FORMS OF LEGAL

BUSINESS
OWNERSHIP
 The legal forms of business ownership

The following are legal forms of business

ownership:
• Sole proprietorship
• Partnership
• Joint Stock Company/ Corporations
• Cooperative societies
 Sole proprietorship

• A sole proprietorship, also known as the sole

trader or simply a proprietorship, is a type of
business entity that is owned and run by one
natural person and in which there is no legal
distinction between the owner and the business.
The owner is in direct control of all elements and
is legally accountable for the finances of such
business and this may include debts, loans, loss
etc. (Wikipedia, March 2015)
• A sole proprietor or a sole trader is a person who
owns a business singly. He is the only owner of the
business and provides all the necessary capital. He
receives all profits (subject to taxation specific to the
business) and has unlimited responsibility for all
losses and debts.
• Every asset of the business is owned by the
proprietor and all debts of the business are the
proprietor’s. Sole proprietor may use a trade name or
business name other than his, her or its legal name.
CHARACTERISTICS OF A SOLEPROPRIATORSHIP
• Capital is contributed by the owner
• The organizer and manager is the owner
• The owner takes all the profits and bears all
the losses
• The liability of the sole proprietor is unlimited
ADVANTAGES OF SOLE PROPRIATORSHIP
• Simple to form and operate (license is enough)
• Efforts and returns are directly proportional
• Quick decisions and prompt actions
• Business secrets can be reserved
• Close contact with customers
• Economy in size and operation, management is not
expensive. The sole proprietorship control all the
activities
• Economic and social utility i.e. employment to people
DISADVANTAGES OF SOLE PROPRIATORSHIP
• Unlimited liability
• Insufficient capital/ limited capital
• Over-worked due to single ownership and
management
• Uncertainty of business, death might mean the end of
the business
• Unable to carry out research due to fear of risks of loss
• Limited scope for expansion due to limited capital
• Absence of specialization
DISSOLUTION OF THE SOLEPROPRIATORSHIP
• By voluntary decision to do so
• By admission of a partner
• Dealings of illegal business
• Death of a sole proprietor
• By sale of the business to another proprietor
• Bankruptcy of the sole-proprietor
 Partnership
Partnership is a relationship between persons carrying
on a business in common interest with a view of
making profit. Each of these persons is called a partner
and a business is referred as a firm.
CHARACTERISTICS OF PARTNERSHIP
• There must be an agreement
• Partners share of profit and losses
• Collective management
• More than one person, minimum 2 and maximum 20
• Restriction on transfer of capital/ rights
CLASSIFICATION OF PARTNERSHIP
Partnership is classified into two classes;
• On the basis of liabilities of the members
• On the basis of the life or duration of the partnership

