INSTITUTE OF ACCOUNTANCY

ARUSHA(IAA)
MODULE NAME: PRINCIPLES OF ENTREPRENEURSHIP
LECTURER: MR. BUNDALA N MACHIYA
 Topic 3

Forms of Establishing New Business

 Sub topics
 The ways entrepreneurs enter into business
 Legal forms of establishing new business
 Factors to consider in choosing a business for
 Legal aspect to consider in choosing business
 Legal procedures for registering and licensing
business in Tanzania
 THE WAYS ENTREPRENEURS
ENTER INTO BUSINESS
An entrepreneur has several ways to enter into
business venture. The most frequently
practiced are classified into three forms:
 Starting Business from scratch
 Buying on going business
 Franchising
 1. Starting Business from scratch
This refers to the decision of starting ne
business.
To start a new business include the following:
 Generating a business idea

Business idea can be obtained from

different sources of information such as
social media, exhibitions and trade show
brainstorming, etc.
 cont..
Feasibility study
 Feasibility study is the process of
determining whether an entrepreneur’s
business ideas is viable foundation for
creating a successful business.
It answers the question “should we
proceed with this business idea or not?”
 cont..
Feasibility analysis consists of four
interrelated
components namely:
Industry and market analysis
Product or service analysis
Financial analysis
Organizational analysis
 cont..

 Industryand market analysis

The focus is to determine the attractiveness
of an industry. This can be achieved by
analyzing the following:
Industry growth-how fast is it growing?
Industry product-how are they essential
to customers?
 cont..

Industry threats:
Which threats does the industry face?
Industry opportunities:
What are the potential opportunities
does the industry has?
Industry competition
How intense is the level of competition?
 cont..
 Product or service analysis
This component of feasibility analysis
involves marketing research and other
possible tools to provide information that
will be used in the design and development
of the product and or service to meet the
needs of the target market.
 cont..
 Financial analysis
In this analysis, the assessment is performed on the
following:
Initial capital requirement.
Startup business firm often need capital to purchase
equipment, technology and other tangible assets,
rent buildings, hire and train employees and
promote their product. Thus, the results of financial
analysis gives an estimated amount needed to
operate the business.
 cont..
Revenue forecast:
An entrepreneur should also forecast or predict the
earning potential of the proposed business.

 Organizational analysis
The focus is to determine whether the business has
sufficient non-financial resources such as:
Managerial expertise
Organizational competence
 cont..
Generally, starting a business from scratch is not an
event, but a process (series or sequence of events)
which may take sometime before fruition.

Advantages of starting a business from scratch

 The decision on investment level depends on
the entrepreneur’s abilities.
 cont..
 It is more encouraging when one starts a
business from scratch which turns into a
success.
 To convert an intangible business idea into
tangible or physical business venture brings a
sense of intrinsic motivation.
 Increases the probability of business success if
the business idea falls under entrepreneur’s
passion and skills.
 cont..
 Ability to quickly adapt to the changing
business environment.
 Enjoying the rewards of investment
including profits.
 Increases self confidence and satisfaction
in entrepreneurial venturing.
 cont..
Disadvantages of starting a business from
scratch
 Relatively little help and advice.
 Most business start-ups fail in their first year.
 Business failure may develop negative attitude
towards starting a business from scratch.
 An entrepreneur bears all loss burden on
himself/herself.
 2. Buying on going business
Before purchasing an existing business,
prospective buyer needs to look under the
covers to see the details.

