Dr. F. O.

Olokoyo

COVENANT UNIVERSITY
COLLEGE OF BUSINESS AND
SOCIAL SCIENCES
DEPARTMENT OF BANKING AND
FINANCE
ALPHA SEMESTER COURSE
WEEK 3

COURSE CODE: BFN 111

COURSE TITLE: INTRODUCTION
TO FINANCE
TOPIC: FORMS OF BUSINESS
ORGANISATIONS AND THE
BUSINESS ENVIRONMENT

LEARNING OBJECTIVES
At the end of this lecture, the students
should be able to understand:

1
 i. The various forms of business
organizations
ii. The sources of their capital
iii. The relative benefit of each over the
other and
iv. The challenges confronting each of
them.
v. The environment under which these
businesses operate.

INTRODUCTION
Business organizations are deliberately
created and managed by people to achieve
specific goals. To define business properly,

2
it is best to look at the purpose of a business.
The primary purpose of a business is to
create customers and satisfy their needs.
Thus, a business can be defined, as any
activity (legal) that satisfies human wants at
a profit. It is also the sum total of all
economic activities (production, distribution
and auxiliary activities) undertaken to
provide customer satisfaction and improve
the standard of living.

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FORMS OF BUSINESS
ORGANIZATIONS
The forms of business organization include
the following:
1. Sole Proprietorship
2. Partnership
3. Limited Liability Company
 Private Limited Liability Company
 Public Limited Liability Company
4. Public Corporations/Enterprises
5. Cooperative Societies

1. SOLE PROPRIETORSHIP

4
A sole proprietorship is a business
organization that is owned, managed and
controlled by one person with the aim of
making profit. It is an unincorporated
business unit and the oldest type of business
organization owned by an individual. It is
also known as a one-man business or sole
trade.

FEATURES OF SOLE
PROPRIETORSHIP
1. The ownership of the business is by
one person
2. The liability of the proprietor is
unlimited

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 3. The capital used in forming and
running the business comes from the
proprietor.
4. It is not a legal entity
5. The aim is to make is to make profit.
6. The process of establishment is very
easy.

SOURCES OF CAPITAL TO SOLE

PROPRIETORSHIP
1. Personal savings of the owner
2. Borrowings from friends and
relatives
3. Borrowing from financial institutions

6
 4. Plough back profit of the previous
year
5. Trade credits

ADVANTAGES OF SOLE
PROPRIETORSHIP
1. It Requires Small Capital: Sole trading
operations require small capital since the
business is small in size. The owner can
use his personal savings and borrowing i.e.
loans from friends and relatives to start the
business.
2. It is Easy to Establish: It does not
require all the formalities and legal

7
 processes undergone by other
establishment.
3. Profits Belongs to the Owner: The
owner does not share the profit of his
business with any one because he
contributed the capital alone.
4. Quick Decisions are taken: The owner
does not consult with anybody before
taking decisions and the decisions are final
and effective without any delay.
5. It is Easy to Manage: Due to the size of
the business the owner is able to learn the
problem facing his staff an the needs and
complaints of his customers and attend to
them promptly.

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6. Privacy: The business and its owners
are not required by law to disclose their
annual account or publish it.
7. Neighbourhood: Sole proprietorship
can exist anywhere and can be found in
any environment. It is easily adoptable and
the business itself can be changed.
8. Personal Relationship: There is
personal relationship between the
employer and the employees and
customers.

DISADVANTAGES OF SOLE
PROPRIETORSHIP

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1. Unlimited Liabilities: The liabilities of
the owner are not limited to the business.
In case of liquidation and bankruptcy, the
personal properties of the owners can be
used to offset the debts of the business.
2. No Separate Legal Entity: The
business is not recognized in law as a
separate legal ‘person’ from the owner i.e.
it cannot sue and be sued; it is not distinct
and separate from its owners.
3. Limited Capital: The business sources
of capital are limited and the owner does
not have access to large and diverse
sources of capital like other businesses.

