SECTION 1: THE NATURE OF

BUISNESS

LECTURE 2: FORMS OF BUSINESS

ORGANIZATIONS
 ORGANIZATION
 An organization is a system that groups people together towards establishing
a common goal. Business organizations are centered on creating goods and
services for profit. There are several types of business organizations that one
can start.
Forms of Business Organizations:
SOLE TRADER
PARTNERSHIP
CO-OPERATIVES
COMPANIES – PRIVATE LIMITED COMPANY
- PUBLIC LIMITED COMPANY
CONGLOMERATES
MULTINATIONALS
FRANCHIZE
NATIONALIZED INDUSTRIES
The Sole Trader

The sole trader is a single business owner.

This person may employ several other
persons to work in the organization, but he
has to make all decisions, acquire all the
capital required and other resources needed
for the business on his own.
Characteristics of a Sole Trader
He or she manages the business and may have the help of family and friends.
He or she enjoys all the profit and bears all the risks
Capital is limited since the savings of the owner fund the business
Personal contact with clients
Performs a large variety of tasks related to the operations of the business
This type of business is not incorporated (not given a separate identity) and therefore easy to set up.

Examples: Electrician, Plumber, small farmers, doctors and lawyers.

Formation
There are no legal formalities in the setting up of a
business as a sole trader except for the registration of a
trade name or the acquisition of a license. For example a
license is required for the sale of alcohol or for the sale of
food items.
ADVANTAGES AND DISADVANTAGES OF A
SOLE TRADER.

ADVANTAGES DISADVANTAGES
 Enjoys all profits  Limited source of finance
 Ease of formation – no legal requirements  Lack of specialised staff
 Independence – find personal satisfaction
in working for themselves  Over reliance upon one’s personal
 Simple organisational structure
health and vigour
 Personal Control – decision making is quick  Unlimited Liability
 Personal Service  Lack of leisure time
 Secrecy – No need to disclose info. Except  Lack of technology
to tax authorities or to creditors
 Personal Commitment to succeed
 He bears all the risks
PARTNERSHIP

An association between 2- 20 people

operating a business with the common goal of
making a profit.
TWO TYPES OF PARTNERSHIPS

Limited Liability Partnership – at

least one partner must have unlimited
liability.

Unlimited liability Partnership- All

partners have unlimited liability.
Characteristics of a Partnership
 1. Minimum of 2 and maximum of 20 for formation. However for professional
such as lawyers, accountants a maximum is not give since they are not
allowed to form companies.
 2. Capital is provided by the partners
 3. A limited partner cannot take part in the management of the partnership
 4. Profits share equally unless stated in agreement

Formation
A partnership deed is usually written up to form the
arrangement. This agreement usually indicates the
number of partners, amount of capital from each
partner, how profits are to be divided, name of
partnership, salary to be paid, how partnership is to be
dissolved, role of each partner, etc.
Types of Partners  
Ordinary/General Partners: take an
active part in the running of the
business.
 Unlimited liability of partners
 Change of members ends partnership
 Assets and liabilities are owned and
shared equally
 Each partner plays a part in the
management of the firm
 Partnerships cannot exist without an
agreement
Sleeping Partners: Invest in the business but do not take
an active part in the business.
Limited Liability Partners: assets will
not be lost if the business goes
bankrupt.
 Limited liability of partners but
one must have unlimited liability
 Change of members does not end
partnership
 Does not play a part in the
management of the firm
ADVANTAGES AND DISADVANTAGES OF
PARTNERSHIP
ADVANTAGES
 1. Relatively easy to set up
 2. More capital can be obtained than
sole trader
 3. Business will not end if one
partner dies (continuity)
 4. Specialization can occur thus
leading to greater efficiency
 5. Shared work load
 5. Pays lower personal tax not
company tax
DISADVANTAGES
 1. Unlimited liability
 2. Personalities of partners may cause
difficulties in decision making which can
lead to disagreements.
 3. Some difficulty in raising capital.
 4. Concentrated risk – risk not spread
enough
 5. Continuity – broken partnership upon
death
 6. Profits are shared, irrespective of effort
in the absence of a partnership agreement.
CO-OPERATIVES

