TYPES OF BUSINESS ORGANISATIONS

TYPES OF BUSINESS ORGANISATIONS

  1. Sole proprietorships
  2. Partnerships
  3. Joint stock companies or Public/Private limited companies.

SOLE PROPRIETORSHIP
Characteristics
1. Accounts do not have to be audited
2. It caters for personal attention of customers
3. Limited to such finances as:
a. Personal saving
b. Loans from relatives & friends
c. Short-term loans from banks.
d. Trade credit from suppliers.
4. Less legal formalities to form.
5. Highly flexible (and adaptable)
6. Highly flexible decision-making process.

Other Advantages

  1. 1. Sole trade usually skilled in the business (good for competition)
  2. Profits motivates owners
  3. High supervision of employees
  4. Low bureaucracy (less time wasted)

Disadvantages
1. Short economic life therefore does not attract long-term finance, therefore, limited
expansion and growth.
2. Unlimited liability
3. Success depends on ability or judgement of owner

Note

  1. Most sole traders do not employ professional advice which implies less growth and stagnation.
  2. Limited sources of finance.
  3. Limited accounts knowledge.

PARTNERSHIPS

Definitions
“The relationship, which exists between persons carrying on a business in common with a view of profit.”

Formation of a partnership

  1. Orally
  2. Actions of the person concerned
  3. Agreement in writing.
  4. By a deed i.e. an agreement under seal.

Note
In case the partners want to run their business under a name which does not disclose true surname of all partners, such a firm must be registered under the registration of Business Names Act.

Types of Partners

  1. General Partners – Unlimited liability and active in participation in partnership activities.
  2. Limited partners – Limited liability and does not participate in the management of partnerships.
  3. Sleeping partners – has no active role, nevertheless, such a partner will have contributed to the capital of the partnership business and will thus share in the profits although at a lower proportion in most cases.

A partnership deed constitutes a legal contract among the partners. The articles of partnerships must contain eleven clauses.

  1. Nature of business.
  2. Profit sharing ratio
  3. Capital contribution
  4. Rates of interest on both capital and drawings
  5. The provision for proper accounts and their audit.
  6. Powers of each partner.
  7. Grounds of dissolution.
  8. Determination of Goodwill
  9. Determination of amount payable to outgoing partners.
  10. Expulsion procedures.
  11. The arbitration clause.

JOINT STOCK COMPANIES
Initiators contribute to the capital base of such companies through the purchase of shares of such companies. These companies are governed the Companies Act (Cap. 486) of 1948.
Such must be registered with the Registrar of Companies after which it is issued with a certificate of incorporation which indicates the Birth of the company.

Advantages

  1. Limited liability.
  2. Perpetual existence (or going concern) which allows the company to make strategic plans to raise finance in Capital Markets more easily.
  3. The company can own assets and incur liabilities on its own accord.
  4. Title to share is freely transferable which makes these shares more of an investment.
  5. Exception – Private limited companies whose transfer of shares needs the consent of its members.
  6. Shares may be used as securities.
  7. Large sources of finance.

Disadvantages

  1. Loss of secrecy – poor competition
  2. Many formalities in forming the company
  3. Heavy initial capital outlay.
  4. Difficult to reconstruct the capital
  5. Bureaucracies especially in decision making processes.
  6. Inflexibility and thus low adaptability.

Note
They cannot participate in the activities outside the scope of their “objective clause”. Differences between a company and a partnership occur under the following factors:

  1. Governance
  2. Legal view (entity)
  3. Title of shares (transferability)
  4. Agency
  5. Liability
  6. Going concern (dissolution)
  7. Membership number.

HOLDING COMPANY
One which holds more than a half of the equity share capital of another company or is a member and/or controls a big percentage of the Board of Directors of one or more of other companies which in this case are called subsidiaries for such a holding company.
A holding company may be viewed as a “financial institution” in the sense that it uses shareholders capital to acquire controlling interests in other companies acquiring up to 51% of the other company’s shares or even more. If such a holding company hold 51% of the shares of another company, it means that it is the majority shareholder and has substantial influence on the operations of its subsidiary. It will almost be like a sole owner of such a company virtue of such share holding.

PUBLIC LIMITED COMPANIES
These are joint stock companies which have sold shares to general public and thus have attracted public money in form of share capital. Such companies are usually quoted on the stock exchange. These companies usually raise large sums of money from the public and in order to do so, such companies must:

  1. Obtain permission from the capital market development authority also known as New Issue Committee.
  2. The company in need of public money will have to obtain permission from the NSE Council before it can be allowed to have its shares “dealt-in”.
  3. The law requires such a company to have a minimum of seven shareholders and there is no upper limit.

PRIVATE LIMITED COMPANIES
These are NOT allowed to advertise their shares so as to attract public money and as such they sell their shares privately (known as private placing) to interested members of the public.
Their shares are not freely transferable as these are not quoted on the stock exchange and they can only be transferred with the consent of the directors.
Differences between the two above lies on:

  1. Number of shares
  2. Transfer of shares
  3. Methods of raising funds from the public
  4. Number of directors
  5. Quotation
  6. AGM’s
  7. Retirement age of director

Sole proprietorships / Partnerships / Joint stock companies or Public/Private limited companies.

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