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4. No Perpetual Existence: When the
owner of a sole trade dies in most cases,
the business dies with him. The continuity
of the business depends on the life and
willingness of the owner.
5. No Sharing of Risks: The owner bears
the risks and losses of the business alone.
6. Managerial Problems: The level of
efficiency and success of the business
depend solely on the managerial ability of
the owner. The business does not have
access to diverse opinions or ideas that
other businesses enjoy.
7. Lack of Economy of Scale: The level of
production and its attendance benefits are

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 not available to sole proprietorship, partly
because of inadequate capital to expand
and partly because of inability to employ
qualified labour.

2. PARTNERSHIP
A partnership is a form of business that
exists between two or more persons with the
sole aim of making profit. That is any two
(2) or maximum of twenty (20) persons can
combine together their skills and money
worth to establish a partnership business. In
the case of banking business the maximum
m is ten (10). Each partner agrees to provide

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a fraction of required capital and share the
losses and profits in proportion to their
financial contribution. It is common among
professionals like accountants, bankers,
lawyers, surveyors etc. There are two
categories of partnership namely:
 Ordinary Partnership and
 Limited Partnership

1. Ordinary Partnership: Here, all the

partners have equal responsibility and bear
all the risks of the business equally. That
is, partners of this type are liable to pay
above their contributions if the business

13
 went bankrupt. The partners do not enjoy
limited liability.

2. Limited Partnership: In this type of

partnership business, the members are
only indebted or liable to the business up
to the extent of their contributions. That is,
members do not pay more than their
contributions for any loss. However, one
partner must be an ordinary partner in this
type of arrangement.

TYPES OF PARTNERS

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1. Active or General Partner: This
partner contributes time and money
resources to the partnership. He is
involved in running the business. In most
cases, he is paid salary or compensated in
profit sharing ratio for the managerial role
he plays.

2. Dormant or Sleeping Partner: This

partner contributes his capital into the
business but does not participate in the
management and the day today running of
the business.
3. Nominal or Passive Partner: This
partner does not contribute money or get

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 involved in the management of the
business. He only contributes his name i.e.
he allows his name to be used in the
formation and in the name of the business
because of his accomplishments in life and
the fortune such could bring to the
business.

SOURCES OF CAPITAL TO
PARTNERSHIP
1. Contributions of each partners
2. Borrowing from financial institutions
3. Plough back profit
4. Trade credits
5. Borrowing from partners

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ADVANTAGES OF PARTNERSHIP
1. Access to Relatively Large Capital:
The initial capital required to establish the
business is contributed all the partners i.e.
capitals of all the partners are pooled
together. Partnership is also relatively
credit worthy and can easily raise needed
capital from banks.
2. Division of Labour is Possible: It is
possible for people of sane discipline but
different expertise to come together to
form partnership e.g. a psychiatrist, an
orthopeadist and a gyneacologist can come

17
 together to form a partnership business for
hospital.
3. Better Decisions can be made: The
partners jointly make decisions, which are
likely to be better decisions than one made
by an individual.
4. It is Relatively Easy to Establish: The
process of formation does not require
complex procedures. The moment the
partners agree to come together and a deed
of partnership is drawn and agreed upon,
the business can take off.
5. Expansion is relatively Easier: It is
easy to expand the scope of the business

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 because the partnership business has
access to relatively large capital.
6. Risk and Liabilities are Shared: Risks
and liabilities are shared among the
partners depending on the deed of
partnership.
7. Continuity: The exit of one partner may
not affect the continued existence of the
business. Other partners can continue to
manage the business in the absence of one.
8. Privacy: Like the sole proprietorship,
the partnership business is not under any
obligation to publish its accounts.

