CHAPTER TWO:
BUSINESS OWNERSHIP
2.1. Sole proprietorship
Sole proprietorship is a form of business organization in which an individual introduces his own
capital, uses his own skill and intelligence in the management of the affairs and is solely
responsible for the results of its operations.
Characteristics of a Sole proprietorship
Single ownership; This is one person business. It is owned by that person legally. In
actual practice business may be owned by one person legally but it may belong to a
family.
One person control; The single ownership naturally leads to control by one person
because in most cases that person manages the business.
Unlimited liability; The owner is usually identified with the business. The person takes
personal liability for all the debts of the business because in principle he/she enjoys the
profits of the business alone.
No government regulation; Unlike companies incorporated under the companies act or
by statute, there are no laborious government regulations that the single ownership firm
are subjected to, of course they are subject to general laws like licensing and legality
business, but not required to submit accounts, list of directors, and such other
requirements.
No separate entity from the firm; The unlimited liability really dictates that the person
is the firm. People who deal with this organization do not separate the owner from the
organization.
Advantages of a sole proprietorship Business
Ease of formation and dissolution: Formation of sole proprietorship requires no legal
formalities. The business is formed by simply registering it with the registrar of
1|Page
companies after filling a form with particulars of the proprietorship and nature of
business.
Direct motivation: All benefits of the business go to the owner. This direct relationship
between effort and reward serves as a powerful incentive to the proprietor to manage the
business efficiently. This provides direct and immediate reward.
Ease of coordination: Since the proprietor takes all decisions, and the business activities
are relatively few because of its size, there is no problem of coordination. All decisions
flow smoothly and there is no clash of interest with anybody in the organization.
Promptness in decision making: The sole proprietor needs not consult with any one
while making decisions. This facilitates, quick and prompt decision making.
Flexibility in management: If there is any change in business, the sole proprietor does
not have to consult any one therefore will be able to make changes without delay.
Secrecy: Secrecy can be maintained about business matters and there is little risk of
competitors taking advantage.
Freedom from government regulation: Sole proprietorship is the least regulated form
of business organization. Because it is usually small, laws governing it are not as
numerous and are not subjected to filling returns that other forms of businesses like
limited companies are required to do.
Limitations
Finances: Sole proprietorship suffers from the limitation of financial resources. They
depend entirely on their savings or from those of friends and relatives.
Limited managerial skills: Sole proprietors may lack managerial skills in some areas of
business since they manage the business on their own.
Unlimited liability: The liability of the owners is unlimited. Thus, in event of winding
up the business, not only the assets of the business but also his private assets will be used
to pay off the firms debts if any.
Uncertainty of duration: Sole proprietorship comes to an end if anything happens to the
proprietor. Death of the proprietor or insanity means cessation of the business.
1.2. A partnership
2|Page
Partnership is the relation between two or more persons who have agreed to share profits of a
business carried on by all or any one of them acting for all. Or it can also be said to be a relation,
which exists between two or more persons with a view of making profits.
Characteristics of a partnership
Existence of a business: An association of persons will become a partnership only when it is
meant to do some kind of business, to be carried on by all or any of them acting for the
others.
Plurality of persons: There must be at least two or more persons who join together for
purposes of business for an organization to qualify as a partnership. Minimum number of
persons required to make a partnership by law is two and the maximum is 10 in case of
banking business and not more than 20 in case of other businesses (general).
Contractual relationship: The business is set up by an agreement between persons
concerned called partners. Only persons capable of contracting can be partners. The
agreement can be oral, written or implied. The existence of an agreement creates contractual
relationships among the partners.
Profit motive: The purpose of the partnership business should be to earn profits and there
must be an agreement to share them. Law, through the partnership Act, provides that where
there is no specific agreement, profits and for that matter losses, will be shared equally.
Principal- agent relationship: The business must be carried on by all or one or more of
them, acting on behalf of all partners. Thus every partner is an agent of the other members of
the organization.
Unlimited liability: Each partner has unlimited liability in respect of the firm’s debts and
creditors can recover their dues from property of any or all partners in case the firm’s assets
are insufficient to cover the debts on dissolution of the business.
Who can be a partner?
All legal persons capable of contracting can be partners. Even minors can be admitted into
partnership but the exception is that they are not personally liable for the debts of a firm, but
their share in the partnership property and its profits is.
What constitutes partnership?
3|Page
There must be a business
The business must be carried on by all or any of them acting for all- implied agency.
