Forms of business organizations

Commerce study Manual STUDY MANUAL|PDF NOTES|SYLLABUS|REVISION

When establishing a business,a person must decide on form of business ownership.in making this decision,he/she will consider the following factors;

  • The formation requirements
  • Ease of creation of business.
  • Flexibility(change).
  • Expenses to start and maintain(capital needed).
  • Legal requirements.
  • Government control and regulation
  • Income tax consequences(some are taxed others not and others are taxed more than once)
  • The liability of the owner.

A business unit is a distinctive form of business organization  formed one or more people with a view of providing goods and services.We usually have two organizational form in an economy namely;

  1. UNINCORPORATED BUSINESSES

This are businesses that do not have separate entity or existence from that of their owners.according to law such organizations are one and the same with their owners and they do not have separate rights and obligations from those of their owners.Examples include the sole proprietorship and partnership.

  1. SOLE-PROPRIETORSHIP.

This are businesses that are owned and operated one person.the enterprise has no existence apart from its owner.the owner has rights to all profits and bears all the liability for the debts.the owner has unlimited liability meaning,if business can not meet its financial obligations,the owner can be forced to sell his property that will satisfy creditors or clear the business debts.this is the simplest and easiest form of business ownership.it is owned one person and may be assisted family members or other staff.

The specific examples would include;

  • Simple shop keepers.
  • Roadside sellers.
  • Traders who offer direct services in law,accounting and medicine
  • Itinerant traders

THE SOURCES OF CAPITAL INCLUDE;

  1. Owners savings
  2. Borrowing from friends,banks and other money lending institutions;the amount of capital borrowed depends on,
  • Whether the loaner has funds to loan out.
  • The amount of interest to be paid on the loan
  • The ability of the borrower to repay the loan with interest
  • Whether the available loan will be able to meet the purpose for which it is intended.
  • Inheritance
  1. Donations from friends and relatives
  2. Credit buying
  3. Ploughing back profits
  • Leasing and renting out property.
  • Hire purchase funds
  1. Funding’s from non governmental organizations.

ADVANTAGES OF SOLE-PROPRIETORSHIP.

  • Few formal legal requirements are required to set up this kind of business thus easy to start even in terms of the capital requirements.only a licence is required.
  • Decision making and implementation is fast because the proprietor does not have to consult anybody in matters relating to business-easy decision making.
  • A sole proprietor exercises direct personal contact on the business at all times
  • The trader has close and personal contact with the customers,therefore customers are known personally to the trader and hence the trader is in a better position to cater for their tastes and preferences more effectively.
  • A sole proprietor is able to access the credit worthiness of his/her customers because of close personal relationships.this is because extending credit to a few carefully selected customers reduces the probability of bad debts
  • The trader is accountable to him/herself –thus independence as one is his/her own boss.
  • A sole proprietor is able to maintain top secrets of the business operations
  • He/she enjoys the profits alone
  • The trader can get assistance from family members.
  • Flexibility in terms of changing from one type of business to another
  • No taxes are charged on the businesses the government because the taxes are submitted the individual thus owners enjoy freedom from corporate business taxes
  • Simplicity in creating and dissolving
  • Freedom from government control.

DISADVANTAGES OF SOLE-PROPRIETORSHIP.

  • Has unlimited liability-if the assets available in business are not enough to pay all the debts,the personal property of the owner such as house will be sold to meet the debts.
  • Expansion of business may be limited the scarce capital and also lack of access to other sources of capital.
  • A sole proprietor works for long hours and has little time for recreation
  • If a sole trader fall sick the business may experience difficulties due to lack of adequate management.
  • A sole-proprietorship may not benefit from advantages realized large scale(economies of scale) such as the access to loan facilities and large trade discounts.
  • Death of the owner may lead to the collapse or poor performance of business arising from poor management other people who take over the business.thus it lacks continuity.
  • Lack of specialization in the running of the business may lead to poor performance-this is because one person can not manage all aspects of the business effectively ie one may be a good sales man but a poor accountant.limited skills prevails.
  • Poor quality decisions because there is no consultation.
  • The owner bears all the losses alone.

Circumstances under which the Sole Proprietorship ideal.

  1. When customers show preference to specialized services
  2. Where small capital is required to start up a business
  3. Where returns are low and may not warrantee existence of a large business.
  4. Where the market experiences frequent demand changes
  5. Where locations are remote and the population may be small.(when the market is local).
  6. When personal contact with customers is required.
  7. When one likes being his own boss.

Where promptness is required in decision making.

DISSOLUTION OF A SOLE PROPRIETORSHIP.

  • Decision of the owner to dissolve the business.
  • Death,insanity or bankruptcy of the owner
  • Complision of the intended purpose especially if the business was operating on a contract
  • Court order to dissolve the business.
  • Transfer of business to another person.

PARTNERSHIP.

This is an association of two or more persons acting as co-owners of a business for profit.partners contribute financial(money and property) and managerial skills(labour force) and each shares in profits as well as losses of business.

A minimum of 2 persons and a maximum of 20 is the limit expect for professional sevices such as medicine and law which can have a maximum of 50 persons.

TYPES OF PARTNERSHIP BUSINESSSES.

  • GENERAL PARTNERSHIP-this is a partnership where all partners have unlimited liability for the business debts.This means that incase a partnership is unable to settle all its debts,from the available business assets,the personal properties of individual members will have to be sold to pay off the debts.
  • Limited partnership-here the members have limited liabilities meaning that incase the business is unable to settle all its debts from the available business assets,the partners loose only the amount of capital it has contributed to business and not their personal property.

In this partnership,there must be at least one partner whose liabilities are not limited ie unlimited liability

FORMS /TYPES OF PARTNERS.

  • Quasi partner-allows his/her capital contribution to be used in business even after retirement.
  • Nominal/ostensible partner-allows his/her name to be used in business though he does not actively participate in business operation.
  • Limited partner-his liability is limited to his capital contribution in business.
  • General partner-has unlimited liability to business debts.
  • Silent /sleeping/passive-contributes towards the capital of business,actively participates in business operations but does not allow his name to be published as an owner.
  • Minor partner-this is a partner below 18 years of age.
  • Major partner-this is one who is above 18 years of age.
  • Dormant partner-this is one who does not actively participate in partnership business.
  • Active /real partner-this is one who actively participates in partnership business.
  • Temporarypartner-this is the one who carries out specific task and when it is through the partnership ceases.
  • Permanent partner-this is the one who operates indefinitely.

PARTNESHIP ACT.

This is a document that provides the rights of partners in business.this includes:

  • Sharing in management and operations of business.
  • Sharing in any profits that a company makes.
  • Having right to access company books and records.
  • Receiving a formal accounting of business affairs of partnership(cash flows,statement of cash).
  • The document also states the obligations of partners ie sharing in any loss incurred business.
  • Working for the partnership without salary as necessary.
  • Submitting to a majority vote incase of differences that may arise among partners.
  • Giving other partners complete information about all affairs of partnership.
  • Not to engage in any competing form of business.

PARTNERSHIP AGREEMENT.



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