LECTURE TWO (2)

Types of business organization

Learning Outcomes

 Distinguish between the private and the public sectors

 Outline the main features of for-profit (commercial) organizations

 Outline the main features of for-profit social enterprises

 Outline the main features of non-profit social enterprises

Main features of profit-based (commercial)
organisations
Profit-making businesses come in many types of legal organization and
existence, but the most common are the following:

 Sole traders

 Partnerships

 Companies or corporations
Main features of profit-based (commercial)
organisations
For-profit social enterprises include:

 Cooperatives

 Micro-financers

Public–private partnerships (PPPs).

The common feature of all these types of business is that one of their aims is to
generate profit.
Sole Proprietorship

A business owned and operated by one person is known as sole proprietorship.

The legal structure of the sole proprietorship is non-corporate and can be

formed without authority from an existing government unit.

It is found in almost every line of business. The sole proprietorship business is

also common in many professions.
Features of Sole Proprietorship

 The sole trader owns and runs the business. Sole traders may employ other
people, including those empowered to make some of the decisions, but the
sole traders themselves make management decisions and have ultimate
responsibility for the business.

 No legal distinction exists between the business and the sole trader. The
sole trader is the business and, thus, is liable for all the debts of the business
or other claims (such as the outcome of a lawsuit).
Features of Sole Proprietorship

 The sole trader has privacy and limited accountability. Most of the time, sole
traders do not have to declare their finances to anyone except the tax authorities,
which want to know how much profit the business has made for tax purposes.

 Registering the business is generally relatively easy and inexpensive – and quick.
Although laws vary from country to country, in general starting and operating as a
sole trader is simpler than for other types of legal organizations.
Advantages of Sole Proprietorship
 One of the greatest advantages of being a sole trader is that all profits
from the business belong to the sole trader, as no legal distinction separates
the owner from the business.

 Complete control over all the important decisions.

 Flexibility in terms of working hours, products and services, and changes to

operations privacy, as sole traders generally do not need to divulge
information minimal legal formalities close ties to customers, which can give a
competitive advantage.
Disadvantages of Sole Proprietorship
 Owner has unlimited liability for debts.

 Sole proprietor may lack special skills and abilities.

 Difficulty in raising capital.

 The burden or operation responsibilities are borne by the owner as the business
grows

 There are limited opportunities for employee.

 Uncertainty of duration
Partnership
A general partnership is an association of two or more persons acting as co-owners
of a business for profit.
The number of people who can enter a general partnership agreement can be two
but should not exceed twenty persons.
They may invest equal or different amounts of capital or services or both and receive
equal or different shares of the profit.
Unless the terms of the partnership agreement provide, otherwise each partner has a
right to participate in the business by making decisions.
Classifications of Partners
 General partner: A member of a general or limited partnership who has
unlimited liability for the debt of the firm. He actively engages in the
transaction of the firm.

 Limited or special partner: The liability is limited to individual contribution.

But there must be at least one partner the limited partner, who is subject to
the unlimited personal liability.
Classifications of Partners

 Secret partner: A partner who plays active role in the business but does not
want to reveal his identity to the public.

 A nominal partner holds himself out as a partner or permits others to hold

him out as such. He is not actually part owner of the business since he neither
shares in the management nor the profits but in some instances he can be held
liable as a partner.
Formation of Partnership

An agreement of intent which may be oral, written or implied by the acts of

the parties to the agreement is central to all general partnerships.

It is preferable that the agreement be in writing to avoid later

misunderstanding.

The general partnership agreement is usually called Articles of Partnership or

Deeds of Partnership or Co-partnership Articles.
Contents of the Partnership Deed
 Firm„s name

 Name of partnership owners

 Location of the business

 Nature of the business

 Duration of the agreement

 Amount of each partner„s capital

 Provision for accounting system and a fiscal year

Contents of the Partnership Deed

 Provision for salaries or drawing accounts of partners

 Distribution of profits or losses

 Procedure for dissolving the partner

 Statement of individual partner„s duties

 Method for determining a partner„s investment if he wishes to withdraw

Features of Partnership

 Decisions are made jointly by the partners, who own and run the business
together.

 The business is owned and managed by more than one person.

 No legal distinction exists between the business and the partners, who are
liable for all the partnership‟s debts and other obligations.

 Partnerships typically have a greater degree of accountability than a sole

trader.
Advantages of Partnership
 As partners often bring different skills and qualities, partnerships often have
more efficient production through the specialization and the division of labour.

 In general, partners bring more expertise to a business than one person can.

 As partnerships are perceived to have greater stability and lower risk, they
generally have access to more finance.

 Partners can help in emergencies or when others are ill or on holiday.

 Partnerships have more chance of continuity as the business will not necessarily
end if one partner dies.
Disadvantages of Partnership
 Compared to businesses that operate as companies (corporations), partnerships
usually have less access to loans from banks and other financial institutions.

 Limited finance can often prevent a business from expanding or maximizing

opportunities for making profits.

 An individual partner does not have complete control over the business and must
rely on the work and goodwill of others.

 Profits have to be shared among the partners.

 Partners may disagree, which in the worst case could break up the partnership.
Corporation or Company
Corporation is an association of individuals organised under a charter granted by the
state. It is in a sense an artificial person created by the laws of the state.
As an independent legal entity, it may have perpetual life hold property, conduct
business and enter contracts, sue and be sued.
It has the right to buy, to sell, own, manage, mortgage and otherwise dispose of real
and personal property.
Its owners who may be used as the directors are called stockholders and shareholders
(ownership is represented by transferable stock certificate)
Features of Corporations

 The shareholders own but do not run the business.

 The business and the owners are divisible. The shareholders are not liable
for any of the debts of the business.

 The legal existence and many of the details are legally recorded and
matters of public record.

 A company is held to a high degree of accountability.

Memorandum of Association

Memorandum of association – this document records the key characteristics and

the external activities of the company being created.

This gives the details of the types of business to be undertaken, the amount of
its authorized capital, the address of the registered office, details of the shares
to be divided into and a statement that its liability is limited.

For example, the memorandum will provide basic information on the objectives
of the business and record the share capital initially required.
Article of Association

This document specifies how the company will be regulated internally.

It will, for example, explain the initial organization of the executives of the
company with their titles and areas of responsibilities (chief executive of officer,
chief financial officer, etc.) and the rights and responsibilities of each shareholder.

It provides details of the internal operations, a description of the purposes of the

corporation, including voting rights of shareholders and power and duties of
directors.
Private Limited Company
Under this category are corporations formed and owned by private individuals
usually for the purpose of making profit and those chartered for non-profit like
the social, religious, charitable, recreational or educational corporations.

The numbers of shareholders may be as few as two, but the maximum must not
exceed fifty, excluding past and present employees of the company.

Secondly, a shareholder is not permitted to transfer his share without the consent
of the company and cannot invite the public to subscribe for shares
Public Limited Company

There should be at least seven shareholders but no requisite maximum number.

If the business decides to become a public limited company (and the phrase
typically used is “the company is going public”) then it has to offer its shares in
a public place
Advantages of Corporation

 Access to finance is easier than for sole traders and partnerships.

 The investor has limited liability.

 There is continuity.

 There are possibilities for expansion.

 An established organizational structure exists.

Disadvantages of Corporation

 Setting up a company can take time and cost a great deal of money to
fulfil the necessary legal requirements.

 Owners risk partial or entire loss of control of the business.

 There is loss of privacy.

 There is possible limitation of activities by charter restriction.