There must be an intention to make and share profits.
Formation of partnership
A partnership rests on a contract among persons, therefore, its formation does not involve any
special legal problems. Law does not make it compulsory for a partnership firm to be registered
but registration becomes necessary in view of the fact that an unregistered firm has certain
disabilities. For instance, an unregistered firm cannot file suit in court to enforce rights against
outside parties under a contract. For this reason, registration with the Registrar of firms becomes
part of the formation procedure.
Ways of formation
By word of mouth: Here partners agree through spoken words that they have formed a
partnership and acknowledge it. They need not put it in writing.
In writing- partnership deed: Here partners agree and put their agreement in writing. A
partner’s written agreement is called a partnership deed.
Implied partnership: This arises from the course of dealings. In this case, there is no
explicit agreement either by word of mouth or written, but the partnership relationship is
implied from the behavior or actions of the concerned persons. For instance when a
person always sells goods on behalf of another and shares in the profits and people
believe he is a partner. While there may be no agreement, there is an implied partnership.
Partnership by holding out: This is a form of implied partnership where a person who
is not a partner by word of mouth or deed acts in such a manner as described above, in
the implied partnership. He is said to be holding out as a partner if the public deals with
him believing that he is one.
The partnership deed
This is an agreement that spells out the rights and obligations of the partners. In absence of a
partnership deed, the provisions of the partnership Act will come into operation. The Act defines
the rights and duties of a partner and is substitute for the deed.
4|Page
Contents of the deed
The nature of the business to be conducted
The capital of the firm and the proportions to be contributed by each partner.
The ratios in which profits/losses will be shared
The rates of interest to be allowed on capital or charged on drawings
Amounts if any, partners may draw in advance before ascertainments of profits
Partners salaries, if any.
Preparation and auditing of accounts
Admission of new partners
Duration of the partnership
Types of partners
Besides the usual partners who contribute to the capital of the firm and participate in its business,
the following special types of partners may be noted.
Sleeping or Dormant partners: This is a partner who does not actively participate in the
partnership activities. He is usually not known to outsiders though he is liable to third parties.
Though he does not participate in the day to day running of the business, he has a right to
books of accounts and examining and copying them and of course sharing of the profits in
agreed proportions.
Nominal partners: Is a person whose name is used as if he were a member of the firm but
who in reality is not a partner. He is liable to third parties who give credit to the firm on the
strength of his being a partner
Partner in profit only: One who shares in profits but does not share losses. He does not take
part in the management of the business but is liable to third parties who deal with the
partnership on that basis.
Partner by Estoppel: Is one who without being a partner, conducts himself in such a way as
to lead third parties believe he is or is liable to such third parties. In the event of the
partnership being dissolved and its individual partners have to contribute to the liabilities of
the business towards third parties, he is estopped from denying the fact that he is a partner.
Sub-partners: Gets a share of profits of the firm from one of the partners. He has no rights
against the firm and is not liable to third parties for the firm’s debts.
5|Page
Minor/major partners: A minor is a partner of age below 18 years. He can be admitted to
the benefits of the existing partnership with the consent of all partners. A minor is not
personally liable for the debts of the firm but his share in partnership property and benefits
are liable. He has a right of access to the accounts of the firm including the right to examine
and copy them. While a major, is a partner of age 18 and above
NB: Discuss other types as well.
Advantages of a partnership business
Ease of formation: Like sole proprietorship, the partnership business is also relatively
easy to form as it has no complex legal formalities.
Flexibility: A partnership like a sole proprietorship is not subject to regulations as in case
of companies and is thus easily adaptable to changes.
Larger resources: Unlike sole proprietorship, the plurality of persons allows pooling of
resources and enables the businesses undertake relatively larger scale operations.
Spread of risks and combined abilities: Unlike the sole proprietorship where the risk is
only to one person, in the partnership, the risk is spread over the several partners.
Survival capacity: Compared to sole proprietorship, which comes to an end on the death
of the proprietor, the partnership need not do so if the partnership deed so provides
Prompt decision making: Because partners can meet frequently to discuss, and solve
business problems, they are more prompt than joint stock companies which have to go
through the process of calling of Board of Directors and shareholders’ meetings for
certain decisions.
Limitations of partnerships
Lack of harmony: Because of plurality of persons there are usually different views from
the different partners. Immediately there is a lack of mutual understanding and harmony,
the partnership will be set by problems and may fail to continue in business.
