KCA 004 / BAC 1306/BCT 1203/BBIT 04204

ENTREPRENEURSHIP

Forms of Business ownership

Legal Issues of Business ownership

Businesses operating under the informal

sector are generally not registered and
many don't pay taxes

The government tends to ignore the fact

that such unregistered businesses are
actually breaking the
law.. Reason?
Its far more important that people,
especially the poor, are allowed to pursue
whatever means they can to earn a living.

Unfortunately, there are some risks that

come with the decision to operate
informally
An unregistered business is not recognized
by law. Such businesses sometime face
arbitrary and very disruptive decisions that
affect their smooth operation

Having a registered business guarantees

protection because there are laws that exist
to protect private investments

Thus its safe to operate formally and seek to

understand your legal rights as a business
person.
There are six major business ownership
structures namely;

- Sole Proprietorships
- Partnerships
- Private limited companies
- Public limited companies
- Non-profit organizations
- Cooperatives
Sole Proprietorship

-Business organization that is owned and run by

one individual (Sole Proprietor)

- No legal distinction between the owner and

the business
Features

Ownership
-The business is owned by a single individual

-Owner enjoys all the business profits and bears

all the risks (loses)

Management and control

-The business is managed by the owner

-Sole decision maker and has total control

-May have some paid workers to assist him

Finance (capital)
-The capital required to start the business is
provided by the owner

- Other sources - friends, family, financial

institutions or bank

Unlimited liability
-Sole trader is personally accountable for debts
of the business

-If unable to pay his debts the creditor can lay

claim on his personal Property
Legal status

- The sole trader and his business are considered

as one

- All the assets and liabilities of the business

belong to the sole proprietor

- Owner and the business exist together and the

business ceases to exist once the owner dies
Legal formalities

The sole trader can set up or close the business

as and when S/he likes, the operation of the
business is not governed by any special act or
regulation.

However, a few legal restrictions may be there in

setting up a particular type of business.

For example, to open a shop, the sole proprietor

needs a trading license from the local authority
Partnership

A partnership is an agreement between two or

more people to finance and operate a business
with the common objective of making profit.

Each member of a partnership is known as

‘partner’ and jointly the members are known as
a ‘partnership firm’
Characteristics of a Partnership

Membership

A partnership is formed by at least two members

are required to start a partnership business and a
maximum of 20 members
Partnership agreement

The relation between the partners of a

partnership firm is governed by an agreement
which may be verbal, written or implied.

If it is in writing it is known as a ‘Partnership Deed’

Terms
-This agreement must contain-
-The amount of initial capital contributed by
each partner
-Profit or loss sharing ratio for each partner
- Salary or commission payable to the partners,
if any

- Duration of business, if any

- Name and address of the partners and the

firm

- Duties and powers of each partner;

- Nature and place of business; and

Any other terms and conditions to run the

business
Legal Status
The Law does not recognize the firm as a separate
legal entity separate from the partners.

The partnership firm is just a name for the business.

If someone take legal action against the firm, it is as

good as someone suing all the partners.

Transfer of Interest
No partner can sell or transfer his share or part or
partnership of the firm to any one without the approval
of the other partners
Unlimited liability

Like a sole proprietorship, the liability of partners in a

partnership is also unlimited. This means, if the assets of
the firm are inadequate to meet the firms liabilities,
then personal possessions of the partners, if any, can
be used to meet the business liabilities.

Sharing of Profit and Loss

Unless provisions are put in the partnership agreement

on the manner in which profits and losses are to be
shared, all profits and losses are shared equally
amongst the partners
Dissolution of Partnership

Unless provisions are made in the partnership deed by

default a partnership will end upon the death,
disability, insanity or even withdrawal of any one
partner.

Rights of Partners

Unless provisions are made in the partnership deed, by

default, each partner has an equal right to participate
in the management and control of the business.

Differences in the ordinary course of partnership

business are decided by a majority of the partners
COMPANY (Corporation)
A company is a separate legal entity having an
existence separate and apart from the owners.
Characteristics

Limited liability

Companies Liability is limited to the properties of the

company and the owners are not personally liable for
the debts of the company.

