FORMS OF BUSINESS ORGANIZATIONS

Unincorporated and Incorporated Business

Businesses vary according to the legal form they take.
A. Unincorporated: These are businesses where there is no legal distinction between the owner
and the business. Everything is carried out in the name of the owner. These businesses tend
to be small and owned by one person, or a small group of people.
B. Incorporated: An incorporated business is one that has a separate legal identity from that
of its owners. Meaning, the business can sue, be sued, taken over or liquidated.
Incorporated businesses are often called limited companies and the owners are
shareholders.
Sole Proprietorship/Sole Trader
A business owned and managed by only one person. The person who owns the sole proprietorship
business is called sole proprietor or sole trader.
Advantages of A Sole Proprietorship
 Decision making is faster because there is no consultation.
 It requires little capital to start and run
 The sole trader can get assistance from his friends and family members in running the
business
 The business is flexible. This means that the sole trader can decide to change the type of
business any time e.g. from a hotel to retail shop.
 The sole trader has direct contact with the customers and therefore he knows the tastes and
preferences of customers.
Disadvantages of Sole Proprietorships
 The owner suffers loses and debts alone
 The business lacks continuity i.e. in case the sole trader dies or becomes incapable of
running the business, it will shut down.
 The sole trader works long hours and therefore has less time for leisure.
 The business is difficult to expand because there is limited sources of capital.
 The owner is likely to make wrong decisions because he does not need to consult.

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  It has unlimited liability i.e. if the business is unable to pay its debts then the property of
the owner will have to be sold to pay the debts.
Partnership
A business owned and managed by a minimum of 2 and a maximum of twenty people.
The owners of a partnership are called partners. All the partners must have a written agreement
known as a partnership deed or agreement. It is binding legal document that states the formal rights
of partners in the event of a dispute.
Contents of a partnership deed
 Name and address of the firm
 Name and address of each partner
 Duties and responsibilities of each partner
 Methods of keeping financial records
 The nature of the business and the date when it will start
 Ways of handling disputes
 Profits and loss sharing ratio
 Interest on capital if any
 Interest on drawings if any
 Salaries and commissions if any
 Method of dissolution of the partnership.
Types of Partnerships
1. Limited Partnership
This is where some partners provide capital but take no part in the management of the business.
Such a partner will have limited liability and can only lose the original amount of money invested.
This means that in case the business is unable to pay for its debts, the personal property cannot be
sold to pay the business debts.
However, even with a limited partnership, there must be at least one partner without limited
liability i.e. his personal property can be sold to pay business debts.
2. General or Ordinary or unlimited Partnerships
This a type of partnership where partners have unlimited liability. This means that if the business
is unable to pay its debts, the personal property of the partners can be sold to pay business debts.

