TYPES OF BUSINESS UNITS (FIRMS)

Posted by Resource Center 21/09/2019 0 Comment(s) Investing, Finance & Economics,Business and Management,Accounting, statistics and Commerce,

 

TYPES OF BUSINESS UNITS (FIRMS)

  1. Sole or individual proprietorship
  2. Partnerships
  3. Joint stock companies
  4. Co-operatives
  5. Public or state enterprises

 

SOLE OR INDIVIDUAL PROPRIETORSHIP

Business owned and controlled by an individual.  The individual contribute capital and makes business decisions alone. The individual does all the business tasks alone e.g. planning, purchasing,keeping books of account,selling, talking to the customers etc.  The individual enjoy the profit alone and bear the losses alone.

 

MERITS OF SOLE PROPRIETORSHIP

  1. Easy to start since we do not have many legal procedures for its formation except to obtain a license.
  2. Personal incentive – all the profits goes to the owner and therefore motivated to work very hard.
  3. Quick decisions making as there is no consultation.
  4. Require small capital to start as the business operate on a small scale.
  5. Direct contact with the customers in which case you will know their needs.
  6. Business secrets are well kept.
  7. No danger of labour disputes
  8. Easy to change the nature of the business
  9. The owner is free to make decision of his or her choice.

 

DEMERITS

  1. Lack of division of labour leads to inefficiency because the individual cannot be an expert in all tasks.
  2. Unlimited liability – if the business is unable to pay it’s debts, the personal property of the owner can be sold and the money raised used to clear the business debt.
  3. Limited capital because the money is contributed by one person.
  4. The business own very few assets and therefore difficult to get loans from the bank.
  5. Poor decisions making because there is no consultation.
  6. Use of machine in production is limited and therefore output is always low.
  7. The owner bear the losses alone.

 

PARTNERSHIPS

Business owned by several partners for the purpose of carrying out a business with a view to make profit and share the profit among the partners. Minimum number of partners is two for a partnership formed to carryout ordinary business and the maximum number of partners is twenty.

 

Partnership formed to operate banking business – maximum number of partners is 10.  Partnership where all members are professional e.g. doctors – maximum number of partner is 50.  People willing to form a partnership are advised to prepare a partnership deed (agreement) in writing.

 

CONTENTS OF PARTNERSHIP DEED

  1. Name, address and location of the business
  2. Name and address of the partners
  3. The commencement date of the business
  4. Duration of the partnership business i.e. whether permanent or temporary.
  5. The amount of capital to be contributed by each partner.
  6. The rate of interest paid to a partner based on capital contribution.
  7. The amount of money a partner can withdraw from the firm and the interest to be charged from such drawings.
  8. The rate of interest payable to a partner who gives a loan to the firm.
  9. The ratio which profits and losses are to be shared.
  10.  Whether salary is payable to any partner and how much.
  11.  Duties of the partners
  12.  The procedure of admitting a new partner
  13.  The procedure of retiring a partner and procedure of dissolving the partnership.

 

In the absence of a partnership deed the partners will be governed by the following rules laid down in section 24 of the Partnership Act of 1890.

(i) All partners should contribute equal amount of capital.

(ii) Profits and loses are shared equally by the partners

(iii) No interest should be paid to a partnership based on capital contribution.

(iv) No salary is payable to any partner.

(v) A new partner can be admitted only with the consent of all the existing partners.

(vi) If a partner gives loan to a firm, it will attract interest at a rate of 5% per annum.  In the event of any differences arising among the partners on matters of ordinary business, the will of the majority shall prevail.

(vii) The nature of the business can be changed only with the consent of all the partners.  The books of the firm shall be kept at the principle place of business and all partners have the right of free access to inspect or copy them.

(viii) In case a partner spends his or her money on behalf of the business, the business is supposed to refund that money.

 

TYPE OF PARTNERS

  1. Active Partner: Takes part in ay-to-day management of the business in addition to contributing capital.
  2. Dormant/Sleeping Partner: Contribute capital, does not take part in business activities, liable for the debts of the firm and the age is 18 and above.
  3. Minor Partner: Contribute capital, below age of 18, liable for the business debts to the extent of his or her capital contribution.
  4. Quasi Partner: A partner who has retired but left his or her capital in the firm. He is treated like a creditor.
  5. General Partner: Has unlimited liability towards the debts of the firm i.e. his or her personal property can be sold to pay the debts of the firm.
  6. Limited Partner:  Has  limited liability towards the debts of the firm, i.e. his or her personal property cannot be sold to pay the debts of the firms. His/her loss is limited to the amount of capital contributed initially.

