Chapter Eight

Legal Forms of Business Organization

 CHAPTER EIGHT
LEGAL FORMS OF BUSINESS ORGANIZATION
Business undertakings can be organized as public or private form of ownership.

From the point of view of private organization or ownership, there are four
forms of organizations for a business unit;

 Sole proprietorship
 Partnership
 Corporation
 Cooperatives
Characteristics of an ideal form of organization

In choosing a particular form of organization, an entrepreneur will

generally consider the following factors;
1. Ease of formation
2. Ease of raising capital
3. Limited liability
4. Direct relationship between ownership control and management
5. Flexibility of operation
6. Continuity or stability
7. Retention of business secrets
8. Freedom from state regulation
9. Low tax burden:
3.1 SOLE PROPRIETORSHIP
It is a form of business ownership in which a single individual assumes
all the risk of operating the business, owns its assets, controls and
uses any profit that is made.

This form is known also as individual or single proprietorship, sole

ownership or individual enterprise.

The salient features of sole proprietorship include;

 Single ownership
 Owner- manager
 No separate legal entity
 Undivided risk
 Unlimited liability
 Freedom from government control
Advantages of sole proprietorship:
 Ease and low cost of formation and dissolution
 Direct motivation and personal care
 Freedom and promptness in action
 Business secrecy
 Social desirability
 Absolute control
 Flexibility in operations
 Minimum government control
 Single taxation
Disadvantages of sole proprietorship:
 Limited resources and size
 Unlimited liability
 Limited managerial skills
 Undivided risk
3.2PARTNERSHIP
A partnership agreement is defined as a contract whereby two or more
persons who intend to join together, make contribution for the purpose of
carrying out activities of an economic nature and of participating in the
profit and loses arising out there of if any.
Characteristics of partnership:
 Plurality of persons
 Contractual relationship
 Capital contribution
 Unlimited liability
 Agency relationship
 Utmost good faith & trust
 No separate legal entity
 Restriction on transfer of interest
 Unanimity of consent
Types of Partnership:
There are two types of partnership, namely

1. General partnership has unlimited liability and

2. Special partnership allow for a limited liability to its
partners.
General partnership:

1. Partnership-at-will
2. Particular partnership
3. Ordinary joint Venture
• Partnership-at-will: In this form, no stipulation is made as to when and how
the partnership will come to an end. a partner can pull out of the firm after
giving certain number of days notice to the firm withdrawing from the
partnership or terminating the Deed of Agreement.

• Particular partnership: This type of partnership specifies a fixed period of

time for completion of a particular business venture and after achieving the
objective or after expiry of stipulated period, it automatically becomes
dissolved.

• Ordinary joint Venture: This in fact is a temporary partnership

arrangement between two or more persons to carry out a particular business
venture. After accomplishing the tasks, the joint venture comes to an end.
• In joint venture, generally the right of management is delegated to one of
the partners who are accountable to other members. While in a general
partnership, all the partners are entitled to carry out the business; in a joint
venture all the members do not enjoy the right of implied agency.

Special partnership:
1. Limited partnership: In this form there is at least one partner
whose liability is unlimited and one or more partners whose liability
is limited to the extent of capital contributed.
The duties and obligations of the limited partner are:
– The limited partner is not entitled to take an active part in the management
of the business and as such cannot bind by his acts.
– He cannot withdraw any part of his capital nor can he transfer his interest to
others without the consent of the general partner.
– The general partner who has unlimited liability need not take the consent of
the limited partner to admit a new partner into the business.
– The death or insolvency of the limited partner does not affect the business or
the limited partnership.
2. Special joint ventures: In this form, the partners have limited liability and
they will terminate after accomplishing the task for which they are created.
Kinds of Partners
A Partner of a firm may be classified into the following categories:

1. Active Partner
2. Sleeping partner or Dormant partner has limited liability
3. Nominal or Ostensible partner lends his/her name only
Advantage of Partnership
 Ease of organization
 Large financial and managerial resources
 Reduced risk
 Flexibility
 Democratic functioning
 Better public relations
 Tax liability / single taxation
Disadvantage of Partnership
o Unlimited liability
o Risk of implied agency
o Lack of harmony
o Lack of continuity
o Profit is shared
o Lack of business secrecy
o Investment withdrawal difficulty, and non transferability of interest
3.3 JOINT STOCK COMPANY (CORPORATION)
A joint stock company is essentially a group of persons coming together
voluntarily to carry on certain business by organizing themselves into a
single entity with a view to function as an artificial person in the eyes
of the law.
Its “an artificial being, invisible, intangible and existing only in
contemplation of law being the mere creature of law, it possesses
only those properties, which the character/ certificate of incorporation of
its creation confers upon it.”
Features of Corporation:
 Separate legal entity
 Limited liability
 Transferability of shares
 Perpetual existence
 Common seal
 Separation of ownership from management
Corporate Structure:
There are three groups that comprise the corporate structure:
 The stockholders,
 The board of Directors, and
 The officers of the corporation.
Group Rights of Shareholders:
o The right to elect directors;
o The right to vote and amend the by-laws;
o The right to change the charter;
o The right to vote on the disposal of corporate assets;
o The right to dissolve the corporation.
Individual Rights of Shareholders:
 The right to buy, sell and transfer his/her stock;
 The right to receive dividends in proportion to the number of shares owned;
 The right to inspect and review the company’s records;
 The right to vote at stockholder’s meeting;
 The right to receive evidence of ownership (stock certificates);
 The right to sue officers and director for fraud;
 The right to share in distribution of assets in event of dissolution.
Advantage of Corporation
Financial Strength
Limited Liability
Scope of expansion
Stability
Efficient & bolder management
Diffused Risk
Public confidence
Disadvantage of Corporation
Difficulty of Formation
Lack of owner’s personal interest
Delay in decision making
Fraudulent management
Taxation
Lack of secrecy
Expensive management
3.4 COOPERATIVES

As defined by ILO, “Co-operatives are associations of persons usually

with a limited means who have voluntarily joined together to achieve a
common economic end through the formation of a democratically
controlled business organization, making equitable contributions to the
capital required and accepting a fair share of risks and benefits of the
undertaking”.
Features of Cooperatives:
 Voluntary/ Open membership
 Equality of voting rights
 Democratic control
 Disposal of profits/surplus
 Service motto
 Members subscribe capital for the enterprise
 Registrations & legal status
Types of cooperatives
The principal types of cooperatives are the following:
o Consumers’ cooperative societies
o Producers’ cooperative societies
o Marketing cooperatives’ societies
o Housing cooperatives’ societies
o Cooperative credit societies
o Cooperative farming societies
Advantage of Cooperatives
o Democratic Management
o Limited Liability
o Stability & Continuity
o Easy Formation
o Low Operating Costs
o General Reserves
o Exemption & Privileges
o Social Advantage
Disadvantage of Cooperatives
 Limited Capital
 Lack of Managerial Talent
 Internal Bickering
 Lack of Motivation
 Delay in decision making and Implementation
 Lack of Secrecy and Government Regulations
 Limitation of Size
3.4 PUBLIC ENTERPRISES

A public enterprise is one that is organized by Federal, State or City government

for the purpose of conducting public business.
Characteristics of Public Corporation:
o Primarily service motto
o Government Financed
o Collective ownership
o State management
o Public accountability