LECTURE FOUR

LEGAL FORMS OF BUSINESS

Legal Forms of Business 1

 4.0 Introduction
The legal forms of business are:
– Sole Proprietorships
– Partnerships and Limited Liability
Partnerships
– Limited Liability Companies (corporations)
Others
– Co-operatives
– Community Interest Companies (CIC)/ Social
enterprises
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 4.0 Introduction
LEGAL FORMS OF BUSINESS OWNERSHIP

Legal Forms of Business 3

 4.0 Introduction

The choice depends on circumstances and

objectives of the business.

Each of the forms, has distinct advantages and

disadvantages in terms of
• the life of the business,
• the ability of business to raise cash,
• and taxes
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 4.1 Sole Proprietorships
- A business owned by a single individual.
----Most businesses start as sole proprietorship as it is
quick, easy and cheap to form.
– As a firm grows the advantage of corporate form may
come to outweigh the disadvantages

Features of sole Proprietorships:

• Non legal Entity: It has no legal entity separate
from the owner

• Unlimited Liability

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 4.1 Sole Proprietorships
Features of sole Proprietorships (Cont)
• Simple to form--may require doing a little more
than getting a license and opening your doors

• May be helped by family members or may

employ others to help

• Most common form of business organisation

• Many large corporations start out as small

proprietorships
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 4.1 Sole Proprietorships
Registration of Sole Proprietorship Business
Under the Business Name Act of 1962 (Act 152),
every sole proprietorship must be registered with
the Registrar General

The registration of name prevents others from

trading with the same name

The registration are renewed annually.

A statutory fee is paid on registration.

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 4.1 Sole Proprietorships
Registration of Sole Proprietorship Business
The following document are required:
• The name of the business
• The objectives of the business
• The principal place of the business
• Other places where business is carried out
• Particulars of the owner: full name, nationality,
place of residence etc.

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 4.1 Sole Proprietorships
Advantages of Sole Proprietorship Business:

• Easy to form: It is straightforward and easy to set up with

little legal requirement and cost

• Decision making: the owner is his own boss makes all

decisions.

• Sharing of profits: The owner keeps all profits.

• Confidentiality: Legally no audit of account is Required

No public disclosure of records (except the VAT
returns, income tax returns to tax authorities)
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 4.1 Sole Proprietorships
Disadvantages of Sole Proprietorship
Business

• Unlimited Liability: Creditors can look beyond

business asset to proprietors personal assets

• Limited sources of fund: Financing limited to

personal wealth of the owner (cannot raise
equity investment from others ) this limits the
business’ ability to exploit new opportunities.

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 4.1 Sole Proprietorships
Disadvantages of Sole Proprietorship (Cont.)

• Taxation: No distinction between personal and business

income and all profit are taxed as personal income
whether retained or not

• Transfer of ownership: transfer of ownership is less

flexible except selling the bus assets or the entire bus.

• Life span: the life of a sole proprietorship is usually

limited to the life of the owner.

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 4.2 Partnerships and Limited Liability
Partnerships

Partnership
A business formed by two or more individuals or
entities with intention to share profits.

Limited Liability Partnership is a partnership with

one or more members with limited liabilities and
at least one member with unlimited liabilities

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 4.2 Partnerships and Limited Liability
Partnerships
Features:

• It is similar to sole proprietorship in many ways:

• Non Legal Entity: Has no legal entity separate from the owners

• Unlimited Liability (except dormant partners with limited liabilities)

• Government regulation: Not highly regulated

• Joint and several responsibility

• Membership is restricted to 20 ( except non trading partnership—

law, accountancy)

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 4.2 Partnerships and Limited Liability
Partnerships
Registration of a Partnership Business
The formalities to establish a partnership follow those of
sole proprietorship.

• It is also regulated by the Business Name Act of 1962 (Act

152), every partnership must be registered with the
Registrar General.

• It is legally required that the names of all the partners

appear on the firm’s letterhead.

• Partnership Agreement: It’s not a legal requirement but it

would be a good idea to have a partnership agreement
from the onset.
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 4.2 Partnerships and Limited Liability
Partnerships
Partnership Agreement
In the absence of an agreement, the Partnership
Act assumes the following in the event of a
dispute:
• All partners have an equal vote in how the
business should be run.

• All partners have invested equally in the

business

• All partners have equal right share of profits and

losses
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 4.2 Partnerships and Limited Liability
Partnerships
Partnership Agreement (Cont.)

