BUSINESSS ORANISATIONS – PRIVATE SECTOR

There are two broad categories of privately owned business organizations, namely:

a. NON – INCORPORATED ORGANISATIONS

An organization which according to the law has no separate legal entity from its owners. This means that the owner
and the business are one under the law. It also means that the organization cannot enter into a contract on its own
and it cannot sue or be sued as a firm. e.g. sole trader and partnership.

B. INCORPORATED ORGANISATIONS
An organization that the law recognizes as an artificial person, or as legal entities in their own right and not the
employees of them.
An incorporated organization as a legal entity has certain rights – to enter into contracts.
- To own property and employ people.
- To sue and be sued for breach of contract.

PRIVATE SECTOR
This is a section of the economy that consists of business organizations owned and controlled privately by
individuals. The main objectives of a firm in the private sector are maximizing profits for the owners.

1. SOLE TRADER/ SOLE PROPRIETOR

- A business owned and controlled/ operated by just one person who provides all of the capital needed to form,
operate or expand the business. Eg farmers, Hairdressers

FEATURES OF SOLE PROPRIETORSHIP

- Owned and controlled by one person.
- No continuity.
- Easy and simple to form.
- Owners face unlimited liability.
- All profits belong to the sole trader who bears all the risks and losses.

ADVANTAGES DISADVANTAGES
Requires small amount of capital to set up which is - however there is lack of capital for expansion or
easy to raise modernizing the business since he/she contributes
the capital alone.

Easy to set up, run and manage because there are no - however there is Division of labour may be
complex procedures required difficult to organize because of the small size of
the business; as a result the sole trader is always
overworked.

- All the profits made belong to the owner since he is
alone
The owner is his own boss therefore makes
independent and quick decisions on how to run the
business and has the freedom to choose his own
holidays, hours of work
Business affairs can be kept private since there is
no requirement to submit financial documents
except for the tax office.
- however Difficulty to borrow money from
financial institutions because sole traders are
considered high risk customers
-
- however there are limited skills and abilities from
which the business can benefit.
-
- No assured continuity/ limited life

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2. PARTNERSHIP
- A relationship that exists between two to 20 people who have come together to do a common business with the
view of making profit. Eg accountants, builders, doctors, lawyers
- There are two types of partneships:
a) Limited liability partnership (LLP)
A partnership in which at least one partner has unlimited liability and other partner’s liability is restricted to the
amount of capital invested in the business.
b) General/ordinary partnership
A partnership in which all partners have unlimited liability, and are usually very active in the operations of the
business.

FORMING PARTNERSHIP

In forming a partnership 2 – 20 people come together to form a partnership. They have to draw up legal document
called partnership deed or partnership agreement. The document gives details of the way in which the
partnership is organized and run.

CONTENTS OF PARTNERSHIP DEED

- Name of the business and the names of partners.
- Amount of capital contributed by each partner.
- How profits and losses will be divided or shared among partners.
- Duties and rights of each partner.
- The duration of partnership and the conditions under which it may be brought to an end.
- Amount of salary to be paid to each worker.

FEATURES OF PARTNERSHIPS

- Formed by 2 -20 people.

- Each partner contributes to raise capital.
- Has no legal entity – ownership and control is not separate.
- Has unlimited liability
- No assured continuity.
-
ADVANTAGES DISADVANTAGES
More capital is raised than in the case of the sole Membership of partnership is limited to 20; this
trader as more people are involved. restricts the firms’ ability to raise more capital

Expenses and management of the business are Conflicts may arise among partners.
shared.

There is a breadth of skills and abilities from which Decision making may be delayed by consultation
the business can benefit because several people may and disagreements among partners
be involved this may lead to management of the
business.

Each partner may specialize in one aspect of the Partners have unlimited liability and are therefore
business and this promotes efficient management personally liable for the debts of the business – their
personal assets are at risk.