 

ADVANTAGES OF PARTNERSHIPS

(i)   Better decisions are arrived at because of the consultation among the partners.

(ii) Division of work where each partner is assigned some specific duties and therefore efficiency is improved.

 (iii) More capital is realized because several partners contribute

(iv) Large scale operation is possible because of large capital and therefore the business will enjoy economies of scale.

(v) Use of machinery is possible because the partners can afford to buy them as they have large capital.  This increases output.

  1. Putting of talents in the production job to improve efficiency.
  2.  Easy to get credit facilities like loans from the banks because you have a large capital base.
  3. Every partner has a personal interest in the business because if the business incur huge debts the personal property of the partner can be sold i.e. the partners have unlimited liability.

 

DISADVANTAGES

(i) Lack of mutual confidence and trust among the partners.  Some partners engage in activities to enrich themselves at the expense of other partners.

(ii) Delay in decision making

(iii) Partners have unlimited liability i.e. their personal properties can be sold to clear the partnerships debts.

(iv) Lack of responsibility

(v) Partners share the profits and these discourages personal commitments.

(vi) A partner cannot sell or transfer his or her ownership to another person without the consent of  the others.

 

JOINT STOCK COMPANIES

Owners do not know one another.

  1. Business which require a lot of finance are organized as joint stock companies. Owners are know as shareholders who contribute money through buying shares according to their financial abilities.  The raised finance is invested in business and the profits realized shared amongst the owners based on shareholding levels.  People who start up a company are normally known as promoters who are usually seven in numbers.  The promoters of a company must prepare the following documents before they start selling shares to the members of the public.

 

1.         MEMORANDUM OF ASSOCIATION

Define the companies relationship with the outsiders and it has the following sections/causes:

  1. Name Clause: Shows the registered name of the company and usually has the word limited at the end to indicate that the liability of the shareholders towards the debts of the company are limited to the value of the shares they have bought e.g. Uchumi Supermarket Limited (Ltd).
  2. Situation Clause: Shows the location of the registered office where correspondence relating to the company should be sent.
  3. Objective Clause: Clearly define the business activity the company is engaged in. It will be illegal for a company to engage in an activity other than the one mentioned in the objective clause.
  4. Liability Clause: States that the liability of the shareholders is limited to value of shares they have bought in the Company.
  5. Capital Clause: States the maximum amount of capital the Company is authorized to raise through selling shares. The capital clause shows the types of shares sold by the Company and their per values.

 

2.         ARTICLES OF ASSOCIATION

Defines the relationship among the shareholders i.e. internal relationship. The contents states the by-laws/rules to be followed:

  1. Inviting shareholders for a meeting.
  2. Procedure of conducting the shareholders annual general meeting.
  3. Procedure of electing directors.
  4. Procedure of appointing company’s auditors.
  5. Rights and duties of directors and shareholders.
  6. Procedure of appointing manager and employees by the directors etc.

 

The promoters present these documents to the registrar of companies and after letting them see that they are in accordance with the Company’s Act Cap 486 will issue a certificate known as certificate of incorporation equivalent to (“Birth Certificate” of the Company) which gives the Company the right to exist as an individual or legal person.

 

The Company has a right just like any other human being to operate a business of it’s own choice, the others to the court of law or be sued by others in the court of law.

 

TYPES OF SHARES

(1) Preference shares are given the first priority when dividends are being distributed. Preference shares can be classified into:

 

  1. Cumulative preference shares – are entitled to a fixed dividend every year. If the Company fail to make profit in one year, the share will get a double portion in the following year.
  2. Non-cumulative preference shares – get dividends only when there is profit.
  3. Participating preference shares get a fixed percentage of dividend. If any profit remains after the share of ordinary dividend, these shares have a right to participate in the sharing of “left over” profits.

 

ORDINARY SHARES

  1. Do not earn a fixed rate of dividend like the preference shares and they receive dividends after the preference shares have been satisfied.

 

DEFERRED SHARES

These are shares kept by promoters themselves so that their share of profit is slightly higher than rest of the shareholders.  If any profit remain after distributing dividends to the preference and ordinary shares, it is distributed to the promoters through the deferred shares.

