TOPIC SEVEN: FORMS OF BUSINESS OWNERSHIP

7.1 Meaning of Business Ownership

Business ownership refers to the legal and financial control over a business entity. It
encompasses the rights and responsibilities of individuals or entities who own and operate a
business or company.

7.2 Forms of Business Ownership

Owning a business is an important undertaking that offers immense benefits as well as a fair
share of challenges. Among the many decisions you'll make when starting a business is choosing
the type of business structure you'll use. Understanding the different types of structures available
can help you make this important decision.

7.2.1 Sole proprietorship: A sole proprietorship is owned and operated by one individual. The
owner of a sole proprietorship doesn't need the approval of a board or partner to make daily
business decisions. They also get to keep and determine what to do with the business' profits.
Here are the advantages and disadvantages of a sole proprietorship:

Advantages

 They're simpler to form than other businesses because it doesn't require a lot of paperwork.
 The owner has sole control of all processes and decision-making.
 Filing taxes for this type of business is easier than for other types of businesses.
 The owner enjoys all benefits and incur all losses singly.
 Decision making is faster since it is done by one person who I the owner.

Disadvantages

 The owner accepts all responsibility for business losses.

 The owner is responsible for raising capital for startup costs.
 It may be harder to sell the business.

7.2.2 Partnership: A partnership is a form of ownership that involves two or more owners
controlling a business. The joint owners may run the day-to-day activities by themselves or
through appointed representatives. In a partnership, the owners sign a formal agreement that
clearly states a partner's rights, shares and responsibilities.Business leaders typically divide
partnerships into limited liability partnerships and unlimited liability partnerships. Here's how
these types of partnerships work:

 Limited liability partnership: In a limited liability partnership

 , individual partners don't accept losses caused by another, meaning no legal entity can seize
or sell one partner's possessions to pay for the other partner's debts.
 Unlimited liability partnership: In an unlimited liability partnership, both partners are
responsible for the business. If one partner is directly responsible for a loss, all other partners
pay for the debt, even if they aren't directly responsible for the losses.

Advantages

 They provide the potential to gain wider access to knowledge and expertise from partners.
 The infusion of capital is easier than it is in other business structures.
 This business type offers the ability to share the burden of startup costs and capital
expenditure.
 The division of labor among partners creates a better work-life balance.

Disadvantages

 Partners carry the burden of liabilities, regardless of the partner who is responsible for the
debt.
 There's a potential loss of autonomy as all partners deliberate on key decisions.
 There can be more potential for conflict between partners.
 Selling complications can arise if one partner disagrees with the plan to sell the business.

7.2.3 Limited liability Company: In a limited liability company, the owner's assets, like their
car, house and personal accounts, have protection if their business goes bankrupt. This ownership
option is a good choice for small business owners looking to start a new business. Here are some
advantages and disadvantages of a limited liability company:
Advantages

 Minimizing personal liability: The biggest benefit of forming your own company is limited
liability protection. Simply put, should your company run into trouble, your personal assets
will be secure. This is because a limited company is treated as a separate legal entity; a legal
‘person’ in its own right. Therefore, the business is entirely separate from the people who
own and manage it.
 Professional status: Your professional status and image will improve considerably when
you start trading as a limited company. Whilst the activities, ownership structure, and internal
management of your business may be the same as when you were operating as a sole trader,
companies are held in much higher regard and create a better impression.

A more professional image, coupled with the benefits of corporate transparency, could also
benefit your business in many other ways, such as:

 attracting new clients and investors

 accessing a wider range of lending opportunities
 expanding into different locations or markets
 creating a valuable and trusted brand identity
 competing on an even playing field with other businesses in your industry sector

 Tax efficiency and planning: Limited companies in the UK pay 19-25% Corporation Tax
on profits, whereas sole traders pay 20-45% Income Tax (or 19-48% in Scotland) on their
profits. These lower rates for companies offer greater flexibility for tax planning.
 Reinvesting surplus cash: Rather than withdrawing all available profit each year and paying
more personal tax on top of your Corporation Tax liability, you can retain surplus income in
the business to pay for future operational costs and growth.