SIMILARITIES BETWEEN SOLE PROPRIETORS AND PARTNERSHIPS

Both

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 - are easy to set up
- have unlimited liability
- have no assured continuity/ have limited life
- Are managed and controlled directly by owners.
- Have no separate legal entity

DIFFERENCES BETWEEN SOLE TRADERS AND PARTNERSHIP

SOLE TRADERS PARTNERSHIP

- owned by one person - owned by 2 – 20 people

- capital is provided by one person
- decision making is fast
- limited skills and abilities
- profits/ losses belongs to the owner
- everything is done by the owner alone
- Capital is contributed by partners.
- decision making is slow due to consultation
- breadth of skills and abilities
- Profit / losses shared by all partners.
- work and expenses are shared

CONTRIBUTIONS OF THE SOLE TRADER AND PARTNERSHIP ON BOTSWANA’S ECONOMY

-Provide jobs- which helps improve the people’s standard of living

-Pay tax-which is a source of income for developments in Botswana.
-Export goods – which brings in foreign exchange

LIMITED LIABILITY COMPANIES

A limited company is one where the law primarily recognizes the organization as an artificial person; it has a
separate legal entity from its owner. This means;

- The company exists separately from owners and continues to exist if one of the owners should die.
- It can make contracts/ legal agreements.
- Can sue or be sued.
- Can own property.
- Companies are jointly owned by people who have invested in the business called shareholders, who appoints
directors to run the business.

NB: In Botswana according to the Company Act, two documents, the Memorandum of Association and articles of
association have to be prepared before a limited Company can be created.
They are drawn up and presented to the Registrar of Companies by promoters i.e. the people who wish to form a
company.

LIMITED LIABILITY
The liability of the owners (shareholders) is limited to the investment they made by buying the shares in the
company i.e., they will only pay up to the amount they invested in the business.

IMPORTANCE OF LIMITED LIABILITY TO THIRD PARTIES AND THE COMPANY

-In case of a law suit, the assets of the owner cannot be used to pay the debts of the business unless they were
pledged as collateral.
- It attracts capital since it encourages the public to invest in the company without fear to lose personal assets
-It encourages the company to borrow money and invest without fear which increases the chances of growth and
progress.

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PRIVATE LIMITED COMPANY
- It is formed by two to fifty people. It is registered under the companies act with the word ltd as part of its name.

FEATURES OF A PRIVATE LIMITED COMPANY

- The number of shareholders is subject to a minimum of two and a maximum of fifty.
- Exist as separate legal entity.
- Not allowed to sell shares to the generally public at the stock exchange.
- Shares are not freely transferable
- The company is controlled by shareholders who are also directors.
- Not required by the law to publish its accounts annually.
- Start trading as soon s it obtains a certificate of incorporation

ADVANTAGES

ADVANTAGES
Has limited liability which protects
shareholders’ assets from being used to pay
company’s debts
The shareholders have direct control over
company’s affairs. Their view is heard at
annual general meeting.
DISADVANTAGES
the There are too many legal formalities so this makes
the forming a limited company difficult and costly.
the Shares cannot be freely transferred to a new investor
the without the approval of the other shareholders so this
limit the shareholders ability to sell his/her shares.

Can easily raise more capital by selling its shares The growth of a private limited company can be limited
privately to friends and relatives.. by lack of capital since its shares cannot be sold openly to
the general public.

PUBLIC LIMITED COMPANY.

A public limited company is a corporate association of at least 2 persons which is registered with the Registrar of
Companies and owned by shareholders who have limited liabilities.

FEATURES OF PUBLIC LIMITED COMPANIES.

 It is a company formed by 2 to infinity shareholders.
 It owned by shareholders and controlled by a board of directors who are elected by the shareholders of the
company.
 Shares are freely transferable
 It is required to publish its accounts annual.
 It starts trading after obtaining the certificate of incorporation and the certificate of trading.

ADVANTAGES DISADVANTAGES
Shares are freely transferable on the stock exchange i.e. It is difficult and expensive to form. The
shareholders can take their shares to the stock exchange and sell formalities involved are complex, costly and
them at any time without the consent of other shareholders time consuming.

