Forms of Business

A form of business relates to the legal status of a business. The common forms of
business are
: Sole Proprietor
: Partnership
: Private Limited Company
: Public Limited Company
: Co-operative

In setting up and running a business owners often meet liabilities. A business

Liability is the personal responsibility of the owner for the business debts. The
business owner may or may not be held personally responsible for paying business
debts.
The liability of the commonditarian partners is limited to the amount of capital they
have contributed or agreed to contribute.

Sole Proprietorship
This is a form of business owned and run by one person although may people
may be employed by the business.

Capital contribution
Capital may be raised from the owner’s personal savings or borrowed from
friends or relatives.

Liability
The liability is unlimited.

Formation
It is simple to form and there are few legal requirements. One needs to develop
the mission or purpose of the business and then apply for a business license to
the local authority stating the purpose of the business. Once the business
license is issued, one needs to get registered with the relevant ministry e.g. if one
wishes to set up and run a micro finance enterprise he/she is required to register
with the ministry of finance.

Management
The business is managed by the sole trader himself or herself although he or she
may hire someone.
Advantages
 Decision making is done quickly as the sole trader does not have to
consult anyone
 Profits are not shared, all projects accrue to the sole trader
 The business requires small capital to start

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  The sole trader enjoys privacy
 The sole trader has personalized service or specialized product and a
small market
 It is very simple to form as there are few legal requirements

Disadvantages
 It may be difficult for the sole proprietor to expand because of lack of
capital
 The sole proprietor suffers from lack of continuity due to incapacitation
or death
 It can be difficult for the sole proprietor to leave the business e.g. to
take a holiday, visit the bank or a supplier as there is no one left to run
the business
 Decision-making and management may be inefficient and ineffective
due to lack of consultations as it is a one-man band business.

Partnership
It is a commercial undertaking set up and run by at least two people but not more
than twenty, with the object of making profits and share the profits and losses equally
or according to an agreed ratio

Advantages
 Better decisions than the sole trader may be made as partners will
always consult each other, hence a greater expertise
 Liability, losses and risks are shared unlike in sole proprietorship
 More capital may be contributed from partners since ownership vests in
a group of persons
 It is easy to from since formalities are few
 There may be division of labour due to the diversity of expertise

Disadvantages
 Partners have unlimited liability except for the limited partners or
sleeping partners
 Decisions may take long before they are implemented as partners
need to consult one another
 There may be lack of continuity if one partner dies or incapacitated
 Profits are shared
 One partner can make contracts on behalf of the others which may
lead to all partners losing their money or capital
 There may be conflicts of interests between the partners

Partnership deed

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It is an agreement in writing between partners setting out the following:
 The names of the partners
 The capital contributed by each partner
 How profits and losses will be shared amongst the partners
 How decisions will be made e.g. by majority vote
 How partnership will terminate
 Any other formal agreement about how the business will operate
Capital contribution
The partners who are the owners of the business contribute capital from each their
personal savings or borrow from relatives, friends and banks. Partners may agree
that their capitals earn interest.

Management and decision-making

Each partner is a manager of the business although the partners may choose a
partner with managerial expertise or hire an outsider to manage the business.
Each partner is expected to keep records of the business.
Partners consult each other when it comes to management of business and
decision-making.

Liability
The issue of liability varies according to the type of partnership. There are two types
of partnership, which is ordinary and extra-ordinary partnership.

Ordinary partnerships
In ordinary partnerships, the liabilities of partners are unlimited. This is the most
common form of partnership consisting of ordinary partners only. Each partner is
liable jointly and severally for all the debts of the partnership. By jointly and
severally, it meant that the creditor has the right to sue all to the partners (jointly) or
to sue one of the partners (severally). Thus any one partner can be sued for all the
debts of the business to the full extent of his private assets or belongings. The effect
of this is that the creditor may choose to sue the partner who is most likely to be able
to pay and then leave that partner to recover a proportion from the other partners.