 

CAPITAL JOINT STOCK COMPANIES

  1. Authorized share capital is the maximum amount capital the Company is authorized to raise through the sale of shares.
  2. Issued share capital – This is part of the authorized share capital offered or issued to the public for sale.
  3. Subscribed share capital – is part of the issued share capital which is actually purchased by the public in form of shares.
  4. Paid – up capital – This is the amount of money received from those who have bought share from the Company. In most cases, those who have bought shares are requested to pay for them through the installment system e.g. if the value of one share is 10/=, the shareholder may be asked to pay 5/= at the beginning of the year (paid up capital) and the balance of 5/= to be paid at the beginning of next year (call capital).

 

Management of a Joint Stock Company: The owners of the company i.e. shareholders, through voting system elect directors from among themselves. The board of directors are given powers to employ professionals and other workers who will be in charge of day-to-day management of the company. The profits if any, generated by the company is distributed to the shareholders in form of dividends at the end of the year.

 

TYPES OF COMPANIES

  1. Unlimited companies – The liability of the shareholders is unlimited i.e. if the Company is unable to pay its debts, the personal properties of the shareholders can be sold and the money raised is used to clear those debts.
  2. Companies limited by guarantee – the shareholders promise/pledge to pay a specific amount of money to the Company on inception. Incase the Company is unable to pay it’s debts, the shareholders will be called upon to pay the amount they had guaranteed or promised.
  3. Companies limited by shares – The liability of the shareholders towards the companies debt is limited to the value of shares they had committed themselves to buy from the Company. Under this category, we have:-
    1. Private Limited Company – The minimum number of shareholders is two and the maximum number is 50. Private limited Companies are not supposed to invite members of the public to buy shares in the Company. It is normally a family/friends affairs. A shareholder cannot sell his or her shares without the consent of the other shareholders.
    2. Public limited Companies – Minimum number of shareholders is two and no maximum limit.  It can invite members of the public to buy share in the Company. A shareholder can freely sell shares to any person.

 

ADVANTAGES OF JOINT STOCK COMPANIES

(i)  Shareholders have limited liabilities i.e. their personal property cannot be sold to clear the debts of the company.

(ii)   Large amount of capital can be raised.

(iii) Companies can engage in large-scale production and therefore enjoy the    economies of scale.

(iv) Company has perpetual existence i.e. even if a shareholder pass away, the company will continue with its operation.

  1. The voting system enable the shareholders to exercise control and decision making.
  2. Economic and technical development is possible because the company has large human and financial resources.
  3. Shareholders can freely sell their shares in a public limited company.

(viii) Risks are spread over to many shareholders unlike in sole trade business and partnership.

(ix)  Companies can employ specialist or professionals and this increases efficiency and output.

 

DISADVANTAGES

(i) The owners /shareholders are not involved in the day-to-day management of the Company.

(ii) Formation of a Company involve lengthy legal formalities

(iii) Lack of interest by the shareholders because they are not involved in the day-to-day running of the Company.  Very little dividends is given to the shareholders at the end of the year.

(iv) The more shares you have in the Company the more powers you have in making decisions.  A majority shareholder has ability to dictate to minor shareholders.

(v) Labour disputes can destabilize the operations by the Company.

(vi) Misappropriation of the shareholders money by dishonest directors.

(vii) Heavy taxation of the Company and the shareholders.  The Company must pay corporation tax and the shareholders must pay tax on the dividends they receive (withholding tax on dividend).

 

CO-OPERATIVES

Co-operative is a movement where the members pull their resources together and carryout activities which will benefit the members.  A co-operative is set up by a minimum number of eleven people and it must be registered with registrar of co-operatives for it is legally functional.

 

FORMS OF CO-OPERATIVE SOCIETIES

  1. Consumer Co-operative Society – owned and operated by a group of final consumers to purchase and distribute goods and services primarily to the members at minimum economic price possible. The co-operative set up a retail shop which serve the members in addition to the community around.

 

Functions of Consumer Co-operative Society

(i)    Provide their members with goods and services at fair prices.

(ii)   Provide members with high quality products and therefore protect members from 

  exploitation by other traders.

(iii)  They provide appropriate and genuine advice to the members about the use of   

products.  This service may not be available from other traders.

(iv)   Accept deposits from the members and assist them to buy land at cheaper rates.

(v)    Members are employed to run their shop, thus create employment.

(vi)    Profit from the shop is distributed to the members.

Producers Co-operative Society

It’s owned by producers of similar commodities and operated to collect, process, transport and market their products like coffee, tea, tobacco, fish etc.