Can raise large sums of capital because they sell their shares to Raising of more capital may be expensive
the general public on the stock exchange and can also borrow because it involves the commissions of
money by issuing debentures. stockbrokers and merchants banks.

Enjoy maximum continuity. It is controlled by hired experts so the original

owners may lose control over the company as it

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 grows big.

Large size enables them to enjoy economies of scale. The annual accounts of the company are open to
public inspection which reduces confidentiality
of the firm.

DIFFERENCES BETWEEN PRIVATE AND PUBLIC LTD CO.

The term public in public limited company means that the general public is invited to buy shares from the company
while the term Private in private limited companies means that the shares are sold privately to individuals .

PRIVATE LTD CO. PUBLIC LTD CO.

-Formed by 2-50 people -Formed by 2 to infinity shareholders

-Shares are not freely transferable
-Shares are sold privately to individuals or relatives and
friends.
-Controlled by shareholders
-May not publish its accounts
Name ends with the word proprietary limited i.e. (Pty)
ltd
-Has limitations to raising capital
-Starts business upon receiving certificate of
incorporation
-Not required to issue prospectus.
-Shares are freely transferable
-Shares are sold to the general public through stock
exchange
-Controlled by a board of directors
-Must publish its accounts annually
-Name end with abbreviations (Ltd) or Plc
-Has wider access to raising capital.
-Starts business upon receiving certificate of
incorporation and certificate of commencement or
trading certificate.
-Required to issue prospectus.

Limited Companies are required to draw up or prepare two documents before a company can be created i.e. the
memorandum of association and articles of association

a. MEMORANDUM OF ASSOCIATION
A document that lays down and defines the powers and limitations of the company. It states how the company
intends to relate to the outside world.
Contents
-Name of company, ending with the word “limited”
-Location of the company’s registered office.
-Objectives of the company
-Amount of authorized capital

b. ARTICLE OF ASSOCIATION
A document that lays down the rules and regulations for the internal affairs of the company. It states clearly how the
internal affairs of the company are going to be run and managed.
Contents
-Rights, obligations and powers of director
-Rights and powers of each shareholder
-Procedure of electing directors
-The issue, transfer and forfeiture of shares
-Procedure of distributing profits and carrying out auditing.

NB. The two documents are drawn up and presented to the registrar of companies by the promoters’ i.e. the
people wishing to form a company.

CERTIFICATE OF INCORPORATION

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This is issued by the registrar of companies after ensuring that both the memorandum and articles of association are
in accordance with the provisions in the companies act.
-It certifies that the company has been registered and incorporated as a separate legal entity. With this certificate the
private limited company can start trading.

THE PROSPECTUS
A document prepared by public limited companies inviting the public to subscribe to the shares of the company.
 It gives details of the company’s history
 Details on shares to be issued
 Opening and closing dates of subscription
 Name of the bankers to whom cash and application forms are to be sent

TRADING LICENCE
A certificate issued to the public limited company to commence business.

BOARD OF DIRECTORS
Limited company is controlled and governed by board of directors which is elected by the shareholders during an
AGM.
Membership varies from two – six in private ltd company and six – thirteen in a public ltd CO.
 Board of directors draw up the policy of the company
 control and govern the day to day operations of the company
 implement the companies aim and objectives

SHAREHOLDERS
-They are the owners of the company.
-They inject capital into the business for use in the day to day operations.
- They take part in decision making of the company through the annual general meeting.

ANNUAL GENERAL MEETING

The Companies Act requires a limited company to hold annual general meeting once a year. An AGM is a meeting
of all the shareholders.

The purpose of AGM is to:

- Approve the audited accounts presented by the managing directors.
- Elect the board of directors.
- Receives the director’s reports.
- Discuss the affairs of the company.
Deal with any issues that could not be settled by the board of directors

ROLE OF PROMOTERS AND REGISTRAR OF COMPANIES IN THE FORMATION OF A

LIMITED COMPANY

PROMOTERS
- These are people who wish to start a company
- The y come up with the company name and register it with the registrar of companies.
- They draw up the memorandum and articles of association in accordance with the companies act and submit to
registrar of companies for approval.
- After receiving the certificate of incorporation, they sell shares to raise capital and commence the business.

