FORMS OF BUSINESS

SOLE TRADER/SOLE PROPRIATORSHIP

• This is a form of business owned and run by one person although
many 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 profits accrue to the sole trader
• The business requires small capital to start
• 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

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 the partnership will be terminated
• Any other formal agreement about how the business will operate
Capital contribution
• The partners who are the owners of the business contribute capital
from 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 means 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
fromthe 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 public, he or she does not automatically incur the liability
of an ordinary partner unless he or she has acted like a partner
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
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, 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
• 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
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
availableProcedures 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
•  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.
• 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.
CO OPERATIVE
• 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.
•  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.
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.
Number of owners
• A small number of may be able to form a successful partnership
whereas several owners attract private or public limited companies
where owners may not be held accountable for the debts of the
others.