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Types of partners
i. Active Partner
This is a partner who is involved in day-to-day activities of running the business. An active partner
also provides or contributes capital. An active partner is usually responsible for debts in the
business.
ii. Passive Partner/Dormant/Sleeping Partner
This is a partner who contributes capital for the business but not involved in the day-to-day
activities of running the business.
iii. Major Partner
This is a partner whose age is above eighteen years. This partners can contribute capital to business
and get a share of the profits just like other partners.
iv. Quasi Partner
This is a partner who has allowed the firm (business) to use his name in running the business.
 He gets a share of a profit or loss.
 He does not contribute capital.
 He is not responsible for the business debts.
v. Minor partner
This is a partner whose age is below eighteen years. This partner can contribute capital and get a
share of the profits just like other partners. A minor partner is not responsible for any business
debts.
Advantages of Partnership
 There is a chance of continuity if agreed in the partnership deed, if one partner is unwell
or away because the others will continue running the business.
 Wise decisions can be made because of consultation
 Capital contributed is more and therefore bigger business.
 Responsibilities are shared according to expertise of the partners.
Disadvantages of Partnerships
 Profits are shared out among all partners.
 Decision making is slower because partners will have to be consulted
 If one partner makes a wrong decision, it will affect all partners.
 Lacks business continuity.
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  Partners in a general partnership have unlimited liability.
Co-operatives
Co-operatives are group of people who agrees to work together and pool their resources for the
common interest. The owners of a co-operative are called members. A co-operative society
managed by a committee. Members of the co-operative society usually receive a share of the
profits every year. This is called dividends.
Types of co-operative societies
a) Producer Co-operative Society - a group of people involved in production e.g. farmers
and other manufacturing businesses.
b) Consumer co-operative society - a group of people intending to purchase and use the
same products.
c) Savings and credits co-operative society - a group of people who save money together
with the aim of offering its members a cheap source of credit.
d) Retail cooperatives – cooperative of retail members, who often work together to assert
their purchasing power.
e) Work cooperatives – are businesses in which its employees share ownership. Examples
might be a wine growing or milk producing cooperative. Workers will contribute to
production and be involved in decision making, share in the profit and provide capital
when buying shares.
Advantages of cooperatives
 Members have limited liability
 Cooperatives eliminate the exploitation of members by intermediaries
 Members obtain loans at low interests
 Members receive education through seminars.
 Members have equal chances of being elected to the management committee.
Disadvantages of cooperatives
 Poor management because of lack of qualified personnel
 Corruption and embezzlement of funds are perpetual problems for some cooperatives
 May suffer from political interference
 Withdrawal of members can cause financial problems.
Joint Venture Businesses
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A joint venture is when two or more businesses agree to start a new project together, sharing the
capital, the risks and the profits.
Advantages of Joint Ventures
 Sharing of costs is very important for expensive projects such as building new aircraft
 Risks are shared
 Takes advantage of local knowledge when joint venture company is already based in the
country.
Disadvantages of Joint Ventures
 Profits are shared among joint venture businesses
 Disagreements over important decisions might occur
 Difference in culture might affect important decisions
Franchise
Franchising – arrangement whereby a well-established and successful business permits another
business to use its name, business logo and trading methods in return for a fee.
 Franchisor – person who permits others to use his name, business logo and trading
methods.
 Franchisee – person who is permitted to use the name, logo and trading methods of another
business.
Franchisee pays initial franchise fee and royalty. The royalties are paid on annual basis and they
are calculated as a percentage of sales or profit. Franchising is common in catering business. E.g.
McDonald’s, Subway, Avis, Wimpy, Pizza inn etc.
The support given by franchisor to the franchisee includes:
 A licence to trade under the recognized brand name of the franchisor.
 A start-up package including essential equipment and branding materials.
 Advising on the location of the business in an exclusive geographical area in which to
operate. This means that the business will not face competition from other similar
franchisees.
 Training in how to run the business and operate the systems used by the franchise
 Advertising on behalf of all the franchisees in the chain
Advantages of Franchising to Franchisee
 Business gets customers from day one because it uses the name of a well-known business.
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 Advertising is done by the franchisor, which reduces expenses for franchisee.
 Chance of business failure is very low because the franchisee uses trading methods that have
been tested and found to be successful.
 Goods and equipment can be obtained from the franchisor at competitive prices.
 Given exclusive rights to operate the business in a given geographical area. This eliminates
competition from fellow franchisees.
Disadvantages of Franchising to Franchisee
 Pays a one-off start-up fee.
 A share of the franchisee’s profits is paid to the franchisor in the form of royalties.
 Pays an initial franchisee fee that increases the total cost of starting the business
 Restricted on the type and variety of goods he can sell at the franchise outlet.
 Anything wrong done by any member of the franchise will negatively affect all of them.
 Franchisor may exploit franchisee by supplying raw materials and equipment at a higher
price.
Advantages of Franchising to Franchisor
 Able to expand the business without raising additional capital required to start a franchise
outlet.
 Receives additional income in form of royalties and initial franchisee fee.
 Makes key decisions on products sold, price levels, and the store layout.
 Management of the franchise outlet is the responsibility of the franchisee.
 Cheaper method of growth
Disadvantages of Franchising to the Franchisor
 Incurs high costs on training the staff and advertising on behalf of franchisees.
 Poor management of one outlet could lead to bad reputation for the whole business.
 Distribution of supplies may be difficult due to different locations of the outlets or goods
involved.
Companies
A company is a business organization which has separate legal identity. They can own resources,
form contracts, employ people, sue and be sued.
Features of a company
 Raise capital by selling share.
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 Shareholders have limited liability. This means that they cannot lose their private possessions
if the company fails to pay its creditors.
 Must be registered with the Registrar of Companies after preparing and presenting two
documents that a company need to be formed. i.e. Memorandum of Association and Articles
of Association
Certificate of Incorporation
This is a document issued by the Registrar of Companies before a new company starts doing
business. It establishes the company as a separate legal body. After registration the company is
issued with a Certificate of Incorporation.
 A private limited company can begin its operations after receiving the Certificate of
Incorporation.
 A public company can only start operations after receiving both Certificate of
Incorporation and Certificate of Trading.

