Forms of business ownership

Entrepreneurship-and-Communication-Skills-notes

The following are the types of business organisations:

  1. i) Sole proprietorship –This is a business owned one person.

Advantages

  • Ease of formation: this is the easiest form of business organization to establish. There are no complex forms to complete and no documentation required between you and any other party. It involves registering your choice of business with the registrar of companies filling in a simple form and paying a small registration fee.
  • Easy to raise capital.
  • Owner makes independent decisions: the business owner has complete control over the business is solely responsible for all decisions in the business.
  • Owner has personal contact with employees and customers.
  • Owner enjoys all the profits.
  • Flexibility: the business owner is able to respond quickly to business needs in day-to-day management decisions of the business. One can easily take advantage of an attractive business opportunity.
  • Total control of business

Disadvantages

  • Bears all the losses.
  • Capital base may be limited: This kind of business has less financing capacity. The amount of funds a sole proprietor can raise is limited to their  assets and their credit worthiness.
  • Has unlimited liability: The business owner has little or no protection against personal liability in the event of bankruptcy or adverse legal judgement. Personal assets such as the owners house, land, car and investments are liable to be seized if necessary to pay outstanding debts.
  • Success of the business depends on the entrepreneur’s hard work.
  • Business operations can be affected death of the owner.
  1. ii) Partnerships

A partnership is an association of two or more persons who come together to carry on a business with a view to making profit. Although it is possible to establish a valid partnership without a formal agreement, it is advisable to sign an agreement first. The agreement will state:

  • The effective date of the partnership.
  • The business name of the partnership.
  • The contributions of capital each partner
  • How the business profits and losses will be shared.
  • How a partner may withdraw from the partnership
  • How the business assets and liabilities will be shared in the event of a dissolution.

 

Advantages

  • Capacity for more capital; partners can raise more capital than a sole trader. The asset base is much higher.
  • Work is divided among partners.
  • Better combination of skills and talents: for example, a mechanic and driver could successfully combine resources and talents to start a driving school.
  • Losses and liabilities are shared among partners.
  • Business can easily expand.
  • Formation of the business is simple: the registration and legal formalities are easy and simple.

 

Disadvantages

  • The liability of partners is unlimited.
  • Partners are likely to disagree on various matters affecting the business.
  • If one partner makes a mistake, all other partners suffer the consequences.
  • Some partners may work harder than others, yet the profits are shared. This may discourage a hard working partner.
  • If the business relies heavily on one partner and the partner leaves or dies, the firm can easily collapse.
  • Control is shared

 

iii)  Private limited company – It is formed a minimum of two shareholders and a maximum of fifty.

           

Advantages

  • Can raise more capital through sale of shares.
  • It has limited liability.
  • Death of a shareholder does not affect its operations.
  • They are managed professionals.

 

Disadvantages

  • Shareholders can only transfer their shares with the consent of other shareholders.
  • The company is not allowed to appeal to the public for extra capital, so it may find it difficult to raise money for expansion.
  • Accounts of the company must be filed annually with the registrar of companies.

  1. iv) Public limited company – It has a minimum of seven shareholders and no maximum number of shareholders

            Advantages

  1. Shareholders liability is limited to the amount contributed.
  2. It can raise more funds through sale of shares.
  3. There is no restriction on the transfer of shares.
  4. Public companies can easily expand due to large capital base.

Disadvantages

  1. The procedure of forming the company is long and complicated.
  2. Raising capital can be expensive due to the cost involved.
  3. As the company grows it may be difficult to manage.
  4. Once established it has to comply with many regulations.
  5. The accounts of a public company must be published, so there is no secrecy or privacy about its affairs.
  6. Owners exercise little control over the business.

v)        Co-operative – It is formed people with a common interest such as those in the same trade or dealing in similar commodities.



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