership because each form has its own unique set of
advantages and disadvantages. Therefore, there are some
important factors an entrepreneur need to consider in
choosing a form of business ownership such as tax
considerations, liability exposure, control, managerial
ability, business goals, management succession plans, cost
of formation, start-up and future capital requirements.
• Tax consideration involves calculating the tax bill under each
form of ownership because of income fluctuation on daily basis.
Therefore, an entrepreneur has to be aware of change in tax rate
as it plays a significant impact on the business bottom line.
• Liability exposure is also a very important issue that an
entrepreneur has to look into before venturing into business. An
entrepreneur weighs the potential for legal and financial
liabilities and decides the extent to which they are willing to
assume personal responsibility for their business obligations.
Such being the case an entrepreneur with low tolerance for the
risk may choose a form of ownership that provides protection of
his or her personal assets.
• In addition, start up and future capital requirements is also
an important issue an entrepreneur has to consider, this
involves the ability of an entrepreneur in raising capital under
the chosen form business since some forms of ownership are
better than the other when sourcing for star-up capital.
Despite that, as business grows the capital requirement will
increase and some forms of ownership are easier to attract
outside financing.
• Personal ability in business management, business goals,
plans an entrepreneur tries to achieve, benefits and costs of
a particular form they choose are the other factors TO
CONSIDER.
 1. SOLE PROPRIETORSHIPS
• This is business owned by one person who is known as the
proprietor. The Proprietor is responsible for running all day to
day activities of the enterprise. Funds to run the business
usually come from the owner’s savings, friends, family, or from
a bank loan. If the business prospers, the owner receives all
profits. If the business does poorly, the owner is responsible
for its losses. In addition, this form of business ownership is
designed for a business owned and managed by one
individual. The sole proprietor is the only owner and ultimate
decision maker for the business.
Advantages
• An entrepreneur has complete control of the business, it is well suited to the
aspiring entrepreneur’s desire for independence, does not consult with any
partners, stockholders, or boards of directors. As a result of this independence,
an entrepreneur is free to respond quickly to new market needs.
• Entrepreneurs make all the decisions and bear all the responsibility and they do
not share profits with anyone.
• It is easy to set up, for example, if entrepreneurs want to form a business under
their own names, they simply obtain the necessary business licenses from state,
county, or local governments and begin operation since they require fewer legal
requirements and restrictions than with a partnership or a corporation.
• An entrepreneur enjoys all after-tax profits, no audit of accounts legally required,
has no public disclosures of records except in case where it registers for VAT and
the proprietor has more freedom to do as he wills.
Disadvantages
• Unlimited personal liability is the greatest disadvantage of a sole
proprietorship as sole proprietor is personally liable for all business
debts. Such being the case in the eyes of the law, the entrepreneur
and the business are one and the proprietor owns all of the business’s
assets, for instance, if the business fails, creditors can force the sale of
those assets to cover its debt.
• Feeling of isolation is another disadvantages of this form of business.
This is so because running a business alone allows an entrepreneur
maximum flexibility, and it also creates feelings of isolation especially
in solving problems or getting feedback on a new idea where is no one
to turn to. Most entrepreneurs report that they sometimes feel alone
and frightened when they must make decisions knowing that they
have nowhere to turn for advice or guidance.
• In addition, limited skills and abilities, where the sole
proprietor may not possess the full range of skills that
running a successful business requires. An entrepreneur’s
education, training, and work experiences may have taught
him or her a great deal, yet there are areas in which their
decision-making ability will benefit from the insight of
others. Many business failures occur because owners lack
skill, knowledge, and experience in areas that are vital to
business success.
• Lack of continuity of the business - If the proprietor dies,
retires, or becomes incapacitated, the business automatically
terminates.
 2. PARTNERSHIP
• This is a type of business in which two or more individuals voluntarily
share the costs and responsibilities of owning and operating it. The
term partnership is also defined as an association of two or more
persons to carry on as co-owners of a business for profit. The terms of
the partnership are recorded in the partnership agreement. The most
common form of partnership is a general partnership with unlimited
liability. A general partnership means that all partners have unlimited
liability for the firm’s debts. With this form of unlimited liability each
partner could be held responsible for the other partner(s)’ business-
related areas. If the business fails, their personal savings and other
assets cannot be used to pay the partnership’s debts. The working
relationship between partners can be an advantage of a partnership.
Successful partners usually have complementary talents and share in
decision making.
• However, two individuals can also form a limited
partnership, where the partners are only responsible for the
funds they both invested in the initial business. They have
equal votes on how the business is managed, invested
equally in the business, and equally enjoy profits.
Partnership agreements shows the following items; details
of the partners, the name and nature of the business,
duration of the partnership, date of commencement, and
date of any anticipated termination of partnership, indicates
the capital contribution of each partner, calculation and
distribution of profits, indicate how responsibilities of
managing and controlling the enterprise is distributed and
dissolution of the enterprise/Succession plan.
Advantages
• It is easy to establish. The partnership is relatively easy and inexpensive to
establish. The owners must obtain the necessary business license and submit a
minimal number of forms. In most countries, partners must file a Certificate for
Conducting Business as Partners if the business operates under a trade name.
• There are no restrictions on how partners may distribute the company’s profits
as long as they are consistent with the partnership agreement and do not
violate the rights of any partner. The partnership agreement should articulate
the nature of each partner’s contribution and proportional share of profits.
• Larger pool of capital is also another advantage. Partnerships significantly
broaden the pool of capital available to a business where each partner’s asset
base supports a larger borrowing capacity than either partner would have had
alone. This may become a critical factor because undercapitalization is a
common cause of business failures.
Disadvantages
• Unlimited liability of at least one partner, where one member of every partnership
must be a general partner. The general partner has unlimited personal liability for
the partnership’s debts. In most countries, certain property belonging to a
proprietor or a general partner is exempted from attachment by creditors of a
failed business.
• The other disadvantage is capital accumulation. When it comes to attracting
capital, it presents with limitations. The partnership is generally not as effective in
raising funds as the corporate form of ownership, which can acquire capital by
selling shares of ownership to outside investors.
• Beside that it is also difficult to dispose the partnership interest. Most partnership
agreements restrict how partners can dispose of their shares of the business.
Usually, a partner is required to sell his interest to the remaining partners.
• Lastly, potential for personality and authority conflicts. In some ways, a
partnership is similar to a marriage. The compatibility of partners’ work habits,
goals, ethics, and general business philosophies are an important ingredient in a
successful relationship. Friction among partners is inevitable and can be difficult to
3. CORPORATION
• Corporation are business granted legal status with rights,
privileges, and liabilities that are distinct from those of the
people who work for the business (limited liability).
Corporations can be small such as a one-person business
or large such as a multinational that conducts business in
several different countries. Small portions of corporate
ownership that are owned publicly are called stocks or
shares. Individuals who own shares of a corporation are
called shareholders and become owners of the business
and enjoy profits in the name of dividends.
• A publicly traded corporation that makes a profit may pay out
dividends to shareholders. It can sue or be sued, hold and sell
property, and engage in business operations stipulated in the
charter. Shareholders participate in managing the firm
indirectly by voting and selecting a Board of Directors. A
Board of Directors is the governing body of the corporate
entity and it hires the management and workers for the
entity. The Board also set or approves management policies,
and receive performance reports and declare dividends. In
small corporations, owners may also be directors and
managing officers.
Advantages
• Limited liability for the shareholders, it is easy to widen
ownership base by selling shares, easy to raise finance,
has a formalize structure which ease management
process.
Dis-advantages
• are that more time consuming and expensive to set-up,
audit and accounting costs are high, there is double
taxation on profits that is corporate tax, capital gain tax
and dividend tax.
Having in mind the form of business one wants to have,
then there are other important activities an entrepreneur
has to go through to formalise things.

