Form 2BG 1& 2 Handout

Topic: Types of Business organization

1.Sole trader Business

Advantages
(a)Easy establish and manage- one of your friends may decide that making and/or
selling T-shirts in his spare time could bring him some money.He may have learnt
to design T-shirts in his art class, and decide to fund his project through personal
savings, or by borrowing some money from a relative or friend to start his own
business.
(b)Decision making is speedy- since the sole proprietor owns and operates his/her
own business, he/she does not have to wait for the outcome of any consultation
with anyone else in making decisions. Let us say that your friend produces T-Shirts
and that a customer prefers one design of t-shirt to another, your friend could easily
make a decision.
(c) Customers receive special attention- the sole proprietor can give the personal
touch and this usually suits customers. Customers like to know that those with
whom they do business see them as important. The proprietor too benefits because
the more satisfied the customer is, the more successful the business is likely to be.
(d) Profits are not shared- the sole proprietor does not have to share the profits
generated from his/her business activities. He/she does not have to make any
public declaration of it, or even of his investment.

Disadvantages
(a)Unlimited Liability- this simply means that all losses and debts incurred by the
business must be borne by the owner. In other words if the business does not
generate profits, then the owner has to sell even his personal belongings in order to
pay off his debts. All losses are borne by the proprietor.

(b) Problem in raising capital- a sole proprietor will normally find it difficult to
raise the financial capital for the general funding of the business operations.
Financial institutions such as banks do not readily lend money to such businesses
because, often the sole proprietor cannot provide the collateral needed as a backing
for the loan.
(c )Limited managerial skills- often the sole proprietor does not possess the
entrepreneurial or managerial skills needed to own and operate a business.
Therefore, poor decisions are sometimes made resulting in undue losses to the
business.
(d) Lack of competitiveness- whereas big businesses are able to offer goods at
competitive prices because of their volume purchases and greater range of
products, the sole proprietor has to stick to the existing price or even sell at a
higher price.
(e) Lack of Continuity- since the business is a personal one, that is not separate
from the owner, if the owner dies, then the business also dies if no one is
willinging to take over.
(f) Long working hours- especially at the initial stage of the business, working
hours may be very long and the proprietor may not be able to take a vacation
easily.

2. A PARTNERSHIP BUSINESS
A partnership is a business that is jointly operated by the parties
involved.According to the partnership ACT of 1890, two to twenty persons can
come together to form a business enterprise.

The major Characteristics of this type of business are the partners:

(a) Provide the financial capital needed
(b) Share the profits or losses
(c) Bear the liability for all the debts incurred by the business
(d) Need to register the business with the Registrar of companies
The Registrar requires that the name, type and address of the business, the
partners’ names citizenship and the date of the partnership agreement be
included in the registration document(s)
(e) Are liable to the business for all debts incurred.
PARTNERSHIP DEED
As is the case with a sole proprietor, a partnership requires few formalities. The
business must be registered with the Registrar of companies, and a fee has to be
paid.The registration document or the partnership deed is the legal document,
which sets out the guidelines for the operation of the partnership.
It must include the following:

1.Name of the Business

2.Type of business
3.Location of the business
4.The start up date of the business
5.Personal details of each partner for example name,address,nationality or other
occupation.
6.The amount of capital each partner has invested in the business
7.How the profits will be shared
8.The responsibilities of each partner in the business
9.The procedures for, and limits on withdrawals from the business for personal use
10.The admission of new partners, what happens when a partner dies or simply
leaves the partnership, or retires from the business.

Major Types of Partnership

There are two types of partnership arrangements which include a General or
Ordinary partnership which may have limited or unlimited liability.

General Partnership
In this arrangement all the partners have responsibility for the General running of
the business, and they have unlimited liability. This means that the partners
financial responsibility is not limited to their investment in the business. If the
business should become bankrupt, the partners, like the sole proprietor, may have
to use their personal assets to cover the firm debts. However, there may be a
partner who contributes capital to the business, but does not participate in the
overall management of operations. This types of partner is referred to as a sleeping
or limited partner.
Ordinary Partnership (Limited)
This provision of a partnership Act allow for the formation of the Limited
partnership.However, in this type of partnership, a minimum of one partner must
have unlimited liability.This means that if the business should become bankrupt,
then the partner with unlimited liability is responsible for debts beyond that which
the assets of the business can cover.

Advantages of a Partnership Business

1.A partnership is easy to form and manage.
2.Because more financial capital is brought into the business, a more large scale
operation can be undertaken.
3. The partnership increases the ability of the partners to obtain finance for the
business.
4.Liability does not rest with one person as is the case of the sole-proprietorship.
5.More informed decision making can be achieved since each partner brings his
own point of view to a business problem.
6.A better distribution of the work can be achieved.
7.The partnership enhances the marketability of the company since there is a
tendency to respond favourably to a business team rather than an individual.

