Forms of Business Ownership

TYPES OF BUSINESS ENTERPRISES.

Sole Trader

This is a business carried out by an individual on his/her own accord. This type of business is the most common.

It is easy to start.
It is not registered nor controlled by statute law.
It does not need a great capital outlay to start operations.
One person may run the business with his family
The owner manages it. There is no need legally to take interests of outsiders into consideration when running the business
In this business, no meetings are required to be held nor the need to make any formal appointments of any officials such as directors, secretaries or auditorship.

Although this business is easy to form, it has some disadvantages

Disadvantages of sole trader form of business ownership

The sole trading business has no separate legal personality apart from its membership. This means the owner and his/her business are considered as one.
The owner has no limited liabilities. He/she is liable for all the liabilities.
And obligations of the business. The owner’s property may be sold to meet the debt of the business.
The business cannot own property separate from the property of the owner.
The sole trading business is risky to the owner. He has less security against financial ruin to himself

Partnership

This business, because of its nature is difficult to expand, as raising capital is difficult. This business is a result of agreement between two or more people. The number should not be more than twenty.
The business is easy to start because only agreement is required. The agreement may be orally or written. A partnership may also be formed by conduct of the parties. Thus, no formalities are required bylaw.
It is easier to raise capital for a partnership, as this capital does not have to be money. Partners may contribute money, goods or even services to the partnership.
The partners have legal right to manage their business. Thus they are both owners and managers of the business. They also act as agents of the business in its dealings with the outside world.
Partners owe each other duty of care. Their relationship is one of good faith towards each other. This is supposed to be good for their business.

A partnership has some disadvantages. Some are listed below:

This business cannot have more than twenty members unless the members belong to a designated profession such as lawyers or accountants. This may limit those contributing to capital.
A partnership has no separate legal personality from its membership. See Unit3.
Members of a partnership are liable jointly and severally for a partnership is unable to pay its debts, the creditors, may choose to sue any partner individually for the whole debt or sue the partners jointly.
Insolvency of the partnership may detrimentally affect the estate of the partnership. This is because partners do not enjoy limited liability.
Death or resignation of a partner affects the legal nature of the partnership in that death or resignation would terminate the partnership. Admission of a new partner would also have the same effect.

Cooperative Society

The co-operative Societies Act governs this enterprise. It is relatively easy to form, as the Act requires the Registrar of Cooperatives to assist and promote the interest and welfare of membership.

The aim is to promote the interest and welfare of membership.
Co-operatives are governed by principles of democracy in that each member would have one vote when making decisions despite the number of shares that the member may have.
Co-operatives have separate legal personality from membership.
Co-operative officers are obliged to assist in the running of the co- operative societies for the benefit of membership.

Co-operative societies have difficulties, some of which are as follows:

The application form for registration must be signed by at least ten people who intent to be membership.
The Registrar of Co-operatives has to check and agree with the objectives of the enterprise.
There is a greater involvement of officers from the Registrar’s Office in the affairs of the Co-operative.
It is difficult to raise capital for co-operatives.

Private Business Corporation

This is a business governed by the Private Business Corporation Act.

It allows one or more people associated for a lawful purpose to forma private business corporation.
The business is a separate legal person apart from its membership.Thus, the members also enjoy limited liability in that they will not be liable for the debts or obligations of the business. They are only liable for what would not have paid into the capital of the business.
Members are not obliged to contribute money as capital of the business. Their contribution may be in the form of services or goods. You should note that this contribution should be expressed as a percentage interest.
The members are allowed to manage the business as its agents. You should note that the members here are not bound to the transaction,as the private business corporation is a separate legal person.
Only natural persons can be members of the private business corporation. Also note that people of low moral turpitude. For example, those convicted of fraud, theft or forgery and sentenced to a prison term or to a fine exceeding two thousand dollars cannot become membership.
The private business corporation is simple to manage. It is not required to hold any meetings or to appoint any officers such as directs or secretaries. However, the business is supposed to appoint a finance officer who may or may not be a member.
We should note that this business is still regulated by statute. Members have to sign a statement of incorporation and comply with requirements for registration.