1. ON THE BASIS OF THE LIABILITIES OF THE MEMBERS

Under this classification there are two categories;
• GENERAL/UNLIMITED PARTNERSHIP; in this kind of partnership
all members have unlimited liability in the sense that, if the
business become bankruptcy their personal properties may be
attached to settle the partnership debts.
• SPECIAL / LIMITED PARTNERSHIP; this is the type of partnership
in which the liability of the partners is limited to the amount of
capital contributed by each partner. The personal properties of
the limited partner are not liable for the firms debts.
Characteristics of a limited partnership
• There is at least one general partner with unlimited
liability.
• Other partners’ liability is limited to their capital
contribution.
• Special/limited partner has no authority to take part in
the management of the firm.
• A special/limited partner has the right to inspect the
books of account of the firm.
• A special/ limited partner has the right to withdraw his
capital from the firm.
• Death, insanity, retirement or bankruptcy of a special
partner does not affect the existence of a partnership
• A limited partnership must be registered under the law
The difference between general/unlimited partnership and
limited partnership
• Liability; in limited partnership only the general partner has
unlimited liability, others have limited liability while in general
partnership all partners have unlimited liability.
• Management; in limited partnership a limited partner cannot take
active part in the management of the firm only a general partner
is concerned while in general partnership all partners take part in
the management of the firm
• Dissolution; in limited partnership, death, bankruptcy or insanity
of a limited partner does not affect the continuity of the firm
while in general/unlimited partnership these events affect the
continuity of the firm.
• Registration; a limited partnership must be registered under the
law while unlimited/general partnership does not need to be
registered.
2. ON THE BASIS OF THE LIFE OR DURATION OF THE
PARTNERSHIP
Also under this classification there are two categories;
• PERMANENT PARTNERSHIP/PARTNERSHIP AT WILL; it is a
partnership formed for undefined period, the time or period
of the partnership is not mentioned in the formation of the
partnership, it continues with its operations depending on the
will/interest of the partners. It can be dissolved by any partner
by giving notes to other partners of his desire to quit the firm.
• TEMPORARY/PARTICULAR PARTNERSHIP; is a partnership
formed to achieve a particular job or task for a specified
period of time. It is dissolved immediately after the
completion of the projected business or on the end of that
period agreed in the partnership deed. Example joint venture
business.
FORMATION OF A PARTNERSHIP
• The formation of a partnership requires an agreement
between two or more people (maximum number is 20). The
agreement may be written agreement or by implications
from the conduct of the parties involved.
• A limited partnership must be formed in writings in order to
avoid any possible misunderstanding in the future.
Article of a partnership
• These are terms and conditions contained in the partnership
deed/ agreement.
A partnership deed
• This is also known as partnership agreement, it is a
document which contains terms and conditions agreed upon
by the group of people with a common view of making profit.
Contents of a partnership deed
• Name of the firm
• Nature of the business carried out by the partner
• Duration of the partnership where necessary
• Amount of capital to be contributed by each partner
• Ratios at which profits and losses are to be shared
• Rate of interest to be paid by the partner on the amount drawn by them
• The amount of salary or commission to be paid to any partner for his service to
the firm.
• Matters relating to the admission/retirement of the partner
• Procedures for the dissolution of the partnership and mode of settlement of the
accounts after dissolution.
• Allocation of partners responsibilities to the firm
• Maintenance of accounts and auditing of those accounts
• Loan and advances made by the partners and the rate of interest payable by
them
• Basis of valuation of goodwill at the time of admission of a new partner.
Note that; contents of partnership deed can be attered from time to time with the
consent of all partners.
In the absence of a written partnership deed
• Equal shares of capital, profit and losses
• Indemnity. The firm must indemnify each partner in respect of payments
made by him and personal liabilities incurred by him;
~ In the ordinary conduct of the business
~In any expense incurred for the preservation of the business or property of
the business.
• Interest on capital and advances are entitled to 5% per annum from the date
of contribution.
• All the partners manage and control the business firm.
• Renumaration; no partner is entitled to a salary, or commission for acting in
the business or facilitating the transactions.
• No partner will introduce a new partner without the consent of existing
partners
• Internal disputes are made from the consent of all partners e.g. change in the
nature of the partner
• Partnership books of accounts, files and registers must be kept at the place of
the business.
PARTNERSHIP REGISTRATION
Before the issuing of certificate of partnership
registration the following documents have to be filled;
• A statement which is made in prescribed form
including the details on; name of the firm, principal
place of the business, name of other places where
the business is carried, the date on which each
partner has joined, names and addresses of each
partner and the duration of the partnership if
necessary.
• Partnership deed duly prepared
• A receipt for fees paid for registration
• A trading license
 Types of partners