DISADVANTAGES OF PARTNERSHIP

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1. It is not a Legal Entity: Partnership
business is not a legal entity i.e. does not
have separate legal entity different from
the owners. It cannot sue or be sued.
2. Disagreement: Disagreement or dispute
among the partners can create division and
terminate the life of the partnership.
3. Unlimited Liability: Most partnership
do not enjoy limited liability i.e. the
liabilities of the owners are unlimited to
the amount contributed into the business.
4. Slow Decision Making: Decision-
making is slow, as all the partners need to
be consulted before a decision is made.

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5. Limited Capital: In relative to limited
liability company, partnership business
sources of capital are limited and this
slows down the pace of expansion.
6. Loss of Personal Interest: Loss off
interest or conflict of interest from other
business interest can create problems for
the partnership.

3. LIMITED LIABILITY COMPANIES

This is a business organization owned by a
number of people that is operated as a legal
person on behalf of its owners, whose extent
of loss is limited to the amount or value of

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share capital they hold. The word ‘limited
liability’ indicates the extent of loss to be
suffered by the owners in the event of
bankruptcy or liquidation. They are
registered with Corporate Affairs
Commission (CAC). There is a divorce of
ownership from control i.e. the owners are
not usually the management.

TYPES OF LIMITED LIABILITIES

COMPANY
There are two types of limited liability
companies namely:
1. Private Limited Liability Company:
According to the Companies and Allied

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 Matters Act of 1990 (section 22), a Private
Limited Liability Company is one, which
is stated in its Memorandum of
Association to be a private company. At
least, two persons may form a limited
liability company and a maximum of fifty
persons excluding persons who are
bonafide workers in the employment of
the company.

2. Public Limited Liability Company:

According to CAMA (section 24), any
company other than a private company
shall be a public company and must state

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 so in its Memorandum of association. A
minimum of two (formerly seven) persons
is required to form a public company
while the maximum is not definite but
limited to the number of authorized and
issued shares of the company.

A company whether private or public may

be:
 Limited by Shares: one in which
the liabilities of its members are
limited to the amount paid on their
shares.
 Limited by Guarantee: one in
which the liability of its members is

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 limited to the amount as its members
may respectively undertake
(guarantee) to contribute to the assets
of the company in the event of its
being wound up.
 Unlimited: one that has no limit
placed on the liability of its members.

SIMILARITIES BETWEEN PRIVATE

AND PUBLIC LIMITED COMPANIES
1. They are both artificial persons
2. They have perpetual succession
3. They are both incorporated companies
4. They both enjoy limited liability

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5. They enjoy large scale of production
because they have access to large capital
6. The minimum membership for both is
two
7. They both issue bonds and debentures
8. Their formation is in similar manners

DIFFERENCES BETWEEN PRIVATE

AND PUBLIC LIMITED COMPANIES
S/N Features Private Public
Limited Limited
Company Company
1. Name The last The last
word in the word in the

26
 name is name is
limited PLC.
2. Membership The No upper
maximum limit for
number is number of
50 members
3. Shares Their Their shares
shares are can easily be
not easily transferred.
transferable
without
consulting
others
4. Quoted Their Their shares
Shares shares are are quoted

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 not quoted and traded
at the stock on the stock
exchange exchange.
5. Account They are They are
not required by
required by law to
law to publish their
publish accounts to
their the public.
financial
accounts to
the public
6. Management The Management
and control companies is divorced
are from

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 managed ownership.
by the
owners
7. Raising of Capital can They can
Capital not be easily raise
raised from capital at the
the stock stock
exchange exchange

SOUCES OF CAPITAL OF LIMITED

LIABILITY COMPANIES
1. Owners funds
2. Loans from banks
3. Retained Earnings

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 4. Trade Credits
5. Shares

ADVANTAGES OF LIMITED
LIABILITY COMPANIES
1. Separate Legal Entity
2. Limited Liability
3. Large Economies of Scale
4. Perpetual Existence
5. Access to Large Capital
6. Employees may become co-owners
7. Shareholders Interest are safeguarded
8. Transfer of Share ownership
9. Division of Labour