Companies.

These are regulated both by common and statute law. The statute which regulates them is the Companies Act Chapter 24:03.

Companies are separate legal persons apart from the shareholdership. See Unit2.
A person who intends to form a company has to closely follow and comply with the requirements of the companies Act as to registration.
The members have limited liability in that they are only liable for the amount which would not have been paid on their shares.
Members do not become directors or managers of the company merely due to the fact that they are membership. They have to be appointed.
Shares in companies are transferable. A shareholder may sell his shares to another and as a result, the death or resignation of a share holder does not end the existence of companies.
There are private companies and public companies. These two have major differences as shown in the column below:

Private company

Public company

Number of members between 1 and 50.

Can commence business immediately after registration issued.

Must restrict the right to transfer its shares. Its name must include the word “private”.

It cannot invite members of the public to its shares.

May decide not to appoint an auditor if its members are less than ten or if at all the members agree.

Need not hold a statutory meeting or produce a statutory report.

Unlimited number of members.

Cannot commence business until a certificate of incorporation has been.

The right to transfer shares is unrestricted. Its name only has the word “Limited”

It can invite for subscription of shares from the public.

Must appoint an auditor if its members so Agree.

Must hold a statutory meeting and produce report.

Joint Sector

The joint sector is conceived as a marriage between the managerial expertise of the private sector and the financial resources and social orientation of the public sector. It is viewed as an effective means of achieving a mixed economy. “In a sense joint sector enterprises represent an application of the concept of mixed economy at the micro level”.

The main objectives and advantages of the joint sector are

(i) Curbing Concentration of Economic Power. The proponents advocate the joint sector viewing it as an important means of curbing the increasing concentration of economic power. The Committee even regarded the joint sector as possibly more effective than licensing in achieving this objective.

(ii) Social Control of Industry. Government participation in equity and management is expected to give a social orientation to the enterprise. The joint sector would ensure that the management of industry is conducted according to the overall policies laid down by the government and that public interest and not merely private profit would guide the operations of the enterprises. “Used effectively and with care, the joint sector can be a more useful instrument than all rules and regulations and penal powers of the state in ensuring that development is according to plan. The concept of the joint sector has thus the potential, if properly used, to get the best advantages out the mixed economy which has been accepted in our country as a state policy”.

(iii) Acceleration of Economic Development. The joint sector, by mobilizing and argumenting the productive resources can accelerate the pace of economic development. It enables private entrepreneurs and the state or state agencies to promote or invests in a greater number of projects than would otherwise be possible. “The resources of the private sector in savings investments and entrepreneurship can be harnessed in the joint sector with active state help to supplement the efforts made by the state in the public sector without the private profit motive being allowed to vitiate the effort.

(iv) Promotion of Mixed Economy. It is expected that the joint sector will promote the mixed economy and help achieve development objectives. “The basic justification of the idea of mixed economy is to harness all the productive forces of society, state as well as private to the task of economic development with view to accelerating the process. By allowing the private sector to play its part in the process, the state is able to develop entrepreneurship outside the government, and enlist it to supplement its entrepreneurial role. Similarly, a mixed economy allows the state to take advantage of voluntary savings in society for purpose of investment to supplement the resources it is able to mobilize for the purpose”.

(v) Broad basing of Entrepreneurship: Another advantage of the joint sector is that it helps broad base entrepreneurship by encouragingnew and small entrepreneurship. The joint sector enables potential entrepreneurs with small financial resources and less experience to participate in large enterprises as the public sector shares investment and the risk. “Many private entrepreneurs, whose means are not comparable with those of large companies, may come forward and take advantage of joint sector opportunities because the government’s support and facilitating roles are assured to them. There is some evidence of this at the state level, where the industrial development corporations seem to be playing the role of broad basing entrepreneurship”.

The risk involved
One should consider the risk involved in undertaking a certain type of business and protect oneself adequately from liability. For a sole trader, there is neither limitation of liability nor separation of business property from that of the ownership.