 

MERITS

The producer e.g. a farmer who is a member of this co-operative enjoy certain benefits:-

  1. Obtain a fair price for his/her produce.  The co-operative is in a position to bargain for better prices in the domestic or foreign market.
  2. The cost of transport, processing and marketing is shared by all the members and this is an advantage to an individual producer.
  3. Producers get ideas regarding quality improvements, better methods of production through training seminars organized by the co-operatives.
  4. The co-operative buy inputs in bulk either locally or importing and therefore the cost of inputs is reduced to the individual farmer.
  5. The farmer can get these inputs on credit basis from the co-operative e.g. fertilizers, quality seeds, chemicals.
  6. The producer is assured of a stable price of his/her produce.

 

Savings and Credit Co-operative Organizations (SACCO).

Formed by  people working in the same firm of the same profession who make savings every month from their salaries and this money is remitted to the co-operative.

 

After saving for a minimum of 6 months, the members quality to get a loan equivalent to three times his/her savings. Members are not required to pledge any security like title deeds.  A member must get a guarantor who is also a member.  The rate of interest charged on loans obtained from SACCOs is very low compared with the interest charged by the banks.  SACCOs educate their members through seminars on how wisely they should invest their loans.

 

FEATURES OF A CO-OPERATIVE SOCIETY

  1. It’s a voluntary association.  Membership is open to all as long as you meet the basic requirements/criteria.
  2. Service Motto – The basic principle of a co-operative society is to serve its members and not to maximize profit.
  3. One for all and all for one – Another principle of a co-operative society is self help through mutual help i.e. each member try his maximum to help others and each member in turn will get maximum help from others.
  4. Democratic Management – The members through the voting system elect a management committee which will be in charge of day-to-ay management of the cooperative “one member one vote”
  5. Division of profits – The profits made by co-operative is divided among the member on the basis of services a member has rendered to co-operative e.g. the higher the quantity of milk delivered, the higher the profits received.
  6. The economies of scale-working together as a team, the members can pool their resources together and enjoy the advantage of large scale production, marketing, transportation etc.

 

PROBLEMS FACING CO-OPERATIVE SOCIETIES

  1. Lack of sufficient capital due to the low income by the members.
  2. Poor services given to the members because the co-operative cannot afford to employ qualified personnel’s
  3. Weakness in management. The member elected in the management Committee lack proper education, experience and business acumen.
  4. Misappropriation of funds by the management committee.
  5. Lack of appropriate rules and regulations to control the co-operatives.
  6. Lack of markets accompanied with poor prices in the domestic and foreign market.
  7. Poor transport and communication systems.
  8. High cases of retrenchment has led to defaults of loans.

 

PUBLIC ORGANIZATIONS (PUBLIC OR STATE ENTERPRISES)

The government has set up organizations which are in charge of producing goods and services in the economy. Such organizations include:-

  1. Public Corporations – These are companies formed by the government.  Its share capital is divided into shares which are either wholly owned by the government or jointly owned by the government and private sector e.g. Kenya Airways.  The Corporation is supposed to generate enough profit to sustain its operations. It must give dividends to the government and private sector.
  2. Local Authority – They are set up by the government to provide goods and services to specify areas e.g. city councils, municipal councils, town councils. The supply services like water, sewage system, primary education, transport services, housing services in urban areas,
  3. Parastatals – They are set up by an Act of parliament to undertake specific activities for the benefit of the entire economy e.g. KARI, CRS (Coffee Research Station), KBS (Kenya Bureau of Standards).  They are fully financed by the government.
  4. Marketing boards – e.g. Pyrethrum Marketing Board, Coffee Board of Kenya National Cereals an Produce Boards, formed by Government run by a board of directors appointed by the government.

 

REASONS FOR GOVERNMENT INVOLVEMENT IN BUSINESS ACTIVITIES

  1. To promote general welfare of the public the government undertake certain activities to promote public health and safety such as water, power, telecommunication services, foods production.
  2. To earn revenue
  3. To create more employment opportunities
  4. To control prices e.g. NCPB.
  5. To take up businesses which prove to be very costly to the private sector e.g. the generation of HEP.
  6. To avoid wastage and inefficiency.
  7. Ensure a fair distribution of income in the country i.e. profit generated by government organization is invested in education, health, transport and communication which will benefit the whole country.
  8. To control monopolies by private sector.

 

DISADVANTAGES OF GOVERNMENT INVOLVEMENT IN BUSINESS

  1. Poor services because the civil servants are poorly paid.
  2. Low quality products
  3. The government becomes a monopoly and this increases the prices of the products i.e. generation and distribution of power.
  4. Political motives may lead to bad business decisions.
  5. Slow decision making and the government loose a lot of business opportunities.
  6. A lot of tax payers money is lost when the government subsidies loss-making public corporations e.g. Kenya Railways.

 

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