This makes more sense than withdrawing all profits, paying higher rates of Income Tax, and
reinvesting your own finances when the business needs additional capital.

 Deferring personal income: You can defer the withdrawal of profits to a later tax year when
a lower rate of business or personal tax would be due. This is an efficient strategy if the
 withdrawal of all available profits would take you into a higher Income Tax band or
Dividend Tax bracket.
 Tax efficiency and planning: Limited companies in the UK pay 19-25% Corporation Tax
on profits, whereas sole traders pay 20-45% Income Tax (or 19-48% in Scotland) on their
profits. These lower rates for companies offer greater flexibility for tax planning. Reinvesting
surplus cash rather than withdrawing all available profit each year and paying more personal
tax on top of your Corporation Tax liability, you can retain surplus income in the business to
pay for future operational costs and growth.
 Higher personal remuneration: By setting up a company, you can reduce your Income Tax
and National Insurance contributions (NIC) by taking a combination of a director’s salary
through PAYE and dividend payments from shares. If you keep your director’s salary below
the NIC primary threshold (£12,570), you won’t have to pay any Income Tax or employee
Class 1 National Insurance on those earnings. Furthermore, the company won’t have any
Corporation Tax liability on the salary because wages are a tax-deductible business expense.
 Separate legal identity: Unlike the sole trader structure, a limited company is a legal
‘person’ in its own right, with an entirely separate identity from its owners and directors. As
a result, companies can enter into contracts in their own name and are responsible for their
own debts and liabilities. The owners are only liable (in most cases) for the value of their
unpaid shares or personal guarantees, rather than the full extent of the company’s liabilities.
If a company becomes insolvent, it is the business itself that is declared bankrupt, not the
shareholders or directors.
 Credibility and trust: The professional status of a limited company structure will add
valuable prestige and credibility to your business. In fact, certain businesses and agencies
(particularly in the IT, finance, and construction industries) are only prepared to engage with
other incorporated businesses. This is usually due to the level of risk involved in the contracts
they award.
 Investment and lending opportunities: Companies can have multiple owners, so it is
possible to raise additional capital by selling portions (‘shares’) in the business to new
investors. Generally, companies also have access to more lending opportunities than sole
traders, and certain banks will only lend to incorporated businesses.
Furthermore, it is often possible to secure a loan for a company without the need for shareholders
or directors to provide security against their own property.

 Protecting a company name: All company names must be unique, so no two companies can
be set up with the same name, or even names that are very similar to one another. The official
name of your company cannot be registered and used by any other business. A sole trader’s
business name does not enjoy this protection.
 Pensions: Companies provide the opportunity to invest pre-tax trading income in a company
pension scheme, as opposed to making only personal contributions from your wages or other
earnings. And since employer contributions are an allowable business expense, your
company will receive tax relief against its Corporation Tax bill.
 Splitting income: If you own a company limited by shares, you can issue shares to your
spouse or family members. This will allow you to split your business profits and minimise
personal tax liabilities.

Disadvantages of a limited company

There are some less favourable aspects associated with limited company formation, as one would
expect from anything that provides so many benefits. However, most of these perceived
disadvantages pale in comparison to the tax advantages, enhanced professional image, and
limited liability protection you will enjoy.

The most notable disadvantages are as follows:

 limited companies must be incorporated at Companies House

 you will be required to pay an incorporation fee to Companies House
 company names are subject to certain restrictions
 you cannot set up a limited company if you are an undischarged bankrupt or a disqualified
director
 personal and corporate information will be disclosed on public record
 accounting requirements are more complex and time-consuming
 you may need to appoint an accountant to help you with your tax affairs
 strict procedures must be followed when withdrawing money from the business
 a confirmation statement and annual accounts must be filed at Companies House each year
 a Company Tax Return and annual accounts must be delivered to HMRC every year.
 companies are required to adhere to strict record-keeping requirements, including taking
minutes of meetings and recording all decisions taken by directors and shareholders
 company registers and records must be maintained and made available for public inspection
at your registered office
 if you make any changes to your company details, you must notify Companies House
immediately

7.2.4 Government Agencies

A government agency is a permanent or semi-permanent organization within a national or state
government. These agencies are responsible for oversight or administration of a specific sector,
field, or area of study.

