Forms of Business Organisation

i. Sole Proprietorship
The sole proprietorship is the simplest business form under which individual can operate a
business. The sole proprietorship is not a legal entity. It is a situation where one person owns the
business and is personally responsible for its debts. It is considered as the simplest and most
common form of business chosen by people when starting a business. A sole proprietor is
someone who owns an unincorporated business by himself or herself. According to Aremu
(2012) he posited that the sheer quests for status, independent, and lack of honestly and trust are
accountable for the negative attitude toward combining with another person(s) to form a business
organisation. This is the reason why Nigeria businessmen prefer to do their business alone. They
often realized that it is difficult in Nigeria to find honest business partner, with whom to they can
work together to form a business. One important thing to note in sole proprietorship is that the
owner subscribes solely to all of the equity capital of the business. The owner usually raised
money for the business from his/her personal savings and also approach relations and friends to
get soft loans. According to Sinha (2015) it is a form of business where one man sows, reaps,
and harvests the output of his effort. The following are the salient features of sole proprietorship:
 The structure is fairly simplistic in nature
 Sole proprietorship is the simplest and easiest to form
 Sole proprietorship structure is fairly simple than any other forms of business.
 It does not require legal recognition and attendant formalities.
 There is no distinction between the business and the proprietor/owner. Even when the
business is registered by the Corporate Affairs Commission under the Companies and
Allied Matters Act, as required by the law, Sole proprietor and the business cannot be
separated.
 In proprietorship, management rests with the proprietor himself/herself. This implies that
there is no separation between ownership and management.
 The owner has Unlimited Liability. This implies that in case the business suffer losses,
the private property of the proprietor can also be utilized for meeting the business
obligations to outside parties involved.
 The proprietor enjoys all the profits earned and bears all losses incurred by the business.
The following are the benefits that that accrued to sole proprietorship form of business:
 It is easy to form because no formal registration is statutorily needed. The owner only
need license and permits to start the business.
 There is independent and freedom in decision making.
 There is high secrecy is the sole proprietorship business this is because the business is
majorly manage and control by one person. All the business secrets are known to the
owner alone.
 The sole proprietor usually have tax advantage particularly when compare with other
forms of business. For example, a proprietor’s income is taxed only once while
corporate income is, at occasions taxed twice which is double taxation.
 Dissolution of the business is very easy because the owner has no co-owners. This
means that he will not consult anybody before dissolve the business.
Despite the above benefits sole proprietorship form of business suffers from some limitations
among which are:

 A sole proprietor has limited resources at his/her disposal. This is because he/she depends
on personal savings and borrowings from relations and friends.
 There is constraint in ability of the sole proprietor. It is will be the difficult for the owner
to good in all areas of business such as production, finance, marketing, personnel, etc.
 He enjoys unlimited liability. This implies that he suffers the loss alone and his personal
belonging can be used to settle the business loss.
 The life span of the business is usually limited. The death, insolvent, insane, etc of the
owner usually affect the business negatively.

ii. Partnership
A partnership is an arrangement where parties, known as partners, agree to cooperate to advance
their mutual interests. It is a legal relationship between two or more persons where each person
invests his/her money in order to carry on a lawful business with a view of earning profit. The
profit will be shared based on the agreement between the partners. The partnership reports the
income it earns to the internal revenue service; however, the partnership itself does not pay taxes.
One important thing to recognise in partnership business is that each partner report their own
shares of the partnership’s income on their personal tax returns and pay any taxes owned
(Longenecker, Petty, Palich & Moore 2010).
A partnership agreement may be either in written form or unwritten form. It is advisable that any
agreements between the partners be reduced to writing as this will tend to lead to fewer
possibilities of misunderstandings and disagreements between partners. The partnership
agreement establishes a legal relationship between or among the partners, the partnership itself is
not a legal entity. The following are the salient features of a partnership:
 Profits of the business are share according to partners’ contribution to the business.
 Partnership is not separated from the partners.
 It is easy to form because initial starting cost is low.
 In most cases the death of a partner can negatively affect the business which can lead to
dissolution of the partnership.
 The partners’ risk all their personal assets, even those not invested in the business since
each partner is accountable to business debt.

The following are the benefits that that accrued to partnership form of business:
 It is easy to form because partnerships are generally an inexpensive business structure.
The majority of time spent starting a partnership is often spent developing the partnership
agreement.
 Shared Financial Commitment: There is share financial commitment since each partner
invested in the success of the business. Partnerships have the advantage of pooling
resources to obtain capital.
 Complementary Skills: There are opportunity of being able to utilize the strengths,
resources, and expertise of each partner.
 Employees Incentive: Partnerships have employment opportunities.
Despite the above benefits, partnership form of business suffers from some limitations among
which are:
 Joint and Individual Liability: Partners are not only liable for their own actions, they are
also liable for the business debts and decisions made by other partners. In addition, the
personal assets of all partners can be used to satisfy the partnership’s debt.
 Possibility of disagreement among the partners. Situation where there are too many cooks
in a chicken, there are bound to be disagreements among them.
 Discord among partners on shared profit: Each partner must share the successes and
profits of the business with the other partners. If there is no equal contribution of time,
effort, or resources, this can cause discord among them.
iii. Limited Liability Company
Aremu (2012) posited that it is increasingly becoming mandatory for the sole trader and other
businessman to arrange to form either partnership or limited liability companies because of high
rate of business failures. A limited liability company (or company) may be defined as an
artificial creature, invisible, intangible, and existing only in contemplation of law. As a legal
(artificial) person, it is separate from the owners. It can enter into a contract, sue and be sued in
its name, can affiliate with another company, and open subsidiaries. Examples are: United Bank
for Africa Plc, Cadbury, United Foam Product (Nig.) Ltd, Lever Brother UAC, PZ, and First
Bank.
A company is legally formed by meeting the conditions stipulated in the Companies and Allied
Matters Act (Decree), 1990. The promoters must apply for registration at the Corporate Affairs
Commission together with both a Memorandum and Articles of Association.
The Memorandum of Association usually contain the following important details:
name of the company, with the term “Limited” as the last word of the name;
objects for which the company is formed;
amount of the share capital with which the company proposes to be registered and the
division into shares of a fixed amount;
address of the registered office of the company; and
a statement to the effect that the ‘liability’ of the members or shareholders is ‘limited’.
The Articles of Association, on the other hand, setting out the regulations for internal
organization, and contains provisions relating to:
proceedings at meetings;
alteration of capital;
appointment of directors;
borrowing powers of directors;
transfer or transmission of shares;
winding-up procedure; etc.
The Memorandum and Articles of Association, duly stamped for stamp duties and fees, and
accompanied by certain other forms, are lodged with the Registrar-General, who if everything is
in order, issues a Certificate of Incorporation. At that point, a Limited Liability Company is
formed, and those who signed the memorandum are its “foundation members”.
Features of a company as follows:
 Separate legal entity, which is not affected by changes in its ownership;
 Can own assets and incur liabilities in its own right;
 Can sue or be sued in its own name;
 Has perpetual succession – does not cease to exist upon the death of any or all of the
 owners;
 Liability of owners/shareholders is limited to the amount paid for shares allocated;
 Has the right to borrow on its own account;
 External audit is compulsory;
 Profits are subject to Company Income Tax;
 Statutory annual returns to the Corporate Affairs Commission.