Businesses that are formed, owned and operated by its

members.
Examples of Types of Co-operative
 1.
Financial co-ops: e.g. credit unions which offers
methods of savings and loans
 2.Consumer co-ops: These are involved in the provision
of goods and services
 3.
Agricultural co-ops: provide agricultural products and
equipment to farmers
Characteristics of Cooperatives
 1. All members have a vote
 2. Limited interest on money invested
 3. Profits distributed among members
 4. The members are the clients
 5. Members usually have a common bond

Formation
Each member purchases shares to form the capital base of
the co-operative.
ADVANTAGES AND DISADVANTAGES OF
CO-OPERATIVES

ADVANTAGES
 1. There is a market for members
 2. Employment is provided
 3. Owned and operated by members,
therefore there is a greater
commitment to making it a success.
 4. A medium through which
government can channel aid to the
society.
 5. All profits shared among members
 6. Shared decision making
DISADVANTAGES
 1. Poor, inexperienced and
unqualified management. This can
hinder growth.
 2. Conflict among members can
lead to slow decision making
 3. Unable to attract skilled
professionals
COMPANIES

A company is a business entity which has been

incorporated. It is a legal entity, separate from its
owner(s) i.e. it can enter into contract, can sue and
can be sued. There are two types of companies:

a) Private Limited Companies (Ltd is usually written as

part of the name)
b) Public Limited Companies (PLC is part of the name)
A. PRIVATE LIMITED COMPANIES
 A company where 2-50 shareholders form a company.

 Characteristics
 1. Limited liability
 2. A separate legal entity
 3. Governed by a) memorandum of Association b) Articles of Association
 4. Directors elected at AGM
 5. Proper accounts must be kept for tax purposes
 6. 2-50 shareholders
 7. They tend to be owned by families and close friends.
FORMATION
Certain legal requirements are needed such as a) Memorandum of Association
b) Articles of Association
c) Statement of Authorised Registered or
Nominal capital
ADVANTAGES AND DISADVANTAGES OF
PRIVATE LIMITED COMPANY

ADVANTAGES DISADVANTAGES
 1. The company is separate from owners  1. Shares are not traded publicly
 2. Shareholders have limited liability up and therefore the capital base will
to the amount they have invested be limited
 3. Easy access to loans  2. Skills may be limited
 4. Larger capital base than sole traders  3. Shares are not transferable
or partnerships
without the director’s consent
 5. Privacy
 6. Death of an owner will not affect the
continuity of the business
  
 B. PUBLIC LIMITED COMPANY
An incorporated company which offers shares to the public.
 Characteristics
 1. Limited liability
 2. A separate legal entity
 3. Governed by a) memorandum of Association b) Articles of Association c)
Prospectus.
 4. Directors elected at AGM
 5. Proper accounts must be kept for tax purposes
 6. Shares are sold to members of the public

Formation
Certain legal requirements are needed such as a) Memorandum of Association
b) Articles of Association c) Statement of Authorised Registered or
Nominal capital d) Prospectus.
ADVANTAGES AND DISADVANTAGES OF
PUBLIC LIMITED COMPANIES

ADVANTAGES DISADVANTAGES
 1. The company is separate from  1. Objectives of managers may be
owners different from owners
 2. Shareholders have limited liability (shareholders)
up to the amount they have invested  2. Workers are not part of decision
 3. Easy access to loans making
 4. Death of an owner will not affect  3. Accounts must be submitted for
the continuity of the business inspection
 5. Risk is spread among shareholders
 6. Easy transfer of shares
 7. Specialists are hired to run the firm
C. CONGLOMERATE