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DISADVANTAGES OF LIMITED
LIABILITY COMPANIES
1. High Cost of Formation
2. Lack of privacy
3. Lack of Personal Initiatives
4. Bureaucracy
5. Separation of ownership from
management
6. Large Capital Requirement

4. PUBLIC
CORPORATIONS/ENTERPRISES
These are businesses owned, formed,
managed and financed by government. They
are established either by Act of parliament

31
or decree. They have separate legal entities
different from their owner (government).
Public corporations receive fund at regular
interval from government, as such whatever
profit or loss incurred by these organizations
are borne by the government. Usually
government appoints Board of Directors
who is responsible for the management of
these corporations. Examples are Water
Corporation, Nigeria Telecommunication
Limited (NITEL), Power Holding Company
of Nigeria (PHCN formerly NEPA), Nigeria
Railway Corporation etc. They are non
profit business organization.

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ADVANTAGES OF PUBLIC
CORPORATIONS
1. Legal Status: Public corporations enjoy
separate legal entity.
2. Access to Large Capital: Public
corporations are financed by government
and can also borrow from the banks.
3. Large Economics of scale: Government
does not always allow competition against
public corporations, and they operate in a
way as to serve large market, this allows
them to enjoy large economies of scale.
4. Provision of Essential Services: All
public corporations are expected to

33
 provide essential services at affordable
prices.
5. Perpetual Existence: Public
corporations are going concern whose
continued existence is guaranteed. Change
in government does not bring the business
to an end.
6. Prevent Exploitation of the
Consumers: The goods and services
provided by the public corporations are to
be sold at affordable prices, the
corporations are not set up for profit
purposes.
7. Generation of Employment
Opportunities: Apart from agriculture,

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 government economic activities and
administrative duties including public
corporations generate a lot of employment
opportunities to the public.
8. Even Distribution of Income: The
profits of the public corporations belong to
the government, which are used and
enjoyed by every one e.g. taxes.

DISADVANTAGES OF PUBLIC
CORPORATIONS
1. Appointment in not based on Merit:
The appointment of staff and management
of public corporations in most cases are

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 not based on sound merit but on
godfatherism and political consideration.
2. Government Interference: Government
usually interferes in the internal and day-
to-day administration of these
corporations. This interference does not
allow for policy and good business
judgment in decision-making process.
3. Inefficiency: Most public corporations
are not able to survive financially on their
own because they are always poorly
managed and wasted.
4. Bureaucracy: The structures are usually
formal and procedures of administering

36
 are always strictly followed with little or
no deviation.
5. Slow Decision Making: The size makes
it difficult to make and implement
decisions fast.
6. Mismanagement of Resources: Public
corporations’ administrators do not always
mange these corporations well. The little
available resources are either mismanaged
or out rightly stolen.

5. COOPERATIVE SOCIETIES
A cooperative society is a business
organization that is established by people of

37
same or similar economic background with
common interest to protect and common
problems to solve. It is a very old form of
business and economic alliance by the
people. It existed in the olden days and even
presently in form of contributions like Ajo,
Adashe or Esusu.

FEATURES OF COOPERTAIVE
SOCIETIES
1. It is a democratic organization of one-
man one vote.
2. It is open to all regardless of sex, age,
race, cultural and religious differences.

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3. The minimum requirement membership
is two.
4. Dividend paid to members is based on
patronage.
5. Little interest is paid on capital.
6. Elected members run the society on
behalf of members.
7. It is a voluntary association.
8. The society is not affiliated to any
political parties and should not be.

TYPES OF COOPERATIVE SOCIETY

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1. Consumer Cooperative Society:
Consumers of same or similar products or
consumer
living in the same locality forms it. It is
formed to:
 Educate members on the need for
cooperatives
 Reduce exploitation of the
consumers by buying in bulk and selling
to members at cheap prices.
 Ensure goods sold are genuine and
not adulterated
 Improve the standard of living of
members
 Encourage savings.