Unlimited liability: Just like the sole proprietorship, the liability of the partners in the
event of the winding up of business is also unlimited. Partners will also be called upon to
raise from their own sources to cover the debts of the partnership in the event of the
dissolution of the firm and the liabilities are greater than the assets.
6|Page
Limited resources: The maximum number of members of partnership cannot exceed 20
in case of ordinary business. These factors impose a limit on the amount of resources that
can be available to a partnership business.
Instability of business: Unless specifically provided by the deed, a partnership comes to
an end with death, retirement or insolvency of a partner. Besides, any misunderstanding
among partners also affects the business therefore the life of a partnership is highly
uncertain.
Risk of implied authority: Every partner is liable for the actions of another as provided
by the principal-agency relationship that subsists among them. Actions of one partner
even an undesirable one, will bind all the partners.
Non transferability of interest: In a partnership, no partner can transfer his shares
without the consent of all partners. This makes it particularly difficult for would be
investors to take interest in partnership business.
1.3. Joint stock companies
A joint stock company is a voluntary association of persons incorporated into a business having
joint capital divided into transferable shares of a fixed face value, with limited liability, a
common seal and perpetual succession.
Features of company
Voluntary association of persons incorporated under the companies Act, for the purpose
of carrying out business.
Artificial person; a company is a legal person created by law and enjoys many rights of
a natural person.
Common seal; being an artificial person, a company cannot sign documents for itself.
Consequently a company can function through agents and hence it has a common seal
with the name of the company engraved which acts as a substitute for its signature.
Independent legal entity; since a company is an artificial legal person, it has a juristic
personality that is distinct from and independent of the members. It can own property in
its own names, and can transfer title to property as it likes.
7|Page
Limited liability: The liability of the members of a company is limited to the value of
the shares subscribed to or the amount of guarantee given by them. Thus in the event of
winding up a company and the assets of the company do not sufficiently cover the claims
of the creditors, members will not be required to contribute anything beyond the unpaid
value of their shares or guarantee.
Transferability of shares: Shares of a company are transferable from one person to
another. For a private limited company, there are some restrictions as to transferability
imposed by the Articles of Association.
Perpetual succession: A company has continuous existence which is not affected by the
death, insolvency, lunacy or retirement of its members.
Types of companies
Joint stock companies have taken various varieties and are classified under the following heads;
(a) Companies incorporated under a special Royal Charter.
Historically most of the early companies originating from the United Kingdom were set up
through a Royal/Special Charters. The following are commonly cited examples;
The Imperial British East African Company
The East India Company
The British South Africa Company
(b) Companies Incorporated under the Companies Act: In Uganda, the companies Act 1964
lays down procedures by which a company can be brought into existence. Anybody wishing
to incorporate a company can do so by taking the steps prescribed. There are three main
types of companies that can be registered under the companies Act ie;
1. Companies limited by shares
These include the following;
Private Limited Companies; these are usually formed by small proprietors mainly to gain the
benefits and privileges of companies limited by shares. A private company is that company,
which by its Articles of Association makes the following restrictions;
8|Page
Restricts the transfer of shares
Limits the number of members to 50 excluding past and present employees, and
Prohibits invitation of the public to subscribe to its shares or debentures.
Features of a private company
It is a company limited by shares
It imposes, by its articles of Association, the three restrictions named above in the
definition.
Minimum number of members is 2, and a maximum is 50
Public Limited Company; this is a company which is not a private company. It is a company
which by its Articles of Association does not impose any of the three restrictions imposed by
private companies.
Features of public Companies
Have the features of a company as already stated earlier and is limited by shares
Minimum number of members is seven and has no maximum number
It can offer its shares and debentures to the public at large to subscribe.
Its shares are transferrable without any restriction
Has to hold a statutory meeting and file a statutory report
Cannot commence business without a certificate of commencement of business.
Examples of public limited companies include,
East African Breweries Ltd
East African Industries Ltd.
The Government Company; Government companies are few and are usually formed as a result
of joint ownership of a company by government and the private sector.
Features;
It is a company as already described earlier; limited by shares
Government must own at least 51 % of the paid share capital
9|Page
2. Companies limited by Guarantee; these companies are in most cases non-trading companies
and include associations and clubs. They may or may not have share capital and are governed by
a Board of Governors rather than a Board of Directors. Companies like this in Uganda include
football clubs, sports clubs, and non-governmental organizations. In United Kingdom, football
clubs are now companies limited by shares.
