WOLMER’S HIGH SCHOOL FOR GIRLS

Business Basics
Grade 9
What is a Business?
This is an organization where goods and services are exchanged for one another or for money

OR
This is an organization that is formed when a person or a group of persons uses resources to
produce a good or service that meets a customer’s wants with the aim of making a profit.
Reasons for establishing a Business

 To provide for family needs and wants

 To make a profit
 To gain an income
 For financial independence
 To be one’s own boss
 To escape the 9-5 routine
 To invest his/her money for retirement

Types of business ownership

1.Sole Trader/ Sole Proprietorship

This is a person who has total ownership of and responsibility for his / her own business.

Characteristics of Sole Trader/ Sole Proprietorship

 It is easy and in expensive to form
 He/ She performs a large variety of tasks related to the operation of the business
 He/she manages the business, but may have the services of family and friends
 It is usually financed by the owner.

Formation of a sole trader / Sole Proprietorship

There are no legal formalities involved in setting up a sole trader business except the trade name
must be registered.
Some traders must acquire special licenses. For example, the sale of the alcohol requires a
license from the local magistrate. the sale of food items requires prior approval from local health
authorities.

Legally, the business and the sole trader is in separable and therefore the owner is responsible for
all debts. Including taxes (income tax) and national insurance contributions etc.

Advantages of Sole Trader Disadvantages of Sole Trader

Starting and operating is easy The owner may have difficulty in obtaining
financial support if expansion becomes
necessary

Decisions can be made in a short time The owner nay has to work long hours

Profits do not have to be shared The business may not continue if the owner
dies
2. Partnership
This is the association of 2 to 20 partners operating a business for the common goal of making a
profit.

Types of Partners:

 General/ ordinary/Active partners: Those partners who actively involved in the day-to-
day operations of the business.
 Sleeping, Dormant, Docile or Silent Partners: those partners who invest money in the
business but do not take an active role in it.
 Limited partners: This means if the business become bankrupt, they will lose only what
they have invested in the business.
 Unlimited Partners: Those partners who have “unlimited Liability” status. This means
that if the business becomes bankrupt, then the responsibility is based not only on the
amount the partner invested in the business but also on their personal resources.

Characteristics of Partnership

 The minimum is 2 and the maximum is 20 members except in the case of banking where
the minimum is 10 members,
 Profits a shared equally or as stated in the Partnership Deed.
 Capital is provided by the partners as agreed,
 The retirement or death of one partner may require the organization or dissolution of the
partnership.

Formation of Partnership

When a number of persons wants to form a partnership, a written agreement should be drawn up.
this is called a Partnership Deed. In absence of such agreement the partnership will be governed
by the Partnership Act.

Partnership Deed/Articles of Partnership

This sets out in writing the terms of the partnership. The agreement should deal with:

 The name of the partners

 The nature of the business and the date of its commencement
 The amount of capital put in the business by each partner
 The arrangement for division of profits or apportionment of losses
 The amount of interest (if any) to be allowed on the capital
 The role of each partners
 Salaries, if any to be paid to certain partners for the performance of special duties.
 Voting rights
 Arbitration procedures if partners cannot reach an agreement
 The duration of the partnership and methods of dissolving the partnership

In absence of a Deed, the Partnership Act is enforced. It states that:

 Profits and losses are shared equally

 No salaries are paid to partners
 No interest is paid on capital
Advantages of Partnership Disadvantages of Partnership

More knowledge and experience are combined
for development
The business can grow because more capital is
available.
One person is not burdened with the work and
debts associated
It usually takes a long time to make decisions
Each partner has to share in the loss or
consequences associated even if it is not
initiated or caused by them
Liability may be unlimited in that if the
business becomes bankrupt, the owners may
lose their personal belongings.

3. Companies

A company is a business entity that has been incorporated, that is, the company has a separate
legal identify from who actually owns it.

This separate identity means that the company can enter into contracts, make any legal claims
and face any legal claims that are made against it.