If a company fails, shareholders normally only stand to

lose their investment and the staff loses their jobs, but
neither will be further liable for company debts.
Separate legal personality

A Company is recognized by the law as an artificial

person, it have rights and responsibilities like actual
people. It can own properties and make legally
binding contracts (i.e it can sue and be sued.

Companies can even be convicted of criminal

offences, such as deception, corruption and
destruction of property.)
Perpetual lifetime

Accompany is its own legal person, as long as it fulfills

the legal requirements, it can exist beyond the life
span of any of its shareholders and staff.

Its existence is not affected by the death, insanity,

incapacity or withdrawal of any shareholder or
management staff.
Delegated management

The management of a company is assigned to the

board of directors who have authority and
responsibility to make decisions and carry out business
activities on behalf of shareholders

Membership

A Private limited company having a minimum

number of two (2) shareholders and maximum of fifty
(50) and a Public Limited Company, have minimum is
seven (7) shareholders and the maximum is unlimited.
Advantages

Limited liability

Because it is considered a separate legal entity, the

shareholders have limited liability and their personal
assets of are not at risk for satisfying company debts or
liabilities.

Because of the limited protection provided to the

owners a company is able to take risks and also to
attract a large number of small investors to invest in
the company. .
Dissolution

Since corporations have a perpetual existence, the

dissolution of a company does not happen
automatically it is determined by the state it can be
dissolved voluntarily or involuntarily.

The management of a company are given the

responsible of paying creditors and outstanding claims,
and distributing the remaining assets to shareholders
Economies of scale

Companies produce in large quantities therefore they

experience economies of scale; economies of scale
are factors that cause a producer’s average cost per
unit to fall as he produces in large quantity.

Due to this a large business can pass on lower costs to

customers through lower prices and increase its share
of a market.

Secondly, a business could choose to maintain its

current price for its product and accept higher profit
margins. This further opens the scope for expansion.
Professional Management:
Companies are able to raise large amount of capital
in comparison with other forms of business also
because of its scale of production its activities are
multifaceted and this requires professional expert to
manager to run every department. This increases it
effectiveness and efficiency.

Raising Capital
the ability to issues shares makes it easy for a
company to raise capital investment. It's also easier to
get loans approved from banks and other financial
lending institutions. This is because people have a
positive perception of companies as having long term
financial stability.
Transferring Ownership

The existence of shares also simplifies the sale of your

business interests in the future.

Perpetual life

death or illness of an owner or director, does not affect

the operation of a business, the business continues for
an indefinite period.
Disadvantages

Legal requirements

The formation of a company involves compliance with

the legal requirement as stipulated in the company
Act and compliance with several other Laws.

Compliance with legal and accounting requirements

places a significant burden on companies in terms of
staffing, expenditure and time. Non-cooperation of
these laws will result to a heavy penalty. This affects
the smooth functioning of the companies
Lack of control by the owners

Companies are managed by Board of Directors. This

means the shareholders have little or no say over day
to day management of the company. Since the share
holders are widely dispersed communication with
them may became a problem and they may suffer
from lack of information and all of them may not
participate in decision making. Companies are also
seen separate entity from the shareholder , the
company assets and finances are also detached
from the owners , therefore the owners cannot
"borrow" money from the company accounts or use
its assets.
Double taxation
Company earnings are subject to double taxation,
whereby, company profits are taxed, and then the
dividends paid to shareholders from the "net" profits
are also taxed.

No secrecy
Unlike sole proprietorships and partnerships, limited
liability companies are subject to strict legal
requirements, e.g. the filing of annual returns,
appointment and removal of directors, winding up,
etc. by the government .Other people, including
competitors can see your accounts and other
information that you are obligated to file.
Class Discussion

i) Advantages and Disadvantages of a Sole

Proprietorship

ii) Advantages and Disadvantages of a

Partnership firm

iii) Advantages and Disadvantages of a

corporation