Statutory companies or corporations
These are companies usually owned by government and are incorporated under a special statute
or Act of parliament by the central government for a specific purpose.
Features
It is accompany with features like any other already mentioned
It is established by a special law usually for a specific purpose and the law lays down the rules
governing the company.
It is usually owned by the government.
Statutory corporations also known as parastatals or public enterprises include some of the
following;
Bank of Uganda
Uganda Development Bank
Uganda Railways Corporation
Advantages of Joint Stock Companies
Limited liability; unlike the sole proprietorship or partnership, the liability of members of a
company is limited to the face value of the shares held by them. In the event of winding up of the
company, the members’ private property is not attachable to recover the dues of a company.
However, there is now a provision to “lift the corporate veil” where if owners knowingly cause
loss to creditors or other outsiders relying on this provision, law provides that such owners can
be liable for the acts of the company.
10 | P a g e
Continuity; a company enjoys an entity different and distinct from that of members and is not
affected by them. It therefore enjoys perpetual succession and is a stable form of business
organization.
Transferability of shares; the ease with which shares of a company are transferred, especially
in a public company encourage investment in the company and facilitate liquidity.
Large financial resources; unlike the earlier forms of business organizations which are limited
by financial resources, joint stock companies are able to raise money from the public through
sale of shares.
Advantages of larger scale operations; with the ability to raise amounts of money and other
resources, companies are able to undertake large scale operations and consequently able to enjoy
benefits of large scale production, purchase, selling, management, advertising, etc.
Professionalization of management; unlike the earlier forms of organizations where the owners
are the managers, in joint stock companies, this need not be necessarily the case since
professional people can be hired hence bringing with them skills that facilitate efficiency,
productivity and competitiveness.
Public confidence; because these companies are closely regulated by law right from
incorporation to winding up, the public has confidence in them. For example they are required to
have audited accounts and are supposed to publish such accounts.
Limitations of public limited companies
Difficult and costly formation; Unlike sole proprietorship and partnership, company formation
if cumbersome since there are certain lengthy and costly procedures to be followed. This
involves the preparation of Articles and Memorandum of Association which is filed with the
Registrar of Companies.
Delays in decision making; the management of these companies usually rests in hands of non
owners who have to consult Board of Directors or shareholders in order to take certain decisions.
Consequently there are delays in the decision making process which may result into the company
losing business opportunities.
11 | P a g e
Lack of Secrecy; because of the size of the operations and because management is usually
different from ownership, let alone the imposition of the company’s Act on disclosure of certain
information, it is difficult to keep business secrets in joint stock companies.
Excessive regulations; Companies are subject to regulations which inhibit the smooth
operations of the business. These include filling returns, accounts and other things required by
law.
Lack of personal attention; unlike sole proprietorships and partnerships where owners pay
personal attention to customers, a company managed by hired professionals is indifferent to
customers.
Oligarchic Management; Companies are usually run and controlled by a few persons who may
abuse their positions at the cost of the majority of shareholders.
Formation of joint stock companies
The process of forming a company is called floatation and involves two stages, that of promotion
and the second, that of registration or incorporation.
a) Promotion; a business cannot come into existence unless someone thinks up the idea and
attempts to translate it into a business. This person who conceives the business idea is called a
promoter and the process of conceiving and translating an opportunity into a business is called
promotion
b) Registration or incorporation; this is the second stage in the process of formation of
companies. It is the legal process through which the separate corporate entity of a company is
given recognition by law. A promoter must prepare and file with the registrar of companies the
following;-
Memorandum of association duly signed
Articles of association duly signed
A statutory declaration by an advocate or An Attorney or Chartered or Certified
Accountant engaged in the formation of companies
A list of persons who have consented to be Directors of the company
Notice of the address of the registered office
12 | P a g e
Particulars regarding Directors
Prospectors, in case of public limited companies
Memorandum of Association
This is the principal document of the company and sets forth the basic facts relating to the
company. The purpose of the memorandum is to enable the shareholders, creditors and those
other people who deal with the company to know why it was formed, whatit is authorized to do
and generally the range of activities permitted by law.