A company may be registered as having limited liability or unlimited liability

What is Unlimited Liability?

This means that the investors or shareholders are LIABLE for debts incurred by the company,
that is beyond what they have invested.

What is Limited Liability?

This means that the investors or shareholders are NOT liable for debts incurred by the company
beyond the amount they invested.

There are two (2) types of limited liability Companies:

Private Limited Companies
Public Limited Companies
Formation of a company

Certain legal requirements must be met before a company can commence trading.

Both a Private and Public Limited Company must submit certain documents to the Registrar of
Companies.

These documents are outline below

1. The Memorandum of Association

This governs the company’s relationship with the outside world. It contains:
 The company’s name. which must contain the word limited
 The address of the company
 The objectives of the Company
 The statement that the liability of the shareholders is limited
 The authorized share capital and the type of shares to be issued

The Articles of Association

 2. This covers the internal running of the company. They cover such areas as:
 The names of the directors and their duties
 The voting procedures
 The rules governing the conduct of meetings
 The rights of the shareholders as well as the classes of shareholders
 The auditing rules
 The arrangements for sharing of profits
3. A list of directors and their written consents to take up shares and serve the company.
4. A statement of nominal capital – this how much capital, and how it is distributed. The
stamp duty must be paid to the relevant government tax agency.
5. A declaration signed under oath that the Companies Act was adhere to.

When all documents have been accurately prepared, under the guidance of an attorney-at-law
and the stamp duty has been paid, the papers are presented to the Registrar of Companies who
issues a Certificate of Incorporation.

What is a Certificate of Incorporation? This is the legal document that gives the company the
right to go into operation.

Private Limited Company

What is a Private Limited Company?

A Private Limited Company is an incorporated business organization consisting of 2 to 50

members, whose aim it is to make a profits.

Characteristics of a Private Limited Company?

 A private limited company is financed through the funds of private individuals, financial
institution, government institutions established to provide assistance to business ventures
or retained profits.
 Shareholders have limited liability
 The company must be registered with the Registrar of Companies
 The word ‘LIMITED’ must be included in the name
 Membership is a minimum of 2 and a maximum of 50 or more shareholders with the
expectations of some types of private businesses.
 Accounting statements must be prepared and an audit undertaken, with a copy issued to
the Registrar of Companies.

Advantages of Private Limited Company

 It is a separate entity from the persons who actually owns it.

 A larger capital base than a sole trader or partnership because the membership is larger
 The shareholders have limited liability. The financial commitment of the shareholders
does not extend to his/her personal possessions.
 The company has unlimited life, for example, years after some founding members have
moved on the company can still be operational.

Disadvantages of Private Limited Company

 Capital is limited since the membership is limited to 50

 The company must file its financial reports with the Registrar of Companies.
 It is not easy for shareholders to sell their shares. As a matter of fact, shareholders may be
required to sell their shares to existing members

Public Limited Company

A public Limited company or joint stock company is an incorporated company that offers shares
to the public.

N.B. The Public Limited Company is also called a Joint Stock Company because a number
of persons contribute to its jointly held stock.

Characteristics of a Public Limited Company

 There must be at least seven shareholders, with no limit on the maximum number of
shareholders.
 It must be incorporated.
 The shares are traded openly in the stock market.
 Funding may come from banks, other financial institution or through the offering of
shares to the public.
 The company continues, it does not close down on the death of a shareholder

Advantages of A Public Limited Company

 They can raise large amount of capital.

 The company can easily obtain loans.
 Shareholders have limited liability.
 It has a separate legal existence changes in the shareholders and directors do not affect
the continuity of the company.
 Shares can be quoted on the stock exchanges and sold to the public.

Disadvantages of A Public Limited Company

 Setting up of the company may be time consuming and costly

 Decision making takes longer
 The accounts have to made public
 Control of the company may be lost if another company or other people obtain sufficient
shares in the company.