• Active/ working partner: in addition to capital contributed
by such partner, he takes an active part in the management
of the firm, he bears an unlimited liability for the firms debts.
• Sleeping/dormant partner: this partner only contributes
capital in the firm, for the commencement of the business;
he does not take part in the management of the firm. His
liability is limited to the capital contributed by him.
• Secret partner: is the partner who contributes the capital
and shares the profit s and losses of the firm however his
connection to the firm is not known to the public.
• A minor partner: is the partner who has not reached 18
years , he contributes the capital, he shares only profit
generated by the firm but not the losses.
• Major partner: this is the partner who has reached
18 years; he does not only contribute the capital but
also shares the profits and losses of the business.
• Quasi partner: is the partner who is represented to
the public as a partner although he does not
contribute the capital and does not participate in the
management of the firm, he may receive a share of
profit but he is not liable to the debts of the firm.
• Nominal partner: is the person who lends his name
to the business for prestige enhancement of the
firms standing or firms reputation. He contributes no
capital and he does not any part in the management
but he bears the debts of the business.
Advantages of partnership
• Availability of fairly large capital: new partners can be admitted
whenever the need of capital arise
• Formation is easy: it requires only an agreement deed, a trading
license, and certificate of registration in case of limited
partnership
• Balanced decision/approach: a partnership is a combination of
abilities and talents of many people, such a combination of
skilled people facilitates the making of balanced decisions
through consultations and meetings.
• Division of work/ division of labor: partners can be divided into
different occasions according to their skills, such specialization
increases efficiency of the business
• Flexibility: partners can change their capital, profits and losses
sharing ratios, managerial duties and line of business without
going through any legal formalities.
Disadvantages of partnership
• Unlimited liability; for the active partners their liability is
unlimited, their personal/ private belongings can be used
in the settling of the business debts
• Mutual conflicts; misunderstandings and conflicts
among partners may lead to delay in decision making or
even mean an end of the firm
• Lack of stability; death, insolvency or incapacity of a
partner may result into a dissolution of the partnership
• Risk of implied agency; partners may suffer due to the
negligence or dishonest of one partner
• No transfer of capital/rights; a partner cannot easily
transfer his capital to another person without the
consent of other partners
Dissolution of a partnership
In partnership there different forms of dissolution as follows;
• Dissolution by consent; this is also known as voluntary dissolution as
there is an agreement between all the partners
• Contingent dissolution; also known as possible event dissolution. This
may be caused by death of a partner, insolvency of a partner and
illegal operations
• Compulsory dissolution; if all partners are declared to be insolvent
except only one partner the partnership has to be dissolved as one
person cannot constitute a partnership
• Dissolution by the notice from the general partner (the one whose
liability is unlimited).
• Dissolution under court order; this happens if; a partner has become
insane, a partnership has become bankruptcy, the partnership has
been involved with illegal operations, there are claims of one partner
for dissolution, or there are claims from debtors for dissolution
 Companies
• A company is a voluntary association of
individuals for profit, having a capital divided into
shares the ownership of which is the condition of
membership.
• Also a company may be defined as an association
of investors who buy shares/stock in venture and
receive profit in the proportion of the size of
their investment
• Capital of the company is jointly owned by the
shareholders
• This is a form of business unit established
under the regulations of various companies
act (1948-1959) and it is registered under the
company’s act.
• Shareholders elect Board of Directors to
oversee major policies and decisions
• It has its own life and does not dissolve when
ownership changes
• The corporation is the preferred form of
ownership for most large businesses
• Shareholders elect Board of Directors to
oversee major policies and decisions
• It has its own life and does not dissolve when
ownership changes
• The corporation is the preferred form of
ownership for most large businesses
 FEATURES OF A COMPANY
• It is a separate legal entity: a company is a legal entity
separate from that of the people contributing capital
(shareholders). It is an artificial person; it can hold a
property, enter into contracts, it can sue or be sued on
its own name.
• Perpetual/continuity succession: a company exists
indefinitely till it is liquidated or wound up. The death or
insolvency or any other calamity to its owners (the
shareholders) can not affect the existence of the
company.
• Limited liability: each shareholder is only liable to the
amount contributed by him; his private properties are
not liable for the debts incurred by the company.
• Transferability of shares in case of public company: a
shareholder is free to withdraw his membership from the
company by transferring his shares unless it is otherwise
stated.
• Common seal/ company’s signature: all acts of a
company are authorized by a common seal which is the
official signature and an authority of the company. All the
company’s important documents are attached by a seal.
• Separation of ownership and control: shareholders have
