Part Three:

Choosing The Legal Form of an

Ownership

3.1 Forms of Ownership and legal

requirement
3.2 Advantage and disadvantage for each
types of ownership

1
 What is owner ship
Ownership is the state, act, or right of owning something,
i.e., possessing something. The term may also refer to an
organization or group of owners.
 It is the exclusive and ultimate legal right to a lawful
claim or title.
 If you have ownership, you can possess, enjoy, sell, give
away, destroy, or sell an item of property.
 If you have ownership of something it means that you are
the owner; it belongs to you.
 Ownership does not only refer to people, but also to
other entities.
For example, the government is the owner of a state
2 company. Also, a holding company owns its subsidiary
 Forms of ownership and legal requirements
 Those forms have been modified over the course of
time to keep pace with business needs and the custom
of society.
Ownership of business is represented by the right of
individual or a group of individuals to acquire legal
title to property (assets) for the purpose of controlling
them and to enjoy the gains of profits from such
possession and use.

3
 Forms of ownership
 The most common forms currently in wide use by
small business are:
Sole proprietorship
Partnership
Corporations and
Cooperatives
 Each form of ownership has a characteristic internal
structure, legal status, size and field to which it is best
suited

4
 Sole proprietorship
 It is an individual or single ownership
 These firms are owned by one person, usually the
individual who has day-to-day responsibility for running
the business.
 The sole proprietorship is a form of business organization
in which
 An individual introduces his capital,
 Use of his own skill and intelligence in the
management of its affairs and
 It is solely responsible for the results of its
operation.
 This form is known also as individual or single
5
proprietorship, sole ownership or individual enterprise.

 Advantages of Sole proprietorships
a. Ease and low cost of formation and dissolution:-there
are no restrictions on either starting or terminating small
business operations.
b. Direct motivation and personal care
c. Freedom and promptness of action
The sole proprietor can take his own decision and there
is none to question his authority. the sole proprietor can
take prompt/quick decisions especially when an
emergency arises. 
d. Business confidentiality
e. Single Tax:-The proprietorship does not pay tax as a
business; the profits from the business are the personal
6 income of the owner and are declare on his individual
 Disadvantages of sole proprietorship
a. Limited resources and size:-the capacity and skill are
very limited. Lending institutions and suppliers may not be
willing to cooperate because it is neither safe nor dependable
which results in making the business to remain limited in size.
b. Limited Managerial Skill:- in complex and difficult
condition which requires different expertise knowledge
c. Unlimited liability:-The sole proprietor will be legally
liable for all debts of the business , a source of courage and
real devotion, limit his activities only in specified areas
d. Uncertain future/Death of the owner terminates the
business
e. Difficulty in hiring and keeping high achievement
7 employees
 Partnership
 The association of two or more persons to carry as co-
owners of a business where the relationship is based
on agreement is called partnership.
 This form of a business requires the existence of two or
more persons entering into a contractual relationship.
 This contract, which is an agreement between the
parties, is known as a memorandum of association or
article of partners’ deed.
 The Partners should have a legal agreement that sets
how,
decisions will be made,
profits will be shared,
8 disputes will be resolved.
 Kinds of Partners
1. A general partner
Assumes unlimited liability and is usually active in
managing the business. Most partners are general
partners.
2. A limited or special partner
Assumes limited liability, risking only his /her
investment in the business. Limited partners may not be
active in management, and their names are not used in
the name of the business. 
3. A secret partner
Takes an active role in managing a partnership but
whose identities are unknown to the public. i.e. the
general public does not know of this person’s
9 partnership status.
 Kinds of Partners
4. A silent partner
 As opposed to a secret partner, a silent partner, his identities
and involvement, is known to the general public, but is inactive
in managing the partnership business
5. Senior partners
 Assume major roles in management because of the long tenure
(possession), amount of investment in the partnership, or age.
They normally receive large shares of the partnership’s profits.
6. Junior partners
 Are generally younger partners in tenure, have only small
investment in the firm, and are not expected to make major
decision. They assume limited role in the partnership’s
management and receive a smaller share of the partnership’s
profits.
10
 See others…
 Advantages of partnership
1. Ease of starting
2. Increased source of capital:-
Partnership can offer creditors less risk than a sole
proprietorship; it is often an attractive investment.
3. Combined managerial skill
4. Definite legal status
Today’s partner can be assured that a competent lawyer can
answer virtually any questions he/she might have about
this form of ownership. i.e. lawyers can provide a sound
legal advice about partnership issues.
6. Motivation of important employees
7. Reduced risk
11
 Disadvantages of partnership
1.Unlimited liability
2. Risk of implied authority
 The fault and miss judgment made by a single partner
binds the firm and the remaining partners. Thus, they are
liable for the debts made by the partner.
3. Lack of harmony…agreement or synchronizing
4. Lack of continuity/instability
If any one of the general partners dies, withdraws
because of mentally or physically incapable (injured),
the partnership ends.
5. Investment withdrawals difficulty/frozen-investment

12
 3. Corporation
 A corporation, is an artificial person authorized and
recognized by law, with distinctive name, a common seal,
comprising of transferable shares of fixed values, carrying
limited liability and having a perpetual or continued or
uninterrupted succession

13
 Cont…
Nonprofit corporation: Legal entities that make
money for
reasons other than the owner’s profit.
Examples:
Churches
Charities
education foundations
trade associations
 Limited Liability Company (LLC): A new type of
business
ownership that provides limited liability and tax
advantages. Examples
14
Law firms
 Advantages of a corporation
1. Financial strength
2. Limited liability
3.Scope of expansion
 Corporations have greater potential than sole proprietorship or
partnerships
4. Managerial efficiency
Corporations enjoy the advantage of efficient management by
hiring specialist’s skilled persons to become members of the
board of directors to mange the corporation
5. Ease in transferring ownership
6. Legal entity status
A corporation can purchase property, make contracts, sue
15
and be sued in the corporate name.
 Disadvantages of a corporation
1. Difficulty of formation
 It is time consuming and cumbersome/not manageable to
establish corporations unlike the other forms of
businesses.
2. Lack of owner’s/manager’s personal interest
 These forms of organizations are managed by directors,
hired officials, and employees who may not be expected
to have such an interest in the success of the business as
the individual owner or partner would have in his own
business.
3. Delay in decision-making…it needs official meeting of
managers or board
4.Lack of secrecy….openness…lack of privacy
16
 4. Corporative
It is an organization owned by members/customers
who pay an annual membership fee and share in any
profits (if it is profit making organization).
 Cooperatives are people centered enterprises owned,
controlled and run by and for their members to realize
their common economic, social, and cultural needs and
aspirations.
 Cooperatives bring people together in a democratic
and equal way. 
Whether the members are the customers, employees,
users or residents, cooperatives are democratically
managed by the 'one member, one vote' rule.
17
 5. Other forms of business
1. Franchises
 is right to use the franchisor’s established name and
branding, as well as their already-tested business
model.
 The right to resell (or distribute) a franchisor’s product
and right to use someone else’s business system.
 A franchise is a business in which the owner of the
name or method of doing business (called the
franchisor) allows a local operator (called the
franchisee) to set up a business under that name.

18
18
 K Y OU
THA N n
ti o
e s
Qu

19