OTHER PROCEDURES ARE AS FOLLOWS…….

• Other first important tasks for any new business is to
obtain licenses and permits. It is more important to
ensure your business is properly registered and
licensed to ensure uninterrupted business operations.
Even an existing and an ongoing business may make
changes that require new licenses or permits.
• Some licenses and permits are national, and while
others are local. Often, the terms license and permit
are used interchangeably.
• Licenses are more general, granting permission to do
something or use something.
• Permits are usually given for safety issues, like health
permits, and may require an inspection before they are
granted.
• Special licenses and permits. Depending on what your
business does, you may need one of these special
licenses or permits before you are allowed to begin
selling to customers:
 WHAT IS A BUSINESS LICENCE?
• A business license grants the owner the right to start
and run a particular type of business in the city, area,
or country that issues it. It is a type of permit
indicating the company has the government’s approval
to operate.
• Government agencies can fine or shut down a business
that operates without a license. The type of business
you run, and its location will determine the type of
license you need and where to obtain it.
 WHY SHOULD YOUR BUSINESS
BE LICENSED?
• Business protection: Ensuring your business is properly licensed helps to
bring protection to yourself, your employees and your customers. Having
the correct license will ensure your personal assets are protected in case
of a lawsuit as well as providing protection for you if your business is
damaged.

• Protection for your employees and customers: A license will also ensure
your employees are protected if they are injured as well as protecting
your customers. If you sell food or sell a product that touches the human
body, for example, if you own a restaurant you will be required to have a
specific license as well as be required to pass an inspection. This protects
both you and your customers in case any incidents occur.
• Privacy: If you obtain a license for your business, you are
ensuring that your personal information remains private.
This includes everything from your address to your
finances as they will not be associated with other
businesses and will almost guarantee you retain a level
of personal privacy.
• Trust: Customers will more readily trust a company that
is licensed as obtaining one brings security. A license
proves your company is trustworthy and stable and that
you are dedicated to your company’s success.
• Good for the economy: With so many new
businesses appearing every day, ensuring your
businesses is registered and licensed helps to
formalize the economy. It ensures the tourism
sector is thriving, as well as strong and
protected. Small businesses can also only gain
funding or protection by the law once they are
registered and licensed.
________________________________