Explanatory Terms.

Mission and purpose

Mission and purpose are often used interchangeably through the level,there is difference between the two. Mission has exte__orientation and relates the organization to the society in which it operates. Amo__statement helps the organization to link its activities to the needs of the society and legitimize its existence. Purpose is also externally focused but it relates to that segment of the society to which it serves, it defines the business, which the company will undertake. We may consider the mission and purpose of Kenyatta University to visualize this differences.

The mission of the university is to provide high quality education, promote intellectual leadership develop human resource, advance knowledge through research and enhance technological , economic and social development of Kenya.

About the mission, the university states that:

Kenyatta University will be the center of excellence in the knowledge creation and dissemination capacity building instill democratic principles and increase access to higher education through open life long learning for sustainable development.

About the purpose , the university states that:

Thus, the mission of the company says that it can do for the country (society in general) while purpose suggests how this contribution can be made.

However, in general practice mission and purpose are either used interchangeably or jointly. According to Peter Drucker, “The purpose or mission of an organization the extent of which embodies the decision- maker’s philosophy; it implies the image which the organization seeks to protect”.

An organization’s mission when expressed in managerially meaningful terms indicates exactly what activities the organization intends to engage in now and in future. It suggests something specific about what kind of organization it is and to become. It depicts the organization’s business character and does so in ways that tends to distinguish the organization from other organizations. Missions sets forth principles and conceptual foundation upon which the organization reacts and the nature of the in which it plans to participate. Organizational mission, defined properly, offers guidance to managers in developing sharply focused, result-oriented objectives, strategies and policies. Therefore, a detailed understanding of the of the organizational mission is the starting point for rational managerial action and for the design of its strategies. Managerial effectiveness tends to begin with clarity of mission with an accurate, carefully delineated concept of just what the organization is trying to do and why.

Formulation of mission
Organization mission encompasses the broad aims of the organization; it defines what the organization strives for. Therefore, the process of defining mission for any organization can be best understood by thinking about its inception. Thus, the mission lies in the basic philosophy of those who and manage the organization as shown in the figure below.

Fig… Mission formulation

Characteristics of mission.
Every organization has a mission either defined explicitly or may be deduced from the actions of its top management. For a large organization, where its members do not have face-to-face contact, explicit mission statement is desirable as its serves the purpose of communicating to the members about the corporate philosophy, identity, character and image which govern their behavior in the organization. Therefore, while framing the mission statement, the following points should be taken into consideration so that it serves the purpose for which it is prepared:

Mission should be clear, both in terms of intentions and words used.
It should be feasible, neither to be unachievable, nor too low to demotivate the people for work.
It should be precise but self-explanatory, neither too narrow so as to restrict the organization’s activities, nor too broad to make itself meaningless.
It should be distinctive, both in terms of the organization’s contributions to the society and how these contributions can be made.

Goals.

It has been noted that organizations are purposive creations. Therefore, they must have goals. Organizational mission is one of the features of this purposive creation. Another feature is organizational goals, which are bought out of the mission. From this point of view, the nature of organizational goals is as follows:

Each organization or group of individuals has some goals. In fact, organizations are created for certain goals and members try to achieve these goals through their coordinated efforts.
Goals may be broad or they may be specifically mentioned. They may pertain to a wide or narrow range part of organization, and may be either long or short range. For example, the goals of a business organization may be say to earn profit. This is too broad a goal. To achieve this broad goal, some specific goal may be set, for example, how much profit and in which period. Thus, general goals may be translated in cooperative goal to provide definite action.
Goals may be clearly defined or these may not be cleaned have to be interpreted by the behavior of the organizational members, particularly those at the top level. However, clearly defined goals provide clear direction for managerial action.
Organizational goals have social suction, that is, they are created within the social norms. Since organizations are social units, their goals must conform to the general needs of the society. Various restrictions on organizational goals are put through social norms,rules and customs.
An organization may have multiple goals; many of these goals may even be incompatible. This happen because over the period of time, may exert their pressures on organizational goals. For example, economic and social goals of an organization may be incompatible; the achievement of one may be at the cost of the other at one point of time, while at other time, they may be integrated.
Goals have hierarchy. At the top level, it may be broad organizational purpose, which can be broken into specific goals at the departmental level. From the departmental objectives, units of the department derive their own goals. Thus, a hierarchy of goals is created.
Organizational goals can be changed; new ones may replace old goals. It is possible because organizations are free to set their goals within the overall social norms.