Contents of the memorandum
a) The Name Clause: This clause states the corporate name of the company and any name can
be chosen subject to the following;
The proposed name should not be identical or similar to a name of an existing company
The proposed name should not convey any connotation or link with government
The word “limited” must be the last word of the name of every company limited by shares.
b) The registered office clause; The clause states the country in which the registered office of the
company is situated. The purpose of this clause is to fix the place where all communication and
notices may be sent and where important documents like register of members, debenture holders,
charges and minute books, etc are kept.
c) The objects clause;This sets out the objects with which a company is formed. The company can
only do those activities which are specified in this clause. The following should be taken into
consideration;
The objects must be stated definitely and clearly
The objects must be legal
The objects must not be against the provision of the companies Act
d) The Liability Clause;The clause contains the statement limiting the liability of members to the
amount, if any, the unpaid part of the shares they hold. For companies limited by guarantee, the
clause will state the amount every member guarantees to contribute to the assets of a company in
the event of its being wound up.
e) The capital clause;This clause states the amount of share capital a company is going to be
registered with and the division of the capital into shares of fixed values.
13 | P a g e
f) The association clause;This clause contains a signed declaration by the persons whose names,
addresses and descriptions are given stating that they are desirous of being formed or associated
into a company and that they have agreed to purchase the qualification shares, if any.
Articles of Association
The articles of association of a company contain the rules and regulations for the conduct of the
business of the company and the internal management of the company.
Contents of Articles of Association
Appointment, duties, remuneration and powers of Directors, at times also including the
Managing Director.
The issue of Shares and share certificates including procedure of transfer of shares.
The rights attached to different classes of shares and all other issues relating to shares eg.
Conversion of shares into stock, commission on sale, etc.
Meetings of members, voting rights, poll, proxies, etc
Meetings of Directors, proceedings thereof, resolutions, payments of dividends and creation
of reserves
Keeping of books of Accounts, powers and remuneration of Auditors.
Arbitration and winding up, etc.
Additional formation requirements for public limited companies
The prospectus; A prospectus is any document described or issued as a prospectus and includes
any notice, circular, advertisement or other document inviting offers from the public for the
subscription or purchase of any share or debentures of a body corporate. A prospectus will
contain the following;
Objects of the company
Names, addresses, descriptions and occupations of the signatories to the memorandum
and the number of shares subscribed by them.
Number and classes of shares if any
Remuneration of directors, if any
14 | P a g e
Names, addresses and occupation of Directors or proposed Directors and managing
Director or proposed managing Director.
Allotment of shares
Having invited the public to subscribe to its shares, a company will receive applications for such
shares from the general public and will proceed to allot shares. Allotment is the acceptance by a
company of a subscriber’s application. It is effected by sending each successful applicant an
allotment letter stating how many shares have been allotted to him.
Certificate of commencement of business
Private companies have to commence business immediately upon incorporation, however, public
limited liability companies have to wait unit they have been issued with a certificate of
commencement of business. This certificate is granted after the following conditions have been
fulfilled;
The company has issued a prospectus and filed a copy with the registrar
The minimum number of shares which have to be paid for cash have been subscribed and
allotted.
Every director has paid, in respect of his qualification share an amount equal to what is
payable on shares offered to the public on application
A statutory declaration by the secretary or one of the Directors or any other person so
authorized, that the aforesaid requirements have been complied with and been filed with
the registrar.
Termination or Dissolution of a company
A company is assumed to have perpetual succession. However there are occasions when a
company has to cease to exist. This happens in the following cases;
a. Voluntary winding-up
This is initiated by a resolution of the company itself. A company may be wound up voluntarily
in the following circumstances;
15 | P a g e
When the period (if any) fixed by the articles for the duration of the company has
expired.
When the company has passed a special resolution requiring the company to be wound up
voluntarily
When the company has passed an extra ordinary resolution to the effect that the company
cannot continue to carry on business owing to its liabilities and that it is advisable to wind
up.
b. Winding up under supervision of the court
When a company is in the course of being wound voluntarily and a petition for compulsory
winding up presented, the court in a proper case, may direct that the voluntary winding up shall
proceed subject to its supervision.
c. Compulsory winding up
A company may be compulsorily wound up by the court for the following reasons;
Whenever it passes a special resolution to that effect
If default is made in filling the statutory report or holding the statutory meeting
If it does not commence business within a year from it incorporation
When it is unable to pay its debts
When the number of its members falls below seven and bellow two in case of public
company, and private company respectively.
d. Striking off the register
When the registrar has reasonable grounds for believing the company is deficient he will give
due notice to the company at its registered office of his intention to strike it off the register. If,
after lapse of the requisite period, hears nothing to the contrary, he proceeds to remove its name.
e. Dissolution by the order of the court without winding up
The companies Act provides for the speedy dissolution of a company whose business has been
acquired by another company.
16 | P a g e
