EMT 301

Lecture 4
FORMS OF BUSINESS
 FORMS OF BUSINESS ORGANISATION

A business is an enterprise, or a firm, or

organisation involved in the trade of goods,

services or both to consumers.

 Choosing a form of business organisation
Entrepreneurs should choose a form of business
organisation based on the answers to the following
questions.
• What is the expected size of the business? How fast is
it likely to grow?
• Will the business be run on a full-time or part-time
basis?
• Will the business require any additional skill or capital?
• Will the business be owned and operated by a single
person or by a number of people?
FORMS OF BUSINESS OWNERSHIP;

1. Sole Proprietorship

2. Partnership and

3. Limited Liability Company

Sole Proprietorship

Sole Proprietorship form of business organisation

refers to a business enterprise exclusively owned,

managed and controlled by a single person with

all authority, responsibility and risk.

 Features of sole proprietorship
1.Single Ownership
2.No Separation of Ownership and Management
3.Less Legal Formalities:
4.No Separate Entity
5.No Sharing of Profit and Loss
6.Unlimited Liability
7.One-man Control
Sources of capital of a Sole proprietorship

1. Personal savings

2. Loan from friends

3. Trade credits

4. Loan and overdraft from banks.

Advantages of Sole Proprietorship.
1. Easy to Form and Wind up: It is very easy and simple to form a sole proprietorship.

2. All profits go to the owner: sole proprietors are entitles to all the profits from the

business.

3. Flexibility in Operation: It is very easy to effect changes as per the requirements of

the business.

4. Personal Touch: it is easy to maintain a good personal contact with the customers

and employees.

5. Few government regulations: there are few government regulations which apply to

sole proprietorships.
 Disadvantages of Sole Proprietorship
1. Limited Resources: The resources of a sole proprietor are always limited. Being the
single owner it is not always possible to arrange sufficient funds from his own sources
2. Lack of Continuity: The continuity of the business is linked with the life of the
Proprietor. Illness, death or insolvency of the proprietor can lead to closure of the
business.

3. Unlimited Liability: You have already learnt that there is no separate entity of the
business from its owner. In the eyes of law the proprietor and the business are one
and the same..

4. Not Suitable for Large Scale Operations: Since the resources and the managerial
ability is limited, sole proprietorship form of business organisation is not suitable for
large-scale business.

5. Limited Managerial Expertise: A sole proprietorship from of business organisation

always suffers from lack of managerial expertise. A single person may not be an
expert in all fields like, purchasing, selling, financing e.t.c.
 PARTNERSHIP 
Partnership is an association of two or more
persons who pool their financial and managerial
resources and agree to carry on a business, and
share its profit. The persons who form a
partnership are individually known as partners
and collectively a firm or partnership firm.
 Features of Partnership
1. Two or More Persons: To form a partnership firm at least two persons are
required. The maximum limit on the number of persons is ten for banking
business and 20 for other businesses.
2. Contractual Relationship: Partnership is created by an agreement among
the persons who have agreed to join hands. Such persons must be
competent to contract. Thus, minors, lunatics and insolvent persons are
not eligible to become the partners.
3. Sharing Profits and Business: There must be an agreement among the
partners to share the profits and losses of the business of the partnership
firm.
4. Existence of Lawful Business: The business of which the persons have
agreed to share the profit must be lawful. Any agreement to indulge in
smuggling, black marketing etc. cannot be called partnership business in
the eyes of law.
5. Unlimited Liability: The partners of the firm have unlimited liability. They
are jointly as well as individually liable for the debts and obligations of the
firms
 Formation of Partnership
A partnership business maybe established without any

formality, although the partners have certain

unavoidable obligations to third parties.

It is usual for people entering into partnership to

express their intention in a partnership agreement

known as Deed of Partnership.

 Deed of Partnership
Deed of Partnership is a document drawn up to clarify the respective positions of partners in a

business. The agreement contains the following rules and regulations:

1. The names of partners

2. The firm’s name

3. The proportion in which capital is to be provided and whether interest should be paid on

capital

4. The signatories to the cheques

5. The sharing of profits and provision for drawing

6. The rights and duties of each partner

7. Duration of partnership

8. The payment of partner’s salaries

9. The nature of the business

10. Method of admission of new partners

11. The circumstance which shall dissolve the partnership

 Advantages of Partnership
1. Easy to Form

2. Availability of Larger Resources

3. Better Decisions

4. Flexibility

5. Sharing of Risks

6. Keen Interest

7. Benefits of Specialisation

8. Protection of Interest
 Disadvantages of Partnership
1. Unlimited Liability: The most important drawback of partnership
firm is that the liability of the partners is unlimited i.e., the
partners are personally liable for the debt and obligations of the
firm.
2. Instability: Every partnership firm has uncertain life. The death,
insolvency, incapacity or the retirement of any partner brings the
firm to an end.
3. Limited Capital: Since the total number of partners cannot exceed
20, the capacity to raise funds remains limited as compared to a
joint stock company where there is no limit on the number of
share holders.
4. Possibility of Conflicts: You know that in partnership firm every
partner has an equal right to participate in the management.
 TYPES OF PARTNERS
Partners can be classified depending upon the extent of participation and the sharing of

profits, liability etc.