Due diligence (trust but verify) should not be

viewed as a cost but as an investment in
reducing the failure probability of buying on
going business.
 cont..
Here are the eight questions that highlight critical areas
that need to be addressed:
1. Why is this business being sold?
It is important to establish the owner’s selling
motivation. Although the reason may be very good,
such as retirement or ill health, the buyer needs to
investigate and verify it.
If at any time the owner’s reason for selling doesn’t
appear to be the prime motivation, then further
research must be done on that particular business.
 cont..
2. What is the physical condition of the business?
The overall condition of the facilities needs to be
carefully assessed in order to avoid major expenses after
the purchase.
3. How many key personnel will remain?
In order to conduct a smooth transition, a purchasing
entrepreneur needs to be sure which personnel will
remain after the sale.
Key personnel may be extremely valuable to the
continuity of the venture.
 cont..
4. What is the degree of competition?
The answer to this question must cover two
distinct parts –how many competitors are there
and how strong are they?
5. What are the conditions of the lease?
It is the business that is being sold, not the
building or property. Thus, it is vital to know all of
the conditions of the present lease.
In addition, the landlord’s future plans should be
established as far as future lease provisions are
concerned.
 cont..
6. Do any liens against the business exist?
This refers to the position of creditors and the
liabilities of the business. Entrepreneurs should
check for any delinquent outstanding debts of any
kind by the business.
7. How much capital is needed to buy?
The final purchase price is not the only factor to
consider. Repairs, new inventory, opening
expenses and working capital are just a few of the
additional costs that should be considered.
 cont..
8. What are the future trends of the business?
This is an overall look at the particular
industry trends and how this business will
fit into them.
In addition, the financial health of the
business needs to be projected.
 cont..
Advantages of buying on going business
 An existing business may already have the best
location.
 The benefit of existing key employees and
established suppliers.
 Relatively easier to access financial capital.
 The new owner can use the experience of the
previous owner.
 An advantage of existing customers.
 cont..
Disadvantages of buying on going business
 The previous owner may have created ill
will
 Inventory may be outdated or obsolete
 Change and innovation are difficult to
implement
 3. Franchising
A franchise is the agreement or license between
two legally independent parties which gives:
 A person or group of people (franchisee) the right
to market a product or service using the
trademark or trade name of another business
(franchisor)
 The franchisee the right to market a product or
service using the operating methods of the
franchisor
 cont..
 The franchisee the obligation to pay the franchisor fees
for these rights
 The franchisor the obligation to provide rights and
support to franchisees

Types of franchises
There are two types of franchises:
 Product distribution franchises
In this type of franchise, simply sell the franchisor’s
products and are supplier-dealer relationships.
 cont..

In product distribution franchising, the

franchisor licenses its trademark and logo
to the franchisees but typically does not
provide them with an entire system for
running their business.
The industries where you most often find
this type of franchising are soft drink
distributors, automobile dealers and gas
stations.
 cont..
 Business format franchises
In this type the franchisee is given the complete
method to conduct the business, such as the license
for a trade name, the products or services to be sold,
the physical plant, the method of operation, a
marketing plan, a quality control process, a two-way
communication system and business support services.
 cont..
Advantages of franchise
 Owning a franchise allows you to go into business for
yourself, but not by yourself.
 A franchise provides franchisees with a certain level of
independence where they can operate their business.
 A franchise provides an established product or service
which already enjoys widespread brand name recognition.
This gives the franchisee the benefits of customer
awareness which would ordinarily take years to establish.
 cont..

 A franchise increases chances of

business success because a franchisee is
associating with proven products and
methods.
 Franchises may offer consumers the
attraction of a certain level of quality
and consistency because it is mandated
by the franchise agreement.
 cont..
Disadvantages of franchise
 The franchisee is not completely independent.
Franchisees are required to operate their businesses
according to the procedures and restrictions set forth by
the franchisor in the franchise agreement. These
restrictions usually include the products or services which
can be offered, pricing and geographic territory. For some
people, this is the most serious disadvantage to becoming
a franchisee.
 cont..
 In addition to the initial franchise fee, franchisees
must pay ongoing royalties and advertising fees.
 Franchisee must be careful to balance restrictions and
support provided by the franchisor with their own
ability to manage their business.
 A damaged, system-wide image can result if other
franchisees are performing poorly or the franchisor
runs into an unforeseen problem.
 cont..

 The term (duration) of a franchise

agreement is usually limited and the
franchisee may have little or no say
about the terms of a termination.
 Activity

Question
Give examples of franchising business
firms operating in Tanzania.
 Legal forms of establishing new
business

What is a business legal structure/form?

Business legal structure, also known as a business
entity, is a government classification that regulates
certain aspects of one’s business.
It is a legal framework used to create and define
business organization and ownership at inception in a
particular jurisdiction.
 cont..
A business legal form describes the legal structure of a
firm that influences the day-to-day operations of a
business.
The business structure may not only determines tax
burden but also can have liability ramification.
The common three business forms are:
 Sole proprietorship
 Partnership
 Corporation (Joint stock company)
 Sole proprietorship
 A sole trader (sole proprietor) is a business that is
owned and operated by a single person.
 The enterprise has no existence apart from its
owner.
 This individual has a right to all of the profits and
bears all of the liability for the debts and
obligations of the business.
 The individual has unlimited liability, which means
their business and personal assets stand behind the
operation.
 cont..