Disadvantages of a Partnership Business

1.Each partner has to take responsibility for the acts of their partners.
2.Decision making is slower and even sometimes difficult because partners may
not agree on a particular approach to solve a business problem.
3.Operating cost are higher than in a sole trader business.
4.A partnership has a limited life. The affairs of the business are affected by the
removal of a partner through death, retirement or the admission of a new partner.

PROFITS- The distribution of profits from the business operation of a partnership

is usually shared in proportion to the amount each partner has invested in the
business.

3.COOPERATIVES
Cooperatives are businesses formed by groups with similar objectives and or
interests. The groups may be producers or users of products or services.
Cooperatives have their roots in agriculture, that is cooperatives were first
established by people in the agricultural sector. Such persons found it necessary to
pool their resources in the production of farm products. They bought tools,
seedlings and other materials in bulk for farming purposes.
Although cooperatives have certain common features e.g members pool resources
for their collective benefit, the overall characteristics of cooperatives are really
determined by their types.

TYPES OF COOPERATIVES
1.Producers’ Cooperative- in this type of cooperative society, members are in the
business of producing.For example in a farming community, farmers cooperate in
the production of agricultural products, share the workload, take decisions together
and share profits.

2.Buyers’ Cooperative- this type of cooperative is where persons use a particular

good in their business operations, come together to purchase that good in large
quantities and gain the benefits discounts, for example, these goods are then resold
at reduced prices to members of the cooperatives.

3.Retail/Consumer Cooperatives- this is a type of cooperative in which the

members come together for the purpose of buying certain goods or services at
reduced costs, as well as ensuring that these are in good supply at all times.

4.Financial Cooperative- this is a service-oriented cooperative society. It brings

together persons who have common interests. For example, professionals such as
teachers or other groups of persons with a common goal may come together to
form a credit Union. The aim is for members to form a credit Union. The aim is for
members to pool their resources in the provision of the service that the group
desires. Thus the credit union is Similar to a cooperative.

EARNINGS
A cooperative may realize earnings from its activities. For example, fund raising
activities may generate profits. Interests may be earned on investments made by
the cooperative on behalf of its membership.The cooperatives also charges interest
on loans to members thus adding to its earnings. From earnings, members receive
dividends on their shares if the cooperative makes a profit.

MANAGEMENT OF THE COOPERATIVE

The cooperative is governed by a General meeting. These meetings are held
annually, and it is at this meeting that a committee is appointed to handle the day to
day affairs of the cooperative. Committee members are drawn from the
membership.

ADVANTAGES OF A COOPERATIVE
1.Members pool their resources.
2.Members are entitled, when qualified to borrow from the society.
3.Loans are always offered at a minimal rate of interest.
4.Members are the owners of the cooperative society.
5.Members have a say in the overall decision making of the cooperative society.
6.The opportunity to build the financial base of the cooperative society is
facilitated through the low returns to members of their investments.
7.Members receive dividends on their shares.

DISADVANTAGES OF A COOPERATIVE SOCIETY

1.It lacks the speed to take decisions or even make changes to existing policies in
order to facilitate decision making and thus lose out on many opportunities to
progress.

2.It does not exist to make or maximize profits and this interferes withs its ability
to enjoy worthwhile economic gains.

4.COMPANIES
A company is another type of business unit. It is a form of business organization
that is recognized by law as a separate entity from the persons who actually own it.
So a dissatisfied person could bring a lawsuit against a company and not directly
against the persons who have invested their resources in the company.

They basically two types of Companies :

(a)Limited Liability Companies
(b)Unlimited Liability Companies

Limited Liability Company

Limited Liability means that investors or shareholders are not liable for debts
incurred by the company beyond the amounts they invested. In other words, a
limited liability company is one in which the shareholders have limited liability
toward the company’s debts.

Company with unlimited liability

In a private company with unlimited liability shareholders can be called upon to
take total responsibility for any debts incurred by the firm.Because of this situation
many companies opt for the limited liability company.

5.FRANCHISE

In a franchise, the owners/operators enter into an agreement with a parent

company.The parent company agrees to the franchised company selling its
products or services. The franchise has to abide by the guidelines and regulations
set out by the parent company.Usually the arrangement is set for a period of
time.Franchises could take the form of sole proprietorships, partnerships or private
limited companies.Examples of franchises are: KFC, BUrger KING, MC Donald’s,
BAskin Robbins Ice-Cream etc.

Characteristics of a Franchise
The characteristics of a franchise are dictated by the name of the business, and the
general operational guidelines set out by the parent corporation. Some features are
as follows:
(a) Bears the name of the parent corporation and enjoys its goodwill
(b) Is licensed by the parent corporation
(c) Receives assistance from the parent corporation in terms of professional
advice and marketing at the national level, as well as training for the staff.
(d) Pays fee to the parent corporation

Travellers easily recognize the franchise because of its logo and the
similarity of its layout and buildings and so patronize it as they would in
their own countries.

The major disadvantage is that the franchise is restricted in the line of

products it offers.