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2. Producers Cooperative Society: It is
formed by producers of similar products to
help
members. It is set up to achieve the
following:
 To make available through leasing,
expensive machines and equipment
needed for production
 To educate and train members on
new methods of production
 To train members on new production
technique or style
 To make equipment available at
reduced rate

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  To make available improved
seedlings to producers.

3. Credit and Thrift Cooperative Society:

It is one of the commonest types of
cooperative society even today. It
performs the following functions:
 It encourages members to save
 It provides credit facilities to needy
members
 It educates members on the need of
cooperative society
 It buys essential products and sell to
members at reduced rate.

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ADVANTAGES OF COOPERATIVE
SOCIETIES
1. Cooperative societies encourage savings
among members.
2. They provide credit facilities either
through cash or hiring of equipment
3. They educate their members either in the
area of production process or process of
buying and selling.
4. They enhance the welfare of members
and improve the level of their standard of
living.
5. They are democratic in nature, as
anybody that fulfils minimum entry
requirements is allowed.

43
6. Cooperative societies are legal entities
and are usually registered for recognition.
7. They encourage economic growth and
development through encouragement of
mass production and distribution process.

DISADVANTAGES OF
COOPERATIVE SOCIETIES
1. Lack of interest by members on how the
societies are managed.
2. Elected members may not have the
managerial ability before been elected and
this might lead to mismanagement.
3. Cooperative societies like all other
human organizations face problem of

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 inadequate capital to solve or attend to
members’ need and request.
4. High enrolment rate of members can
make the size too large for effective
coordination.
5. Most members are illiterate who do not
understand how cooperative societies
function or their principles.

THE BUSINESS ENVIRONMENT

All business organizations operate within an
environment. The environment of business
is a highly dynamic one and the forces, a
business has to contend with are as varied as
they are ever changing. A thorough

45
understanding and analysis of the business
environment by the managers will enable the
business to cope adequately with the
changing forces within the environment. The
environmental analysis will make it possible
for the manager to avail himself with the
opportunities presented by the environment
using the business internal strength and
develop adequate to avoid and overcome the
threats in the environment.
A business environment involves all forces
that influence the business operations and
activities. The business makes demand on
the society and vice versa. As a result, the

46
operations of the business and the forces of
the environment are interrelated.
A business environment can be divided into
three, namely:
1. The Internal Environment
2. The Industry Environment and
3. The External Environment

1. THE INTERNAL ENVIRONMENT

This consists of forces that have stakes in
the business like shareholders, the
management and workers. These are forces
within the control of the business. The goals
of these contending forces, within the
business organization often conflict because

47
of the limited resources to satisfy their huge
varied financial demands. As the board and
management pursue the objective of
maximizing shareholder’s wealth, the
workers demand for higher wages and
enhanced compensation packages, which
will ultimately affect the budget for
improved quality service delivery.

a. The shareholders: A Board of Directors

represents these for large companies where
direct participation by all shareholders is
impossible. The board is responsible for
policies formulation and general direction
for the organization. The board must see to

48
it that the business grows and must enhance
the shareholders value.

b. The Management: The Board of

Directors appoints the Managing Director
who in turn appoints the management team.
His main objective is to see to the
implementation of the Board policies and
efficient running of the business.

c. The Workers: These refer to junior and

middle management workers. This force
strives for satisfaction of their welfare.
These people if unionised can exert
pressures to achieve the best welfare
package for their members.

49
2. THE INDUSTRY ENVIRONMENT
This is the most immediate environment
within which an organisation operates. An
outstanding and dynamic organization with
appropriate strategies will influence the
industry environment. A business industry
environment need appropriate analysis,
strategy and understanding by the manager
so as to have a competitive edge. The
industry environment includes:

a. Competitors: Business organizations

attempt to win market shares at each other’s
expense. As such attempts are made to
anticipate and react to individuals’ reactions,