no right to participate in day to day management of the
company it is managed by the representative body
known as the Board of directors, the members of the
board of directors are elected by the members of the
company.
 CLASSIFICATION OF COMPANIES
Companies are classified on the following basis:
On the basis of the incorporation
On the basis of the liabilities of the member
On the basis of ownership
On the basis of the incorporation; Under this
classification there are two types;
• Statutory companies; these are companies
established by the special act of the parliament.
Its objectives, powers and activities are defined
by the special law under which it is created. In
Tanzania statutory companies are established
under the public corporation act of 1992.
• Registered companies; these are established by
registering them with the registrar of companies
under the company’s act. In Tanzania the
formation, working, wind up of such a company
On the basis of the liabilities of members; there
are also two types under this classification:
Limited Companies: the liability of the
shareholders is limited to the amount of shares
they have contributed their private belongings
are not concerned with the company’s liabilities.
• Unlimited Company : is a corporation similar to
limited company but, shareholders have a non-
limited obligation to meet any insufficiency in the
assets of the company to enable settlement of
any outstanding financial liability in the event of
the company's formal liquidation.
On the basis of ownership; this classification involves
the following types;
• Public Limited Companies. A public company must
have an issued share capital which can be issued to
the public. A public company must have at least two
directors; at least one of them must be a natural
person and a company secretary.
• Private Limited Companies. A private company is
defined as any company that is not a public
company .A private company tends to be smaller than
a public company and cannot issue shares to the
public. A private company must have at least one
director, who is a natural person. A private company
does not have to have a company secretary.
 Formation of a joint stock company
There are four steps in the formation of a joint
stock company
1. Promotion: at this stage the promoters (the
founders of the company) conduct a detailed
research to find information on the extent of
demand, extent of competition, source of
supply of raw materials, amount of finance
required, location of the business, verification
of proposal and they assemble the proposition
report.
2. Incorporation of a company : This involves the
registration and issue of the certificate of
incorporation which brings a company into
existence as a separate legal entity. Here the
promoters make an application to the registrar
of companies, it involves approval of the name,
filling of the memorandum of association and
article of the association, provision of the list of
the directors, and a declaration that all
necessary requirements have been duly
complied with and the directors agree to act as
such.
Memorandum of association
• This document acts as a constitution of the
company which states the relationship
(objectives and powers) between the company
and the outside public.
• The contents in the memorandum of association
are: name of the company, domicile, objective,
liability and the nominal authorized capital.
• Memorandum of association is the basis of
incorporation. A company cannot be registered
without the memorandum of association.
Article of association
• This is the second important document that
must be made and signed by the promoters and
sent to the registrar of companies.
• It states all the rules and regulations for the
internal management or control of the company.
• It is subsidiary to the memorandum of
association
• Acting beyond the article of association is
accepted and any changes in the article of
association can be made without government
approval.
Contents of the article of association
• Types of the company’s shares
• Classes and rights of shareholders
• The issue and transfer of shares
• The methods of dealing with any alteration of
capital
• Qualifications, duties and powers of the directors
• Procedures of general meetings and voting rights
• Policies on borrowing and dividend
• Auditing of the company’s books of account
• Matters relating to winding up of the company
• Rules regarding the common seal of the company
3. Floatation of capital
• A public company must first raise the necessary
capital and obtain a certificate of trade while a
private company can commence business
immediately after receiving the certificate of
incorporation.
• The subscribing of the capital involves; permission
for capital issue, appointment of brokers, bankers,
auditors and secretaries, underwriting
agreement, list of securities (shares and
debentures), issue of prospectus, subscription of
shares, allotment and refund, issue of share
certificate.
Methods of raising joint stock capital
• Raise capital privately, if the amount to be
raised is small, shares are issued to the
shareholders of the company.
• Invite the public to subscribe; if the amount to
be raised is large shares are issued to the public.
When the shares are offered to the public the
following should be done: issue of prospectus,
sell of shares to an issuing house, place shares
with stock exchange brokers and right issue of
shares (offered to the existing shareholders only
at the price lower than the market price)
4. Certificate of commencement of the business/
trading license
• This is a document issued by the authority in an
area where the business is going to be carried
out.
• To obtain the trading license the company must
submit the following documents; a copy of the
prospectus, a return of allotment and the
certificate of incorporation
 WINDING OF THE COMPANY