Articles of Association
This contains the rules under which the company will be managed. This document deals with the
internal running of the company.
Contents of Articles of Association
 It states the rights and duties of all the directors
 The rules concerning the election of the directors
 Procedure of holding Annual General Meetings (AGM)
 Procedure of issuing shares and transfer of shares
Memorandum of Association
This is a document that shows the relationship between the company and outside world (it deals
with people or organizations).
Contents of a Memorandum of Association
 The name of the company ending with the word ‘limited’ or ‘Ltd’
 The objectives of the company and nature of its activities
 A statement declaring that all shareholders have limited liability
Types of Companies.
A. Private Limited Companies
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These are companies that are formed by a minimum of 2 and a maximum of 50 shareholders.
Features of Private Limited Companies
 The name must end with the word limited. This means that shareholders have limited
liability.
 They are not allowed to issue shares or debentures to the general public.
 Limited liability/shareholders liable only up to the amount of investment
 Owned by shareholders who may be family members (restricted ownership)
 Shares transferred only by agreement among the shareholders and not freely transferable
 Accounts are not published but are available on application
 Legal entity i.e. can sue or be sued in the company name
Advantages of Private Limited Companies
 Shareholders have limited liability
 The owners of the company can maintain control of their company because they can
restrict the selling and transfer of shares to new shareholders.
 The company has business continuity. This means that it continues to exist even if one
shareholder dies or becomes insane.
 It can expand faster than a sole proprietorship or partnerships
Disadvantages of Private Limited Companies
 It cannot offer its shares to the general public so it has limited sources of capital.
 Shareholders cannot freely transfer shares.
B. Public Limited Company
It is a business organization that has a minimum of 7 shareholders and no maximum.
‘Going public’ can be expensive because:
 The company needs lawyers to ensure that the prospectus is ‘legally’ correct.
 The prospectus has to be printed and circulated
 A bank may be paid to process share applications
 The company must insure against the possibility of some shares remaining unsold,
therefore, a fee is paid to an underwriter who must buy any unsold shares.
 There are advertising and administrative costs
Prospectus - A document produced by a company that wants the public to its shares. When going
public a company is likely to publish a prospectus. This advertises the company to potential
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investors. It also invites investors to buy shares before flotation. Flotation is process of a company
‘going public’
Advantages of Public Limited Company
 Shareholders have limited liability
 There is business continuity
 Business can raise more capital from the sale of shares to the general public at the stock
exchange.
 PLCs can exploit economies of scale.
 Shares can be bought and sold very easily
Disadvantages of Public Limited Companies
 There are more legal formalities that are complicated and time consuming
 It is difficult to manage and control the company in comparison to other forms of
businesses. Managers can take control rather than owners.
 Selling shares to the public is expensive because of additional expenses such as the hiring
of experts like merchant banks and lawyers, printing of prospectus.
 There is little privacy about the affairs of the company because it must publish its
financial statements for the public to inspect.
 Outsiders can take control by buying shares.
Similarities between private and public limited companies
 Both have limited liability
 Both raise capital through selling of shares
 Both have business continuity
 Can expand faster than sole proprietorship and partnerships
 Both have separate legal identity
Differences between private and public limited companies
Private Limited Company Public Limited Company
1. Can be formed by a minimum of 2 and a Can be formed by a minimum of 7 and no
maximum of 50 shareholders maximum shareholders
2. Shares cannot be traded in the stock Shares can be traded in the stock exchange
exchange

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 3. It can begin its operations after only It can only start its operations after receiving
receiving Certificate of Incorporation both Certificate of Incorporation and
Certificate of Trading.
4. Shareholders cannot sell or transfer Shareholders can sell or transfer shares freely
shares freely without approval of all without the approval of existing shareholders.
other existing shareholders
5. Shareholders are able to maintain control Shareholders may lose control and
and management because they restrict management of the business because they do
who joins the company not restrict who joins the company.

Multinational companies
A large business with significant production or service operations in at least two different
countries. Examples include McDonald’s, Toyota, British Petroleum, Microsoft and Coca-Cola.
Features of multinational
 Huge assets and turnover.
 Highly qualified and experienced professional executives and managers.
 Powerful advertising and marketing capability.
 Highly advanced and up-to-date technology.
 Highly influential both economically and politically.
 Very efficient since they can exploit huge economies of scale.
 Ownership and control is centered in the host country.
Public Corporation
This is business organization owned and controlled by the state or government.
Features of public corporations
 State owned.
 Created by law.
 Incorporation.
 State funded.
 Provide public services.
 Public accountability.
Reasons for The Public Ownership of Businesses
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 Avoid wasteful duplications.
 Maintain control of strategic industries.
 Save jobs.
 Fill the gaps left by the private sector.
 Serve unprofitable regions.
Reasons against the public ownership of business
 Cost to government.
 Inefficiency.
 Political interference.
 Difficult to control.
Privatization
It is the process of transferring public sector resources to the private sector. In many countries, the
number of public corporations has been reduced. Privatization can take a number of forms.
 Sale of public corporations.
 Deregulation.
 Contracting out.
 The sale of land and property’
Reasons for Privatization
 To generate income.
 To reduce inefficiency in the public sector.
 As a result of deregulation.
 To reduce political interference.
Appropriateness of Different Forms of Ownership
The type organization structure that owners choose for their business will depend on a number of
factors such as:
 Growth.
 Size.
 The need for finance.
 Control.
 Type of business activity.
 The way in which a business plans to use its profits may be important.
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 Stakeholders.

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