Extra ordinary partnerships

These are usually called special or limited partnerships. They are of two forms:
Partnership encommandite
Anonymous partnership

In both types of extra-ordinary partnerships the sleeping partners must not take any
part in the running of the enterprise. This should be left to the disclosed partners. If
the sleeping partner does take any active part in the running of the business, all
protection is forfeited or lost and the sleeping partner is then liable to the same
extent with the disclosed partner. Where the sleeping partner becomes known to the

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public, he or she does not automatically incur the liability of an ordinary partner
unless he or she has acted like a partner.

i) Partnership encommandite

In this case, the business is carried out by the disclosed or active partners in their
own name alone and the liability of the commanditarian or undisclosed partners is
limited.
The undisclosed partners contribute a fixed sum of money in return for specified
share of profits or losses. The disclosed partners are liable in full to the creditors
but the commanditarian partners are not liable to creditors but only to the
disclosed partners. In business, there are two kinds of Business liability that is
unlimited liability and limited liability.

Unlimited liability is where the business owner is personally responsible for

business debts. Specifically, it means that if the business fails and cannot repay
its debts; the organizations that the business owes money can take the owners
personal belongings to settle those debts.

Limited liability is where the business owner is not personally responsible for
business debts. In real terms, this means that if the business fails, the business
owner will only lose the money that he or she has invested into the business.
The organizations that the business owes money can only take assets which
belong to the business. Even if the business cannot repay all of its debts, they
cannot take the owner’s personal belongings.
The kind of liability that a business has will depend on the legal form of business.
Most formally, registered businesses have limited liability, while most informal
businesses have unlimited liability.

ii) Anonymous Partnership

Anonymous partners contribute their agreed shares to the business capital but take
no part in the running of the business leaving that to the disclosed partners.
However, the liability of the anonymous partner is not limited in the same way as the
commanditarian partner. Anonymous partners are not liable to creditors but only to
disclose partners. In other words, the creditors will proceed against the disclosed
partners who will then have to reclaim from the anonymous partners.

Formation
Persons wishing to form a partnership may agree verbally or orally to form the
business. However, it is a good idea to develop articles of partnership or partnership
deed in case of future disputes.
After the partners have agreed the partners may proceed to apply to the local
authority for a business license. Once the business license is issued, the partners
need to register with the relevant ministry e.g. if partners wish to form a phone shop,

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they need to register with the Ministry of Transport and Communication. As soon as
the permission is granted by the relevant ministry the business may commence.

Private Limited Company

It is one of the joint-stock companies where at least two but not more than fifty
people come together to run a business with the main aim to make a profit.

Capital contribution
Capital is raised by selling shares privately e.g. to family and friends. Shares are not
advertised for sale or traded on the Stock Exchange. The owners of the business
are called shareholders.

Liability
Shareholders enjoy limited liability that is the liabilities of the business are limited to
the amount of capital (shares) that the owners have contributed to the business. The
shareholders do not pay business debts from their personal or private property if the
business fails.

Management
Shareholders appoint directors who run the company on their behalf. The directors
are responsible for making day-to-day decisions, but the shareholders may be
involved in the major decisions that affect how the company operates. Directors are
accountable to the shareholders so if they make bad decisions, they can be
dismissed. In smaller firms, the Directors are very often the shareholders
themselves.

Formation
To become a Private Limited Company the shareholders must undertake business
name search with the registrar of companies. In order to become a legally registered
private limited company, the owners must prepare the following legal documents and
send them to the registrar of companies. If the shareholders are not informed about
this, they may engage a solicitor or other expert to do the documents. The
documents are Memorandum of Association and Articles of Association.
i) Memorandum of Association
These sets out the company’s constitution that is how the firm should relate to the
outside world and the document should include
 Company name
 Purpose for which the company has been formed (i.e. what activities it
will carry out/objective clause)
 Statement of limited liability
 Maximum number and value of shares available

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 ii) Articles of Association
This spells out the rules for running the company. The rules will be for:
 Appointment of Directors
 Conduct of Directors Board meetings
 Increasing and decreasing total number of shares available
 Procedures for selling shares
 Keeping of records e.g. financial records, records of meetings
 Distribution of profits

Registration
Once the business name search (done to find out if there is no similar name) is
undertaken and the memorandum of association and articles of association is
developed, an application including these two documents may be made requesting a
certificate of incorporation. As soon as the certificate of incorporation is issued by
the registrar of companies, the shareholders need to register with the relevant
ministry to start operation e.g. in mining shareholders need to register with Ministry
of Mines.