50
a manager should be able to identify who the
competitors are, how big or strong they are
relative to his own organization, understand
the competitor’s strengths and weaknesses.
These analyses may represent opportunities
that may be exploited. Competitors are easy
to identify at times e.g. Peugeot vs. Toyota,
Coca-Cola vs. Pepsi etc. Sometimes they are
not so obvious. Hence, a business must be
strategically positioned t identify them.

b. New Entrants: New entrants into the

industry influence the level of competition
facing an organization. The ease, with which
a new firm can enter the industry increases
competition, reduces prices and profit

51
margin. Barriers to entries can be in form of
government policy, capital requirement,
brand identification, cost disadvantages, and
distribution challenges etc. The bigger the
barriers, the harder it is to get into business,
this increases the market shares of existing
companies.

c. Threats of Substitutes: Substitutes are

alternative products or services to a
company’s product. Technology and
Research and development have expanded
the threats pose by substitutes. Substitutes
reduce market and product and make
products and company obsolete. A business
should be able to analyse its environment to

52
identify possible substitutes that poses
potential dangers.

d. Customers: All businesses and managers

depend on customers to survive. The
customers are more important to the
organization than the goods produced by the
organization. Customers’ attitudes,
preferences and complaints should be
understood and attended to promptly.

e. Suppliers: Every business organization

needs and has a set of suppliers who provide
essential resources needed by the business
e.g. graduate students (organisations), raw
materials (factories), information from

53
consultants, financial capital and event
transportation. Suppliers can raise costs or
provide poor quality goods or services,
labour can go on strike, and suppliers can
affect manufacturing time, inventory level
and lead-time. Hence, a manager must
position himself and the organisation
properly so that the organization performs
better than the competitors.

3. THE EXTERNAL ENVIRONMENT

A business external environment consists of
all forces outside the control of the firm,
which affect the operations of the business

54
organization. These external environments
include the following:

a. Economic Environment: A wide range

of economic forces in the external
environment affects the business operations.
These forces include the prevailing
economic systems (capitalism, socialism or
mixed-economy), the level of inflation
which can affect the cost of production, the
level and types of unemployment which can
affect how easy or difficult it is to find
quality labour and the current interest rate
which shows the cost of sourcing of external
finance. The manager should also consider
the economic cycles (boom or recession) of

55
the country and the key economic activities.
Other economic variables that affect the
operations of the business include the
exchange rate (devaluation), deregulation of
the economy, policy stability, size of
government budget (deficit or surplus) and
the structural changes in the economy from
agrarian (agricultural) economy to industrial
economy and from industrial to service
economy.

b. Socio-cultural Environment: The socio-

cultural environment deals with the culture,
attitudes, values and perception of the
people which affect what hey wear, how
they relate and behave, what they eat, work

56
attitude and their general outlook to life. The
cultural values of the people include their
religion beliefs and practices, the relative
permissiveness of the society and strict
moral values. This socio-cultural
environment has serious effects on literacy
level, birth rate, role of the family in elder
care, or the extent to which consumption of
certain goods are encouraged or
discouraged.

c. Demographic Environment: This is

essentially the descriptive element of the
people in the society such as the absolute
size of population, average age, birth rate,
family size (extended and nucleus), total

57
workforce available, relative level of skills
possessed, the growth rate of population and
possible effects of future increase in
population. The managers of business
organizations should be able to analyse the
qualitative changes in population, the
current standard of living, the tastes and
preferences of the populace, the
predominant occupation (blue collar/ white
collar/ self-employed), geographical needs
of each geographical area (hot or cold
environment), level of immigration and
emigration, the age and class of people
involved, the effects of migration on
population and demand and the education of

58
those involved to be strategically positioned
to meet the needs of these sets of people in
the different categories.

REVIEW QUESTIONS
1. Mention the various forms of business
organizations and write short notes on each.
2. What are the sources of capital available
to businesses?
3. Write briefly on the challenges facing
businesses in Nigeria.
4. What are the differences and similarities
between Public and Private Limited
Liability Companies?

59
5. Mention the environments under which
businesses operate in Nigeria.

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