A group of companies, each of which

operates in different industries. There is
usually no common identity or purpose
except that of making a profit. E.g. BS&T
(B’dos), Neal & Massey (T’dad), Grace
Kennedy (J’maica)
ADVANTAGES AND DISADVANTAGES OF
CONGLOMERATES

ADVANTAGES DISADVANTAGES
 1. Opportunities for training and  1. No common objective other than
transfer of staff between industries profit
 2. Good cash position since all  2. Comparative analysis not
companies possible
 3. Industries can advertise under  3. Outside control from the head
the group name office is resented
 4. Risk of group failure is spread
over a range of industries.
D. MULTINATIONALS

A firm of this nature is one which owns,

controls and operates business activities in
several countries at the same time.
Decisions are made by the parent company.
e.g. Cable and Wireless, Neal & Massey
ADVANTAGES AND DISADVANTAGES OF
MULTINATIONALS
ADVANTAGES
 1. Provides investment in local
economy
 2. Provides training, expertise,
employment and tend to pay
higher wages
 3. A source of taxation and foreign
exchange
 4. Provides markets
DISADVANTAGES
 1. Large amount of profits leave the country
in which it operates to return to parent
company
 2. May exploit natural resources of small
countries
 3. The welfare of the country is not the
concern of the company
 4. May leave country after tax holidays are
over
 5. May harm the environment
 6. They nay leave if political ideas are not
the same as theirs
E. FRANCHISE

A right which is bought by an individual/organisation

(franchisee) from the person/firm(franchiser), in order to sell
goods by using the franchiser’s name. e.g. McDonald’s, KFC
etc.

Franchisee enjoys most of the profits but incur most losses.

Lump sum paid to franchiser (rent and shares of profits).
Franchisee benefits from marketing and promotional network
of franchiser.
NATIONALIZED INDUSTRIES

Companies which have been taken over by

the government via legislation to achieve
certain economic and political aims
 Features
 1. Legal entity
 2. Managed by board of directors chosen by government minister
 3. Annual reports are given to the minister who lay them in Parliament
 4. Generally no shareholders
 5. Funded by government by loans & grants
ADVANTAGES AND DISADVANTAGES OF
NATIONALIZED INDUSTRIES
ADVANTAGES
 1. The production of public goods
in a manner which is not haphazard
 2. Reasonable prices because profit
it not the motive and so that the
masses would have access to
product/service
 3. Safe guard jobs
 4. Obtain better borrowing terms
than private companies
DISADVANTAGES
 1. Consumers must accept the
product, especially if there is no
competitor
 2. Lack of initiative to improve
product due to monopoly
 3. “Red tape” causes delays
 4. Not run efficiently
 5. Accountability often lacking
 PUBLIC VS PRIVATE SECTOR

All business can be classified as either being

owned by members of the public(private
sector) or by the government (public sector).
In some cases however, there are operations,
which may be joint ventures between the
governments and private individuals. The
differences between private and public are
stated below.
PUBLIC SECTOR PRIVATE SECTOR
 1. Business is run by government  1. Driven by the profit motive
 2. Provides most public goods which may be reflected by the
 3. Usually not profit oriented therefore the prices
pricing of goods usually covers the cost of  2. Raises funds by borrowing or
 production issuing shares, loans
 4. Employs are greater portion of the  3. Controlled by families or
labour force
shareholders
 5. Raises funds through taxation,
borrowing(home/abroad), issuing
government securities
 etc.
 Nationalization

The transfer of ownership from the private sector to the public sectors. This
may be done for the following reasons:
 
 1. To increase efficiency
 2. To keep some industries going for the economy’s sake
 3. To provide goods which may not be otherwise produced
 4. To maintain a stable level of prices
 5. To overcome inequalities in wealth distribution
 6. To control entrepreneurs and to regulate the economy
 7. To secure employment
The drawbacks of Nationalization:

1. Lack of motivation of workers

2. Inefficient production
3. Over employment
4. High cost of production
END OF SESSION 2!