 To establish a sole proprietorship, a

person merely needs to obtain the
business registration license and TIN
number that are necessary in the field to
begin operations.
 Because of its ease of formation, the
sole proprietorship is the most widely
used legal form of business ownership.
 cont..
Features of sole proprietorship
 Liability
The business liability is unlimited (no separation
between the owner and the business), therefore in
case the business fails to meet its liabilities, the
proprietor will be responsible to carry the burden.
This may include personal assets such as family
house, etc.
 cont..
 Risk and Profit
The business owner is the only risk bearer, and thus bears
all the risk. The business owner will suffer loss if the
business gets loss and enjoys profit if the business gets
profit.
 Continuity
Sole proprietorship kind of business is entirely dependent
on its owner. If the owner dies/imprisoned/retired/etc, the
proprietorship will equally affected and hence cease to
operate.
 cont..

Advantages of sole proprietorship

 Ease of formation
It is an inexpensive business structure to
establish and maintain and it has the least
government reporting requirements.
 Less formality and fewer restrictions
These are associated with establishing a sole
proprietorship than with any other legal
form.
 cont..

 Sole ownership of profits

The proprietor is not required to share profits
with anyone.
 Decision making and control vested in one
owner. No co-owners or partners must be
consulted in the running of the operations.
 Flexibility
Management is able to respond quickly to
business needs in the form of day-to-day
management decisions.
 cont..

 Easy to wind it up
It is easy to close the business and stop trading.

Disadvantages of sole proprietorship

 Unlimited liability
The individual proprietor is personally responsible for all
business debts and this liability extends to all of the
proprietor’s assets.
 cont..

 Lack of continuity
The enterprise may be crippled or terminated
if the owner becomes ill or dies.
 lack of personal freedom
It may not be possible to take holidays, as
there is nobody else with the expertise to run
the business while the owner is away; the
same problems arise with sickness or
accidents.
 cont..

 Less available capital

Ordinarily, proprietorships have less
available capital than other types of business
forms, such as partnerships and corporations.
 Relative difficulty obtaining long-term
financing.
Because the enterprise rests exclusively on
one person, it often has difficulty raising
long-term capital.
 cont..

 Relatively limited viewpoint and

experience.
The operation depends on one person
and this individual’s ability, training and
expertise will limit its direction and
scope.
 Partnership

 Partnerships emerge in various ways. A sole

proprietor may reach a stage where further
growth requires the taking-on of a partner.
Alternatively, two or more people may decide to
combine their skills and resources to start a
business in partnership with each other.
 In a partnership, a group of people contribute
their time, talents and money towards the
business. In return, they share responsibilities and
profits.
 cont..

 A partnership can be created by oral or

written agreement, but a written agreement
is preferable.
Partnership agreement is the document
that states the terms under which partners
agree to operate the partnership and protects
each partner’s interest in the business.
A good partnership agreement serves as the
guideline for partners’ working relationship.
 cont..
In the absence of a formal partnership agreement, the
law will assume that each partner has an equal share in
the business.

The partnership agreement will likely to include the

following components:
 Partnership name
Partners should agree on the name of the partnership.
 cont..
 Purpose of the business
What is the reason for the existence of your
business?
What kind of business does the partnership deals
with?
 Domicile and business address
The partnership agreement should state the physical
address for the partnership.
 cont..

 Duration of partnership
How long will the partnership last?
 Names of the partners
The deed should state the names of each
partner.
 Contribution of each partner
This include each partner’s investment in the
business.
 cont..
 Procedures for adding new partners
The deed should state clearly the procedures to be
followed when the partnership need to add new
partners.
 Agreement on distribution of assets if the partners
voluntarily dissolve the partnership.
In this section, the deed is expected to state how the
business assets will be distributed in case of
partnership dissolution.
 cont..

 Partnership dissolution
Under what circumstances will the
partnership dissolve? This should be
stated in the deed.
 Partnership agreement modification
The deed should also contains
provisions for modifications.
 cont..