It is an integrated entity within the administrative apparatus of the state, responsible for the
supervision and administration of specific functions in the public sector.

A government agency is a permanent or semi-permanent organization within a national or state

government. These agencies are responsible for oversight or administration of a specific sector,
field, or area of study.

In many countries the government is the predominant producer of statistics through censuses and
research programs and as a by-product of government functions, such as industry regulation or
taxation. And every level of government produces statistics: national, regional, and local.
However, the extent and accessibility of these ‘official’ statistics varies; for example, while some
countries have one primary statistical agency, such as Statistics South Africa or Statistics
Finland, other countries have multiple agencies and departments. The United States has a main
statistical agency, the U.S. Census Bureau, as well as statistical departments within many other
government agencies, for example, the National Center for Education Statistics within the U.S.
Department of Education and the Bureau of Justice Statistics within the U.S. Department of
Justice. While in the United States, statistics and data produced by the government are often free
and publicly available, some countries, such as Canada, tend to provide more limited access for
citizens or researchers with a university affiliation. In these cases, a government documents
librarian can often be a valuable resource in identifying and navigating the appropriate statistical
agencies and locating official statistical sources.

Government Enforcement

Government actions often begin after an inspection reveals problems in a food establishment, or
may occur in response to an outbreak of illness linked to a food. Government agencies may
utilize a multistep approach to ensure compliance. For example, they may begin by issuing
notices of deficiencies and conducting reinspections to check on a business's corrective actions.
If problems are not corrected or the noncompliance is especially egregious, the agency may issue
a warning letter. If the product has been shipped to distributors, a business may be asked to
voluntarily withdraw or recall the adulterated or misbranded product. Agencies also publicize
their findings through a public health warning and through formal administrative procedures.

Some government agencies may utilize more direct approaches such as detaining suspect food or
levying civil monetary penalties. If the food is subject to continuous inspection or requires
approval by government inspectors before being marketed, the agency may withdraw inspectors,
which effectively shuts down the business until it demonstrates that it has come into compliance.

Governments may also take firms or individuals to court to seize unsafe food or issue an
injunction that stops the firm from manufacturing or distributing their products. The government
may seek criminal sanctions if appropriate. Prosecution may target the person who was in a
position of responsibility, regardless of whether that person intended to commit a crime.
Punishments can include a fine, prison, or both.

Governments can enlist food establishments to enforce standards. For example, the Food Safety
Act of 1990 in the United Kingdom provides a due diligence defense to encourage food
establishments to take responsibility for their products. A person who can prove he took all
reasonable precautions and exercised due diligence to avoid the commission of the offense can
escape conviction. One result of having the due diligence defense available has been the
emergence of private food safety standard setting and certification bodies.

TOPIC EIGHT: THE STOCK EXCHANGE (NAIROBI STOCK EXCHANGE)

8.1 Meaning of Stock Exchange
A stock exchange is a marketplace where securities, such as stocks and bonds, are bought and
sold. Bonds are typically traded Over-the-Counter (OTC), but some corporate bonds can be
traded on stock exchanges.

Stock exchanges allow companies to raise capital and investors to make informed decisions
using real-time price information. Exchanges can be a physical location or an electronic trading
platform. Though people are typically familiar with the image of the trading floor, many
exchanges now use electronic trading.