• Partners would not receive interest on their capital invested

• Dissolution: The Partnership is automatically dissolved if one partner retires,

withdraw or becomes bankrupt

Partnership Agreement must define some broad areas of responsibility and

authority:
• Details of partners

• The nature of the business

• Duration of partnership

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 4.2 Partnerships and Limited Liability
Partnerships

Partnership Agreement (cont)

• Capital contribution by partners and any agreement on
interest payable to partners for the money introduced

• Calculation and sharing of profits

• Management and control of the business

• Dissolution

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 4.2 Partnerships and Limited Liability
Partnerships
Advantages of Partnership Business
• Easy to set up

• Access to the skills and experience of other

partners (complementarities).

• Stronger psychological strength to face

challenges.

• Confidentiality:

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 4.2 Partnerships and Limited Liability
Partnerships
Advantages of Partnership Business
• Increase access to capital

• Better possibility to win large (government)

contract hence higher possibility of growth

• Can be easily transformed into PLCs

• Not subject to corporate tax

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 4.2 Partnerships and Limited Liability
Partnerships
Disadvantages of Partnership Business
• Joint and Several responsibility
• Exit of one partner leads to dissolution (unless
specific continuation provision is made in the
agreement)
• Less flexibility in transferring ownership
• Subjected to personal income tax whether
profit is drawn or not
• Requires high degree of mutual trust: Many
come to a blow
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 4.3 Limited Liability Companies/
Corporations (PLCs)
-- A business created with distinct legal
entity composed of one or more
individuals or entities.
Features:
• Distinct legal entity ( can sue and be sued,
can borrow money and own property, can
be general or limited partner etc).

• Limited Liability.
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 Limited Liability Companies/
Corporations
Features (Cont.):
• Separation of ownership and management
( particularly in large companies --- owners
(stockholders) elect board of directors who
intend appoint managers).

• Transfer of ownership.

• The largest and the most important forms of

businesses in modern economies.
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 Limited Liability Companies/
Corporations
Features (Cont.):
Corporation forms have variations around the
world, the regulations may also differ.
They are often called Joint Stocks companies,
PLCs, LLCs etcs

For example:
• PLCs ( PLCs listed (Public Limited Companies)
and unlisted (Private Limited Companies in the
UK)

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 Limited Liability Companies/
Corporations

The essential features of limited liability companies

are possibility of public ownership

Example Liquidated Banks

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 Limited Liability Companies/
Corporations
Registration:

PLCs must be incorporated under the Companies Code

of 1963 and a certificate of incorporation obtained from
the Registrar General’s Department.

Two key documents which set the by laws and

management arrangements of the company must be
provided:
1. Memorandum of association and
2. Article of Association

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 Limited Liability Companies/
Corporations
Registration (Cont.):
Memorandum of association
It is the company’s charter which must include
the following information
• The name of the company.
• The location of the registered office.
• The objectives
• The limited liability clause
• The share capital and structure
• The name of the signatories

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4.3 Limited Liability Companies/
Corporations
Registration (Cont.):
Article of Association
It is the bylaws and must contains details
information about the internal management of
the company. It deals with:
• Appointment of the board of directors
• Their power and fees
• Procedures for meeting
• Relation between the company and
shareholders etc.
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4.3 Limited Liability Companies/
Corporations
Advantages:
• Limited Liability for Shareholders
• Increase access to capital (issuance of
shares)
• Longer life span
• Easy Transfer of ownership
• Retained profit is not tax

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4.3:Limited Liability Companies,
Corporations
Disadvantages:
• More complicated to form
• More expensive to form and run
• Loss of confidentiality
• Higher corporate tax rates
• Double taxation
• Principal – Agent Problems

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 4.4 Co-operatives

A co-operative is a business which is own,

organised, capitalized and controlled by
member patrons, sharing risk and profits
proportional to their participation.

Once registered, a co-op becomes a

corporate body, i.e. perpetual succession,
may sue and be sued
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 4.4 Co-operatives

It is regulated by The Registrar of Co-

operative Societies Decree NLCD of 1968.

Conditions required for the registration

include:
• Name of the society.
• Objectives of the society.

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 4.5 Community Interest Company
(CIC)
CIC are social enterprises or Not for profit
companies.
e.g. community clubs, societies, political parties
and NGOs, Housing Associations, Football clubs
etc

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 4.5 Community Interest Company
(CIC)

---social enterprises may have the benefits of

limited company structure, if registered as such.

----But there are additional features to ensure they

operate for the good of the community, not
private gain

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