A company may be wound up in case of the

following;
• Having the company’s name off the registrar
• Winding up by the court order
• Voluntary liquidation due to insolvency or
bankruptcy
• Creditors voluntary winding up
Co-operative societies

• This is the type of business organization in

which members make efforts to achieve any
common objective on voluntary and
democratic basis.
• Also a cooperative society can be defined as
the voluntary association of a certain number
of people with the spirit of service in order to
achieve self help through mutual help and it is
managed in democratic manner.
 Features of co-operative society

• Voluntary and open membership; a cooperative

society is at all times open to all the people who wish
to join, and they have the freedom to discontinue
whenever they desire to.
• Democratic control and management; the managing
committee is elected from among the members and
every member has one vote irrespective of the
number of shares held by him.
• Service motto; the basic principle of cooperative
society is to serve its members. The profit is not the
only motive rather it’s a combination of business and
a spirit of service which arouses loyalty fellowship and
cooperative feeling.
• State control; the government exercises close
control over these cooperative societies to avoid
any malpractices on the part of some members.
• Education; the members of cooperative society
are provided with economic and democratic
education which will help them in conducting
various activities in the cooperative society.
• Cooperative among cooperatives: cooperatives
serve their members most effectively and
strengthen the cooperative movement by
working together through local, national,
regional and international structures.
 COOPERATIVE STRUCTURE

• Primary society; here the members are individuals who

join together with the common interest of making efforts
to achieve any common objective on voluntary and
democratic basis.
• Secondary society; this comprises of primary societies
who have joined their forces to achieve a common goal.
The functions of the secondary society are; Marketing the
agricultural products of their members, Financing primary
societies through buying the agricultural products from
the members of the primary society, Establish cooperative
savings and credit services for primary societies, Provides
accounting and auditing services to primary societies and
Represent its members in National conferences
• Apex organization; this organization is formed by
the secondary societies. The functions of this
organization are; To coordinate economic plans
of the members of secondary society, to
encourage and assist education relating to
cooperative organization, represents its
members in collective bargaining, represents its
members in international conference, publish of
news papers and other relevant publication to
increase interest of its members.
• International cooperative alliance; this is a non-
governmental organization established to help
and safeguard the common interest and
aspiration of cooperatives all over the world. The
functions of international cooperative alliance are;
Universal representation of all types of
cooperative , To spread cooperative principles and
methods all over the world, To promote
corporation in all countries, To promote friendly
relationship of all organization all over the world ,
To establish lasting peace and security and To
safeguard the interest of the cooperative
movement in all countries.
 TYPES OF COOPERATIVE