1.Active Partners: The partners who actively participate in the day-to-day operations of

the business are known as active partners or working partners

2. Sleeping Partners: Those partners who do not participate in the day-to-day activities of

the business are known as sleeping or dormant partners. Such partners simply

contribute capital and share the profits and losses.

3. Nominal Partners: Nominal partners allow the firm to use their name as partner. They

neither invest any capital nor participate in the day-to-day operations. They are not

entitled to share the profits of the firm. However, they are liable to third parties for all

the acts of the firm.

4.Partners in Profits: A person who shares the profits of the business without being liable

for the losses is known as partner in profits.

 Sources of Capital for Partnership
• Loan and Overdraft
• Trade credits
• Personal contribution from partners
• Admission of new partners
• Undistributed profits
NATURE OF LIMITED LIABILITY COMPANY

An Association of persons formed or

incorporated under the rules and regulations in
the Companies and Allied Matters Decree of
1990 for the purpose of carrying on a business.
 CHARACTERISTICS OF LIMITED LIABILITY COMPANY
1. Legal Entity: Limited Liability Company has a distinct personality from
that of the members. It can sue and be sued in its own name.
2. Perpetual Succession: the death of shareholders will not affect the
existence of the company.
3. Limited Liability: the liability of shareholders is limited to the amount
contributed or agreed to contribute to the company.
4. Formation: it must follow some special formalities before registration.
They secure incorporation by filing the Article of Association and
Memorandum of Association.
5. Preparation of Annual Accounts: they are required by statute to keep
certain prescribed books of account. The account must be audited
annually.
 Private Liability Company
• Section 28 of the Company Act 1968 defines
private liability company as one which by articles
• Restricts the right to transfer shares;
• Limits the number of his members from two to
fifty;
• Prohibits any invitation to the public to subscribe
to its shares;
• The name of the private company must end with
‘Limited’
 Public Liability Company
• It is defined by sections of the Company Act 1968
as one which by its articles
• Allows the public to subscribe to its shares;
• Must have a minimum of seven persons but no
minimum number is prescribed;
• Allows the shares to be transferred;
• Must end with ‘Plc’ e.g. Union Bank Plc.
 FORMATION OF A LIMITED LIABILITY COMPANY
•The steps in the formation of a limited liability company can be explained briefly as follows;

•The promoter(s) devises a scheme of capitalisation, bearing in mind the cost of formation,

assets to be bought and working capital.

•The promoter(s) is required to secure the services of a solicitor to prepare certain

documents to be filed with the registrar of companies. The documents are;

•Memorandum of association

•Article of Association

•Statement of Nominal Capital

•The documents are stamped and lodged with the registrar of companies.

•After going through the documents, the registrar of companies then issues a certificate of

incorporation to the company. This gives the company the power to commence business.
•A private company can commence business after receiving a certificate of incorporation but

a public liability company cannot commence until it receives a certificate of trading.

 Memorandum of Association

It is a document, forming the constitution of a

company and defining its objectives and powers

with regards to its dealings with the outside

world.
 Contents in MOA
1. It contains the following information.
2. The name of the company which must end
with the word ‘Limited’.
3. The registered office of the company
4. The objects of the company
5. The amount of authorized capital and various
shares into which it is divided.
6. A declaration that the liability of the members
is limited.
 Articles of Association

It is a document in which regulations which

govern the internal management of the
company’s affairs, the duties, rights and powers
of members are stated.
 Contents of AOA
• The method of issue of capital
• Method of holding meetings
• Defined powers and duties of directors
• The right of shareholders
• How directors are to be elected
• How auditors are to be remunerated
• Meeting of sharing dividends
• Transfer and forfeiture of shares
Advantages of Limited Liability Company

1. Legal entity
2. Perpetual existence
3. Limited liability
4. Ease of raising large capital
5. Transferable ownership
6. Specialization in management
Disadvantages of Limited Liability Company

1. Expensive to organise
2. Ownership separated from management
3. Government restrictions
4. Lack of privacy
5. Conflict of interest between shareholders
and management.
 Dissolution of Partnership
1. Bankruptcy
2. By mutual consent
3. By Court order
4. By notice of intention to dissolve
5. On the completion of venture
 Sources of Capital for Limited Liability
Company
• Sales of shares
• Bank loans and over draft
• Issue of debenture
• Retained profit
• Trade credit
 Further reading materials
1. Olawale A. (2014)- Strategic Entrepreneurship
Development, University Press Plc.

2. Olagunju, Y.A. (2008). Entrepreneurship and

Small Scale Business Enterprises Development
in Nigeria. Ibadan: University Press PLC.