Main features of Partnership

 Agreement
There must be an agreement between all the
partners by signing the agreement article of the
deed.
 Lawful business
To indulge in smuggling, black marketing, etc.,
can’t be partnership business in the eyes of the
law. But also, social or charitable venture is not
partnership business.
 cont..

 Competence of partners
In some cases the partnership may include
minor partners. A minor is a person who is
under 18 years of age. He is not liable for
the firm’s debts beyond his capital, he has
the right to act on behalf of the business.
When he attains the majority, he is given
up to six months to decide whether or not
he wishes to continue as a partner.
 cont..

If he decides to continue he assumes all

rights and responsibilities of a major partner,
and considered as a competent partner.
 Profit sharing
In the absence of a written partnership
agreement, thus in the event of ambiguity,
the provision of Partnership Act apply. It
states that, all profits and losses are to be
shared equally by partners.
 cont..

 No separate legal existence

Just like sole proprietorship, partnership firm
has no separate legal existence from its owners.
In other words, partners and partnership are
inseparable in the eyes of the law.
 Principal agent relationship
When a partner deals with other parties in
business transactions, he acts as an agent of the
other partners (principal).
 cont..

 Restriction on interest transfer

No partner can transfer his interest to anyone without
the consent of other partners.
 Dissolution of partnership
A partnership may be dissolved in any of the following
ways:
 Expiration
 Bankruptcy or death
 Illegality
 Order of the court
 cont..
Types of partners
Partners may be classified on the following
basis:
 Active partner
This is a partner that apart from contributing capital, he
plays an active role in the business affairs. He takes part
in the management of the firm and often given fixed
area(s) of responsibilities.
 cont..
 Dormant or silent partner
This partner contributes capital but doesn’t take part in
the running of the business. This type is preferred by
those who have full time job somewhere else.
 Quasi partner
This a kind of a partner doesn’t contribute capital or take
part in the business but allows the firm to use his name as
a partner and gets a commission. Generally, he is not
liable for firm’s debts except when a creditor acts solely
on the assumption that he is a real partner.
 cont..
 Minor partner
A minor is a person who is under 18 years of age. He is
not liable for the firm’s debts beyond his capital but he
has the right to act on behalf of the business. When he
attains the majority, he is given up to six months to
decide whether or not he wishes to continue as a partner.
If he decides to continue he assumes all rights and
responsibilities of a major partner. If he decides
otherwise, he gets capital refunded and his departure
doesn’t dissolve the partnership.
 cont..

Types of partnership
 Ordinary partnership
The kind of partnership which is not separate
legal entity and thus, partners are liable for the
debts of the partnership.
 Limited partnership
In this type of partnership, the partners have the
limited liability for the partnership debts, but
there must be at least one ordinary partner in the
partnership.
 cont..
Advantages of partnership
 Ease of formation
Legal formalities and expenses are few compared with
those needed to create a more complex enterprise, such as
a corporation.
 Direct rewards
Partners are motivated to put forth their best efforts by
direct sharing of the profits.
 Confidentiality
Partnerships do not have to disclose profits to the public.
 cont..

 Relatively easy to access capital

In a partnership, it is often possible to obtain more capital and
a better range of skills than in a sole proprietorship.
 Responsiveness
A partnership often is able to respond quickly to business
needs in the form of day-to-day decisions.
 cont..
Disadvantages of partnership
 Unlimited liability of at least one partner
Although some partners can have limited liability (as
in limited partnerships), at least one must be a
ordinary/general partner who assumes unlimited
liability.
 Bound by the acts of just one partner
A partner can commit the enterprise to contracts and
obligations that may prove disastrous to the enterprise
in general and to the other partners in particular.
 cont..
 Relative difficulty obtaining large sums of capital
Most partnerships have problems raising capital,
especially when long-term financing is involved;
usually the collective wealth of the partners dictates the
amount of total capital the partnership can raise.
 Few tax concessions
Most partnerships pay taxes as individuals and the
personal tax rate may be higher than the company rate.
 Corporation (Joint stock company)

A Joint stock company is a corporate

association of persons formed for the purpose
of carrying out business usually with a view to
profit but in the name of the company, which
itself has a legal existence apart from its
owners.
 cont..