8.2 Functions of Stock Exchange

Stock exchanges act as an agent for the economy by facilitating trade and disseminating
information. Below are some of the functions exchanges contribute:

 Role of an Economic Barometer: Stock exchange serves as an economic barometer that is

indicative of the state of the economy. It records all the major and minor changes in the share
prices. It is rightly said to be the pulse of the economy, which reflects the state of the
economy.
 Valuation of Securities: Stock market helps in the valuation of securities based on the
factors of supply and demand. The securities offered by companies that are profitable and
growth-oriented tend to be valued higher. Valuation of securities helps creditors, investors
and government in performing their respective functions.
 Transactional Safety: Transactional safety is ensured as the securities that are traded in the
stock exchange are listed, and the listing of securities is done after verifying the company’s
position. All companies listed have to adhere to the rules and regulations as laid out by the
governing body.
 Contributor to Economic Growth: Stock exchange offers a platform for trading of
securities of the various companies. This process of trading involves continuous
disinvestment and reinvestment, which offers opportunities for capital formation and
subsequently, growth of the economy.
 Making the public aware of equity investment: Stock exchange helps in providing
information about investing in equity markets and by rolling out new issues to encourage
people to invest in securities.
 Offers scope for speculation: By permitting healthy speculation of the traded securities, the
stock exchange ensures demand and supply of securities and liquidity.
 Facilitates liquidity: The most important role of the stock exchange is in ensuring a ready
platform for the sale and purchase of securities. This gives investors the confidence that the
existing investments can be converted into cash, or in other words, stock exchange offers
liquidity in terms of investment.
 Better Capital Allocation: Profit-making companies will have their shares traded actively,
and so such companies are able to raise fresh capital from the equity market. Stock market
helps in better allocation of capital for the investors so that maximum profit can be earned.
 Encourages investment and savings: Stock market serves as an important source of
investment in various securities which offer greater returns. Investing in the stock market
makes for a better investment option than gold and silver.

8.3 Nature of Stock Exchange

Stock exchanges often function as "continuous auction" markets with buyers and sellers
consummating transactions via open outcry at a central location such as the floor of the exchange
or by using an electronic system to process financial transactions.

 A market for securities: It is a wholesome market where securities of government,

corporate companies, semi-government companies are bought and sold.
 Second-hand securities: It associates with bonds, shares that have already been announced
by the company once previously.
 Regulate trade in securities: The exchange does not sell and buy bonds and shares on its
own account. The broker or exchange members do the trade on the company’s behalf.
 Dealings only in registered securities: Only listed securities recorded in the exchange office
can be traded.
 Transaction: Only through authorized brokers and members the transaction for securities
can be made.
 Recognition: It requires to be recognised by the central government.
 Measuring device: It develops and indicates the growth and security of a business in the
index of a stock exchange.
 Operates as per rules: All the security dealings at the stock exchange are controlled by
exchange rules and regulations and SEBI guidelines.

8.4 Benefits of stock exchange

The following are some of the benefits of a stock exchanges:

Protection of investor and corporate interests: Stock exchanges being centralised platforms,
the regulation of transactions are much easier to implement if those transactions are conducted
through the stock exchange. For example, ensuring that margins in stock trading are paid in time
would be next to impossible in a decentralised share-trading system. This would have led to a
lack of trust among both investors and corporates, leading to higher transaction costs for
everyone as well as unnecessary delays and litigations.

Efficient trading of shares: Stock exchanges offer higher liquidity to investors as they can
easily buy and sell shares on the stock exchange platform than in a decentralised system.
Moreover, because liquidity is high and the information related to the stock is publicly and
equitably distributed, the price at which the stock is traded is also a fair price (not a negotiated
one).

Efficient dissemination of information: Stock exchanges allow and sometimes mandate easier
dissemination of information related to prices of shares and the volumes traded. The huge
amount of data generated by the centralised platform allows stockbrokers and investors to trade
shares with better knowledge and react to big and small events quickly and effectively. The
infrastructure provided by the stock exchange also helps the companies to track their share price
and take appropriate action in time.

Easier access to capital: Getting listed on a stock exchange allows companies to raise capital
without having to spend time and resources pitching their stock to individual investors.
Less dependency on a handful of investors: No single investor can exert too much control over
the company’s stock price as publicly listed stocks are more dependent on market demand and
supply.

Enhanced reputation: sometimes, a lesser known company can gain a lot of reputation by
getting listed on a stock exchange. This in turn can help it gain greater market cap more easily.
Furthermore, it can use its publicly listed stocks as collateral for availing large loans from
financial institutions.