Advantages
 There is continuity of the business even if one of the owners dies,
therefore a company enjoys an unlimited life
 More capital may be raised from the shares sold to at least two
persons
 With limited liability the company two persons attract capital from
people who would not otherwise be prepared to invest
 The company enjoys its independent status and hence the limited
liability enjoyed by its shareholders
 In private company the founders of the business can usually keep
control of it by holding a majority of the shares
 The risks of the business are spread

Disadvantages
A private limited company is more difficult to begin as a lot of formalities
are involved
 The owners have less direct control over the business as professional
managers may run the business and are in charge of the firm’s
operations
 The shareholder can only transfer his shares to someone else with e
consent of the company
 The company is not allowed to appeal to the public for extra capital

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  The accounts of the company must be filed annually with the registrar
of companies. They are then available to anyone on payment of a
nominal fee.

Public Limited Company

Is a joint stock company where at least two persons associate to form a common
stock (capital) for profit. Unlike a private limited company which may or may not
appoint an auditor, a public limited company must appoint an auditor. It must keep a
register for directors’ shareholdings unlike the Private Company which does not.
Shareholders in Public Limited Companies are free to transfer their shares unlike in
Private Company where the transfer is under the control for the directors.
Companies have to meet certain conditions in order to be regarded as Public Limited
Company:
a) It must be stated in the memorandum of association that the company
is public
b) The name of the company must end with the words public limited
company
c) The issued capital of the company must be at least 50 000pounds
d) The company must have at least two persons and no upper limit

Advantages
 like the Private Company, the Public Limited Company has the
advantage of independent legal existence; limited liability; continuity of
the business
 The Public Limited Company can raise more capital than the Private
Company as it enjoys the extra benefit of being allowed to appeal to
the public for funds, whereas the Private Company has to rely on
friends and relatives for capital.
 The Public Limited Company has no restriction on the transfer of
shares
 The Public Limited Company enjoys large-scale production and
benefits from economies of scale.

Disadvantages
 A lot of formalities are involved
 Management may be difficult due to large scale operations
 There is no secrecy or privacy about the affairs of the firm
 The owners are not directly in charge of the operations as professional
may be hired to run the business

NB: In forming the Public Limited Company, the similar procedures of Private
Company are followed except that the Public Limited Company will need to further
get a trading certificate to start operations.

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Cooperatives
This is a form of business where at least ten members have a voluntary agreement
to work together as equals for a common goal or objective. All members are equal
owners of the business.

Capital contribution
Every member contributes capital; therefore it is possible to raise large amounts of
capital. Membership is open to anyone prepared to buy a share in the society and
he or she will receive interest on his capital.

Liability
The members enjoy limited liability. Note, however, that a cooperative remains an
informal group, unless it is properly registered and as such if informal owners do not
have limited liability.

Management
The members of the cooperative elect a committee to manage the operations of the
cooperative. This committee is responsible for decision making on behalf of the
group.

Formation and registration

Members wishing to form a cooperative society need to carry out business name
search. In Zimbabwe, the cooperative s must register with the Ministry of Youth
Development Gender and Employment Creation. The registrar is interested in the
following aspects:
 The purpose of forming the cooperative
 The object clause of the business
 Feasibility of the proposed activities
 That there are at least ten members who are motivated and willing to
work together
 That the members are committed to the objectives of the business
 That there are committed to the objectives of the business
 That there are sufficient financial resources to be invested by the
members
 The education levels of the members, including Entrepreneurial skills
and other skills, especially those members who will be the leaders of
the cooperative. It may be necessary for the leader to attend a special
training course in cooperative management before the cooperative can
be registered.

Advantages
 Losses are shared amongst the members unlike in sole proprietorship.

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  Cooperatives enjoy limited liability if they get registered formally
 Effective and efficient decisions may be made as members consult
each other
 More capital is raised than in the sole proprietorship business

Disadvantages
 Cooperatives often fail because the management committee lack
business management knowledge and expertise
 There may be personal differences and conflicts of interests between
committee members
 Profits are shared amongst members
 Individual members lose their independence as they are bound by the
rules and decisions of the cooperative

Selecting the best form of business:

a) Risk level
If more money is required to form the business, it means that risk level is high
especially if the funds are to be borrowed. High-risk ventures require a limited
liability clause. If none, or very little of capital is borrowed then it may be easier
to start as a sole proprietor or partnership.

b) Market or industry requirements

Many customers prefer to deal with a formally registered company as they feel more
confident that it is a serious business.

c) Number of owners
A small number of people may be able to form a successful partnership whereas
several owners attract a private or public limited companies where owners may
not be held accountable for the debts of the others.

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