Features of Corporation
 Separate legal entity
The corporation is considered as a
separate legal entity, carrying out
business in its own name. It may enter
into contracts, borrow money, own
property, sue and be sued, and pay
taxes.
 cont..

 Limited liability
The liability of shareholders is limited to their
investments into the corporation. Creditors are
limited to the corporate assets for settlement
of their claims.
 Perpetual life (Going concern)
The life of a company is considered endless
from the day of its incorporation.
 cont..

 Relatively easy of ownership rights

transfer
In public company, the ownership rights
can easily be transferred in part or total at
the discretion of the shareholder. The
ownership transfer doesn’t require an
approval from other shareholders.
 cont..

 Professional management
Corporations are required to employ
professional managers for business
operations management.
 Easy of capital acquisition
A public company can obtain or raise
capital by selling shares to the general
public in the stock market.
 cont..

Types of companies
There are two types of companies, namely:
 Statutory companies
These are state owned companies such
as parastatals.
In Tanzania, the formation and control
of these companies is vested under the
parliament.
 cont..

 Registered companies
These are companies which are
incorporated by registration.
In Tanzania, the government agency
that is responsible for companies
registration is called Business
Registration and Licensing Agency
(BRELA).
 cont..

Registered companies are divided into

Limited and Unlimited Companies but also
Public and Private companies.
Limited companies
These are companies whose liability of
members is limited. Limited companies
comprise of two types, namely: Company
limited by shares and company limited
by guarantees.
 cont..

Company limited by shares: The liability of

members is limited to the nominal amount of
shares they take. This applies for companies
formed for gain.
Company limited by guarantees: The
liability of members is limited to the amount
they have agreed to contribute in the event of
winding up of the company.
 cont..

Company limited by guarantees are formed

for purposes other than trade. For example,
charitable organizations, professional
institutions, etc.
 cont..

 Unlimited companies
The liability of members is not
limited. These companies are
formed to gain the benefit of
incorporation, e.g. to avoid some of
obligations imposed on limited
companies such as an obligation to
file annual accounts.
 cont..

 Public companies
These companies are formed when it is
desired to go to the general public for
funds to expand an existing business.
Public company is required to have a
minimum of 7 members and unlimited
maximum number. Shares are
transferable, and can be offered to the
public for subscription.
 cont..
 Private company
This is a registered company which by its
articles:
 Restricts the right to transfer its shares
 Limited number of members from 2 to 50.
 Prohibits an invitation to the public to
subscribe shares.
Private companies are formed mainly to gain
the benefit of limited liability.
 cont..
Advantages of company
 Relatively easy of raising capital
Increased potential for raising finance by share
issues to the public or through other financial
investors.
 Limited liability
Creditors’ claims are limited to the assets of
the company, not personal assets of its owners.
 cont..

 Relatively easy of ownership transfer

No restrictions applies to the sale and
purchase of shares.
 Spread of risks
The risk of loss is spread over a large
number of investors and thus, each
shareholder carries a small burden of loss.
 cont..

 Transparency

A public company is required by

the law to reveal its financial and
non-financial information.
 cont..

Disadvantages of corporation/company
 Lack of control by owners
Shareholders do not have direct control
over the running of the business.
 Conflict of interest
The directors may have their own
interests which may conflict with the
interest of the company.
 cont..

 Lack of secrecy
The company’s operations can not be
kept confidential, as companies are
required to submit detailed reports to the
government agencies and to the
shareholders as well. This gives a chance
for the competitor to identify some gaps
and respond accordingly.
 cont..

 Relatively expensive to incorporate.

A lawyer may be required in the
formation of the company. It may
include costs such as registration fees,
stock certificates costs, etc.
 cont..

 Double taxation
Corporations must pay tax on their
profits, and the shareholders of the
corporation are required to pay personal
income tax on profits received as
dividends.
 Basic constitutional documents

To incorporate a company, it is necessary to

draw up two basic constitutional documents,
namely;
 Memorandum of association and
 Articles of association.
 cont..

 Memorandum of association is a document

that defines the constitution of the company in
its relation to the outside world.
 It lays down powers and limitations of the
company and establishes the company’s
individual identity.
 cont..

 MoA gives the following details:

 Name clause
This states the name of the
company with the last word of the
name to be limited (Ltd).
The company can adopt any names
it pleases except that it may not
register a name identical with that
 cont..

