CHAPTER TWO

BUSINESS ENTERPRISE
AND
OWNERSHIP

PRINCIPLES OF ECONOMICS 1
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BUSINESS ORGANISATIONS
1. The sole proprietor (the most common)
2. The partnership
3. Limited liability company (private & public)
4. Co-operative Society, and
5. Public Enterprise

PRINCIPLES OF ECONOMICS UMaT, TARKWA, GHANA 2

 FORM OF OWNERSHIP
SELECTION CRITERIA
• The nature and size of business
• The capital required
• Type of managerial services required
• Financial liability the owners are willing to
assume

PRINCIPLES OF ECONOMICS 3
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 SOLE PROPRIETOR
Attributes
• Single person
• Sole source of capital
• Takes decision
• Bears all the risks

PRINCIPLES OF ECONOMICS 4
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 SOLE PROPRIETOR
Common Areas of Application
Farming, hairdressing, retailing, building,
windows cleaning, lumber, automobile
repair and maintenance, small-scale
mining and most of the service industries
where the element of personal attention is
very important.

PRINCIPLES OF ECONOMICS 5
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 SOLE PROPRIETOR
Advantages
Owner is boss
Owner receives all profits
personal interest in the efficiency
of business
Flexible business

PRINCIPLES OF ECONOMICS 6
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 SOLE PROPRIETOR
Disadvantages
 Lacks special skills and abilities
 The sole proprietor is liable for the debts of his
business and thus liability is unlimited.
 Strict limitation on its activity to acquire capital
for expansion.
 Illness or death may close the business

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 PARTNERSHIP
Legal definition of a partnership
It is the relationship which
subsists between persons carrying
on business with a view to profit.

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 PARTNERSHIP
Areas of Application
Some areas of application of partnership
include such professions as Law,
Accountancy, Estate Management,
Medicine and Small-scale Mining.

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 PARTNERSHIP
Advantages
• Flexible
• Skill and abilities pooled. Greater
degree of specialisation than sole
proprietorship
• Possibly greater capital
• Possibly larger size
PRINCIPLES OF ECONOMICS 10
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 ADVANTAGES OF
PARTNERSHIP CONT’D
• Operating economies (combining firms
reduces certain operating expenses such
as advertising, supplies, equipment)
• Retirement from management: A sole
proprietor wishing to retire may form a
partnership and relinquish management
functions to the partner.

PRINCIPLES OF ECONOMICS 11
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 PARTNERSHIP
Disadvantages
• Survives on continuous harmonous
relationships among partners
• Partnership terminates with the death or
resignation of any partner
• The business in unlimited (mostly)
• Each partner bound by contract of others
• Difficulty in withdrawing from partnership
PRINCIPLES OF ECONOMICS 12
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JOINT STOCK COMPANIES
•Basically it consists of an association of people
who contribute towards a joint stock of capital
for the purpose of carrying business with a view
to profit.

•The distinguishing feature of this type of

business is “limited liability”.

PRINCIPLES OF ECONOMICS 13
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 JOINT STOCK COMPANIES

Basic Certification/Requirement
1.Certificate of Incorporation
2.Certificate of Commencement
3.Company Code

PRINCIPLES OF ECONOMICS 14
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 JOINT STOCK COMPANIES
There are two kinds of joint stock companies relates to:

1.The private company and

2.The public company

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 JOINT STOCK COMPANIES
The essential differences between the public and private companies relates to:

1.Size
2.Method of raising of capital and
3.The transferability of shares

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 FINANCING A BUSINESS

Capital refers to the money and credit

required to run a business

PRINCIPLES OF ECONOMICS 17
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 SOURCES OF CAPITAL
Three broad classes of sources:
• Owner/proprietary/equity capital
• Retained earning (ploughed-back
profit)
• Borrowed capital

PRINCIPLES OF ECONOMICS 18
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 OWNER CAPITAL
Sole proprietor Partnership Corporation
• Own savings
• Shares (stocks)

PRINCIPLES OF ECONOMICS 19
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 BORROWED CAPITAL
• Short-term Capital (loan from bank payable
within one year eg. 30, 60 or 90 days)
• Long-term Capital (capital borrowed for longer
than one year)
– Notes (1 – 15 yrs)
– Leasing? (using assets for a fee)
– Bonds:
• Mortgage bonds (pledging specific assets as guarantee)
• Debenture bonds (by faith and credit of corporation

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 SHARES
Types of Share
• Preference shares (preferred bond)
Cumulative Preference shares
Participating Preference shares
• Ordinary Shares (common bond)
• Debentures

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 EXAMPLE
The Alapri Company Limited
Loan capital 20,000 £ 1 6% Debenture £ 20,000
Share capital 80,000 £ 1 Preference shares (5%) £ 80,000
100,000 £ 1 Ordinary shares £ 100,000
£ 200,000
Year 1
Profits available for distribution £ 7,700
This will be distributed as follows:
Debentures, 6% of £ 20,000 £ 1,200
Preference shares, 5% of £ 80,000 £ 4,000
Ordinary shares, dividend 2.5% £ 2,500
£ 7,700
Year 2
Profits available for distribution £ 15,200
This will be distributed as follows:
Debentures, 6% of £ 20,000 £ 1,200
Preference shares, 5% of £ 80,000 £ 4,000
Ordinary shares, dividend 10% £ 10,000
£ 15,200
PRINCIPLES OF ECONOMICS 22
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 CO-OPERATIVE SOCIETIES
• Capital is raised by members (but limited
to some established value).
• Each member has only one vote
• Management is in the hands of
Management Committee
• Profit distributed proportionally to size of
investment.

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 CO-OPERATIVE SOCIETIES
Areas of application (examples):
• Retail business
• Footwear industry
• Farmers and distillers
• Small-scale miners

PRINCIPLES OF ECONOMICS 24
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 PUBLIC CORPORATIONS
• Ownership is in the hands of the
public sector
• Government appoints Board
• The objective is to provide efficient
service at reasonable price
(minimum profit)

PRINCIPLES OF ECONOMICS 25
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 ATTRIBUTES OF PUBLIC
CORPORATIONS
• Control
• Size
• Ownership
• Finance
• Motives

PRINCIPLES OF ECONOMICS 26
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