Role of organizational goals.
Organizational goals should be clearly specified because they perform a number of functions. For example Peter Drucker that objectives are essential in all key areas where performance and results directly contribute to the growth and survival of business for enabling managers to:

Organize and explain the whole range of business phenomena by such objectives;
Verify the objective in actual business operation;
Predict employee behavior;
Vouchsafe the soundness of decisions; and
Improve their performance.

The major functions and contributions of goals are:

Defining an organization;
Directors for decision making;
Performance standards;
Basis for decentralization;and
Integrating organization, group and individual.

Determinants of organizational goals.

Before initiating any action, the goals must be established as they provide direction for such actions. A contingency approach recognizes, however, that in some situations, it is difficult or impossible to set goals. In practice often organizational goals are set in a complicated power play involving various individuals and groups, and reference to values of the relevant individuals and groups in a particular society. There are many factors that enter into the struggle to determine goals and, thus, goals are the result of a continual bargaining- learning-adaptive process in which not only the internal factors, but also external environmental factors play a role.

Therefore, various determinants of organizational goals may be grouped into

Environmental determinants and
Personal determinants of organizational goals.

Environmental determinants.

The organization as input-output system receives inputs from the environment, transform these inputs and, returns the outputs to the government. The organization, therefore, depend upon the environment for its survival. In this process of interaction, the organization must adopt suitable strategies for coming to terms with the environment. This strategy may be in the form of competition or cooperation. Based on this, Thomson and McEwen have suggested four alternative strategies for dealing with the environment:

Competition,
Bargaining,
Cooperation, and
Coalition.

Out of this, the last three strategies relate to varying amount and form of cooperation. All of these allow outsiders to intervene and limit organizational decisions regarding goals, but the entry of outsiders is different strategies.

Personal determinants.
This affects organizational goals in two ways. First, choice of a particular organizational goal is an ordering of a kind of personal, particularly of top management/founders of the organization and they cannot eliminate their personal preferences. Second, choice of organizational goals depends upon various qualitative information, the interpretation of which is likely to be personalized. There are three important personal factors, which affect choice of goals. They include; personal preference and aspirations, value system of top management, and managerial power relationship.

Organizational and individual goals.

Goals may be considered from three perspectives:

Environmental level,
Organizational level, and
Individual level.

These three levels goals interact and influence one another. While the interaction between environment and organization has been identified, this section deals with interaction between organizational and individual goals. The relationship between organizational and individual goals can be presented as follows:

Fig…Relationship between organizational and individual goals.

The interaction between organizational and individual goals may take a variety of forms ranging from totally opposing to completely identical as shown in the figure. In between the two extremes, there may be three other positions, though hypothetically there can be many positions on this continuum. Exploring what individuals want from the organization and what the organization wants from the individuals can identify the relationship between the two.

Individual needs.
When an individual enters the organization, he brings with him a highly complex system of needs and attitudes. Many theorists, particularly psychologists, feel that the basic properties of most organizations do not match with the requirements of individuals. The phenomenon is known as personality view of individual-organization relationship. This is what leads to the formation of informal groups by individuals in formal organizations. Conflict is generated when an individual is placed in an organization with formal structures. This happens because of lack of congruency between the desire of a healthy personality and the demands of the formal organization.

Organizational needs.
Not only the individual has his desire to fulfill by joining an organization, the organization, in turn, also expects certain things from the individual. Personality theorists suggest that organizational properties require rational behavior from the individual. These also except that individual will follow organizational control and work according to organizational design.