 Objective clause
It outlines the objectives of the company.
The company can not act beyond these
objectives.
It includes all prime activities and secondary
activities.
 cont..

Objective clause serves two purposes:

• It protects shareholders, because the
document clearly states the purposes
to which their money can be applied.
• It protects the person (outsider)
dealing with the company who can
discover from the document the
extent of the company’s power.
 cont..

 Registered office clause

This clause requires the promoter
to indicate the physical address
(location) of the registered
company’s office.
 Liability clause
There must be a clear statement
that the liability of the company is
 cont..

 Capital clause
This clause states the share capital the
company intends to raise. It includes:
 Total amount of share capital
(capital is divided into units of
equal values called shares)
 The value of each share
 The types of shares
 cont..
For example
The share capital is 200ml, then is divided into
ordinary shares and preference shares.
Type of share Ordinary Preference

Number of units 50k 40k

(shares)
The value of each share 2000/= 2500/=

The amount for each 50k x 2000=100ml 40k x 2500=100ml

type of share
Nominal share capital 100ml + 100ml= 200ml
 cont..

The total value of all shares is

called nominal share capital.
Once the memorandum is
registered, a company becomes
empowered to raise this amount by
selling shares.
 cont..

Declaration clause
This clause confirms that,
shareholders are willingly bounded
by the MOA.
The signing should comprise not less
than 2 members in the case of private
company and 7 in the case of a public
company.
 cont..
Articles of Associations
Articles of Associations govern the internal
structure of the company and deal with such
matters as:
 Voting rights of shareholders
 Procedures for calling meetings
 Methods of appointing officers
 cont..

 The method of deciding the level of

payment of directors
 The number and powers of directors
 Retirement method
 Appointment of auditors
 Arrangements for dividend distribution
 INCORPORATION OF A NEWLY
COMPANY UNDER THE LAWS OF
TANZANIA
 Procedure for Company
Registration.
 Currently Company registration in
Tanzania is conducted through
online system where all the
documents are submitted
electronically through BRELA
online registration system.
 Firstly, the one who wishes to
register a company must conduct
the name search, to be sure that the
 cont..

 The name search is made through the BRELA

online system.
 If the name is available for registration, and in
case the registration will take place in few days
after search, it is advised to file an application
for reservation of the said name, the registry
will reserve the name by granting exclusive
rights over the said name and will not allow
other person to register the same.
 cont..

 Secondly, once the name has been

cleared for registration the next
step will be preparation of MoA
and AoA, together with the
compliance declaration, Form 14B,
declaring that all the requirements
relating to the formation of the
company have been complied with.
 cont..

 The form is filled in and signed by

either a proposed director, or
secretary of the company or an
Advocate of the High Court
engaged in the formation of the
company, and they must be attested
by the Commissioner for Oaths.
 All these documents are to be filed
with the registrar of companies and
 cont..

 However, in order to be able to

register a company in Tanzania,
one is required to have copies of
National Identification Cards or the
passport for all local and foreign
prospective shareholders,
respectively.
 The Directors are required to have
Tax Identification Number (TIN)
 cont..

 Thirdly, the registrar will examine

the application and all the
documents accompanying it, and if
the application has complied with
all the requirements then the
registrar will go on to issue the
Certificate of incorporation.
 However the company will need to
finalize registration with TRA for
 Post-Registration Compliance.

 Being registered is not an approval to

conduct company business activities,
companies are supposed to be compliant
with the post- registration compliance
requirements, which include:
 VAT Verification Number
Registration for VAT is required by
companies with an annual turnover of
TZS100 million.
 cont..

 Securing Business License

Prior to making an application for a business
license a Tax Clearance Certificate for the
business shall be obtained
from TRA.
Depending on which industry, the company
has intended to operate, it will have to apply
for business license from the relevant
authority.
 cont..

 Filling of Annual Returns

It is a statutory duty for every
company incorporated in Tanzania
to file their Annual Returns with
the Registrar of Companies,
accompanied with Audited
Accounts, which are made up to a
date not later than the return date.
 cont..

 Keeping Books of Accounts

It is a requirement of the law that
every company shall keep in
English or Swahili proper books of
accounts, which
are sufficient to show and explain
the company’s transactions.
END OF TOPIC THREE
.