REGISTRAR OF COMPANIES
- Approves the company name after ensuring that there is no other similar name existing.
- Receives memorandum and articles of association and checks if they are in accordance with the companies act
- Issue certificate of incorporation if they are satisfied with the articles and memorandum of account.
- It ensures that the company does not raise more capital than the authorized capital.

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 CAPITAL OF LIMITED COMPANIES
The main source of capital for limited companies is selling of shares and issuing of debentures.

Capital of a limited company

Shares Debentures

Naked Mortgaged

Ordinary Preference
Redeemable Irredeemable

Authorised capital is the total amount of money that a limited company is allowed to raise through the issuing of
shares.

1. SHARES
A unit of a limited company’s capital or a portion into which the capital of a limited company is divided.

TYPES OF SHARES
a. Ordinary shares
b. Preference shares

ORDINARY SHARES
 These are shares which receive variable rates of dividend depending on the profits made.
 Shareholders get dividends after preference shares have already received theirs.
 Shareholders have voting rights because the shares are more risky form of investment.
 Shareholders will only be paid after all the debts of the company have been paid if the company fails.

PREFERENCE SHARES
These are shares which receive dividend on a fixed rate e.g. 10 %. They are classified as: Cumulative PS, Non –
cumulative PS, Redeemable PS and Participating PS.
-They receive dividend before the ordinary shares.
-Shareholders have no voting rights at AGM’s

TYPES OF PREFERENCE SHARES

A. Cumulative preference shares: The cumulative P.S. gets a fixed dividend every year. If in one year no profits
are made, they are paid in arrears in the next year when profits are made.

B. Non – cumulative preference shares: They do not have any right to arrears of dividend, i.e. If the company
makes no profit this year, they get nothing and the next year the company makes good profit they only get their
amounts.

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C. Redeemable preference shares: These are shares which will be bought back by the company at a later date
either out of accumulated profits or from money received from a fresh sale of shares.

d. Participating preference shares: The shareholders here are entitled to a bonus if a very big profit is made in a
particular year. The shareholders participate in decision making in the company.

DIFFERENCES BETWEEN ORDINARY & PREFERENCE SHARES

ORDINARY PREFERENCE

 Receive dividend after preference shares
 Shareholders have voting rights.
 More risky form of investment
 Receive a variable rate of dividend
depending on the amount of profits made.
 Receive dividend before ordinary shares.
 Shareholders have no voting rights.
 Less risky than ordinary shares.
 Receive dividend on a fixed rate and shares
may be cumulative, participating or non
cumulative.

2. DEBENTURES
A loan given to a company by outsiders on which a fixed rate of interest must be paid whether the company makes
profit or not.
 Debentures are long term loans to the company.
 Debenture holders are not owners of the company; they are creditors of the company.
 Debentures holders are paid a fixed rate of interest every year.
 Debentures may be redeemable as they are loans.

TYPES OF DEBENTURES

A. Naked debentures- these are debentures which are issued without any property or security pledged against them
i.e they are not secure.
B. Mortgage debentures- have some property pledged against them. They are more secure
C. Redeemable debentures- are issued for a fixed period of time and can be bought back by the company
D. Irredeemable debentures- can never be bought back. The money borrowed against them remains outstanding
until the company is liquidated. The holders get interest against their debentures

DIFFERENCES BETWEEN DEBENTURES AND SHARES

SHARES DEBENTURES

-It is a unit of limited company’s capital
-A Shareholder is part-owner of the company,
and may vote.
-Shares are paid dividend when profits are
made.
-Shares are usually irredeemable.
-Shareholders may get more than the face value
when company is liquidated.
-Shareholders especially ordinary shares receive
variable dividend.
-It is a loan borrowed from members of public
-Debenture –holder is a creditor and has no voting rights
-Debentures are paid interest whether or not the company
makes profits.
-Debentures are redeemable.
-Debentures holders are paid only the face value of the
debentures held when the company is liquidated.
-Debenture holders are paid fixed interest.