• CONSUMERS COOPERATIVE SOCIETY

• This is a voluntary association of consumers who are
organized for the purpose of purchasing goods in bulk at
the production centers on favorable terms and then
arrange equitable distribution to members at
reasonable prices.
• PRODUCERS COOPERATIVE SOCIETY
• This is a voluntary organization of producers established
for the aim of providing various requirements to its
members, to assist them in their production activities,
transportation of the products, and marketing of the
products and retain profits for their members.
INDUSTRIAL COOPERATIVE SOCIETY
• This is the voluntary association of producers
who produce their products together and market
their own manufactured goods with the
necessary services and assistance. example SIDO.
SAVINGS AND CREDIT COOPERATIVE SOCIETY
• This is a voluntary organization of people who
have common bond and who have agreed to
save their money together and lend money to
one another at low rates of interest.
 TRADE MARK
• Choosing a business name, slogan or design is a
legal issue with which entrepreneurs must deal
with.
• Legal problems can arise if you choose a name
that another company has trademarked or
registered as a corporate name with the
appropriate state agency.
• A trademark is a form of legal protection for a
distinctive word, name, phrase, logo, symbol,
design, slogan or any combination of these
elements.
• It’s a good idea to do a trademark search before
choosing a name, logo or slogan.
• This has been made so easier thanks to the
internet.
• There are some companies that deal with searching
of trademarks like Thomson & Thomson
(www.thomson-thomson.com) and CCH Trademark
Research Corporation (www.corsearch.com)
• Also a trademark search can be conducted in the
Trademark Register through the state agency with
which corporations are registered.
 PATENT RIGHT
• A patent is a legal property that allows its holder
to prevent others from employing this property
for their own use for the specified period of time.
• Although the use of patent traditionally provided
inventors and organizations with protection for
technological discoveries that were the basis for
proprietary products and services, this advantage
is declining in significance because new
technological discoveries can rapidly replace the
technology that’s currently protected by the
patent.
 TYPES OF PATENTS
• Utility Patent: the most common type, covers
conventions that work uniquely to perform a
function or use. Example a new devise to
administer medications.
• Design Patent: applied when a unique or new
form, shape or design of an existing object.
Example a sharpener that looks a train.
• Plant Patent: this covers new strains of living
plants such as flowers, trees and vegetables.
 QUALIFICATION FOR PATENTABLE INVENTION
• Statutory/subject matter: an invention must be a
process, a machine, a manufacture, a composition or
an improvement of these.
• Novelty/newness: An invention is new/novel if it was
not know to the public before the date of filing of the
patent application or the priority date claimed.
• Non-obviousness: this determines whether the
differences in the new invention would have been
obvious to a person having ordinary skill in the type
of technology used in the invention.
• Usefulness: the invention must have a useful purpose
Not everything can be patented, for example:
• Artistic creations
• Mathematical algorithms or models
• Abstract intellectual or mental concepts or
processes, a purely mental process or a process
you can simply perform using a pencil and paper.
• Plans or schemes
• Principles or theories
 CONTRACTS
• A contract is an agreement that creates legal
obligations and is enforceable in a court of law.
• Organizing and then managing an on going
entrepreneurial venture may entail executing
different types of contracts.
• The commonness and potential variety of
contracts that an entrepreneur may deal with
means knowing something about contract law.
• Its highly recommended that an entrepreneur
should enlist professional legal advice regarding
the writing and execution of contracts
There are four essential parts in a contract
1. Mutual assent: it means that both parts must
agree to the contract
2. Considera]\tion: both parties must do or pay
something as stated in the contract.
3. Legality of objects: the contract can not force
the parties to do something illegal
4. Capacity of the parties: all the parties of the
contract should be legally able to perform their
part of the contract
• For instance, minors, people of unsound mind,
intoxicated persons or drugged persons can
legally get out of contracts.
• In addition, contract laws has specific
understandings about which contracts must be in
writing to be legally binding, what a breach of
contract is and interpretation of contracts.
• There’s much more to contract law than what an
entrepreneur can gain knowledge of, therefore
it’s a good idea to get legal advice on preparing
any contracts that your business may need.
 EMPLOYMENT LAWS
Employment laws covers:
Hiring and firing of workers
Employee policies
Employee compensation and benefits
Discrimination
Workers 'compensation
Workplace health and safety
Family and medical leave
Other employer-employee relations
Note: The key is to be aware of when you need legal
advice, that is, learn enough to know when legal
advice is needed.
 It is highly recommended that you seek professional
legal advice in employment law matters.
 It can be an expensive proposition if an employee
sues and you are found to be at fault.
 Other legal issues that entrepreneur should be
aware of are:
– Sales law
– Trade secret laws
– Securities law
– Credit laws
– Consumerprotection laws
– Pension and fringe benefit laws
– Entitrust law