BUSINESS LAW

BUSINESS ORGANISATIONS
There are many forms of business units.

The following are the most common ones:

1 Sole Proprietorships

A sole proprietorship is a business which is owned

and run by one man who enjoys all the profits and
bears all the risks alone.

The owner of a sole proprietorship is known as a

sole proprietor or a sole trader.
Characteristics
The distinguishing features of sole
proprietorships are as follows:
a Ownership is by a single person - that is, sole
proprietorships occur where one person owns the
business alone.

b Management and Control - day to day

management and control of the business is usually
by the owner. The owner runs and controls the
business.

c Finance - the owner provides the capital (the

money for starting the business)
Many people use their savings to start a business but
frequently part of it is in the form of borrowed funds.
d Size - the business of the sole trader is usually small
due to the amount of capital invested since the capital
is usually small.

e The business is not a separate legal entity from

the owner – which means that the owner is liable for
the debts incurred by the business. However, the
business is a separate accounting entity i.e. accounts
are prepared for the business as an entity.

f Ease of Entry – it is easy to start a sole

proprietorship since it does not require a large initial
capital expenditure and there are no registration
formalities unless a licence has to be obtained to
operate the business (e.g. if selling liquor).
Advantages
a Managerial Freedom - decision-making
can be effected quickly since the owner
does not have to consult anyone. There is
no board to convince and no committee to
argue with and therefore decisions are
reached quickly.
• b Direct Responsibility – any consequences of
action are the sole responsibility of the owner.
He/she gains all the profits from his/her efforts (if
he/she makes mistakes he/she loses).

• c Simplicity of Organisation - (simple

management structure) The difficulties of
management often associated with large scale
organizations are thus avoided.

• d Personal Contact – he/she is in close contact

with his customers and can therefore have
knowledge of their wants and can offer good
personal services.
• e No formal procedures - are required to
set up the business (except for types of
business where a licence must be obtained
e.g. retailing wines and spirits, operating
taxi cab).

• f Flexibility - sole traders can react

quickly to change or the sole trader can
change the whole policy of his business in
a very short time. He/she can make quick
decisions.
Disadvantages

a Unlimited Liability – In the event of the business

failing the owner is personally liable for the debts
incurred by the business i.e. the owner of the business
suffers personal liability in the case of bankruptcy.

b Limited amount of Capital – the sole proprietor’s

capital is usually limited and he/she has difficulties in
obtaining outside finance. This hinders expansion
because it can only be done by ploughing back profits of
the business.

c Lack of Continuity –usually the business does not

continue after the death of the proprietor.
d Limitation on Expertise – the owner may not
possess all the attributes required to run a business.
An engineer, for instance, may have little financial
acumen.

e Indispensability of the Owner - the business

has high dependence on the individual which can
mean long working hours and difficulties during
sickness. Absence of the owner will result in loss of
personal direction during that time.

f Disadvantages associated with small size, e.g.

absence of economies of scale, problems of raising
finance, lack of specialisation.
Partnerships
A partnership is a “relationship that submits
between two or more people carrying on
business with a common view to make
profits”.
Characteristics
(i) A partnership isn’t a separate legal entity from its
owners which means that:

a. a partnership cannot sue or be sued in its own name.

anyone claiming against the firm must take action
against any or all the partners as individuals.

b. a contract cannot be entered into in the name of the

firm. Contracts must be in names of the partners.

c. there is no continuity – if any partner dies, withdraws

from the firm or becomes bankrupt, the partnership
dies.
(ii) Each partner (like a sole trader), except the
limited partner, has unlimited liability for the debts
of the business.
(iii) No account of the firm’s activities has to be
published.
Formation of Partnership
A partnership may not have more than 20 members
except in respect of certain professional firms such as
accountants, doctors etc.

There are no registration formalities just like sole

trader. Partners must draw an agreement – the
Partnership Agreement.

A mere oral agreement is insufficient but it is better

for the partners to have a written agreement.
A written partnership agreement is known as a
Partnership deed.
Contents of the Partnership Agreement
a. The name of the firm and the names and addresses of the
partners.

b. The nature of the business

c. The capital of the partnership and how much each partner is

supposed to contribute.

d. The role to be played by each partner in the business.

e. The profit and loss sharing arrangements.

f. The duration of the partnership and the conditions under which

it may be brought to an end.
In the absence of an agreement or where there is
ambiguity or where the agreement is silent, the
provisions of the law, principally embodied in the
Partnership Act will apply.
Types of Partners
Active Partners - partners who take a full part in the
running of the business.
Dormant Partners - these partners agree to
contribute to capital and to receive their share of
profits but to take no part in the running of the
business.
Limited Partners - these are partners whose
liabilities are limited to the amount of capital
contributed to the business. Normally, these do not
take an active part in the activities of the business.
(note that limited partnerships do not exist in Malawi)
Note: In a partnership there must be at least one
partner with an unlimited liability)
Advantages of Partnership
a More Capital: a number of people carrying on business
together will obviously provide more capital than a single
person.

b Specialisation: since there are more people it is possible

for them to divide work among themselves according to the
capabilities possessed by each of them.

c Consultation: the partners will from time to time consult

each other to iron out business problems while the sole trader
does not have anyone to share ideas with, which normally
results in poor decisions.
d Shared Strain: the partners share the worries of the
business apart from sharing work.

e Personal Contact: most partnerships still operate on a

scale which is small enough to permit personal contact with
customers and employees.
Disadvantages
a The liability of each of the partners (except limited
partners) is unlimited.
b The business is identified with its owners hence lack of
continuity because any changes in the composition of the
partnership will result in its dissolution.
c Since any undertaking of one partner binds the others, it is
important not to enter into a partnership with someone
whose business judgment is dubious.
d Since each partner is entitled to a say in the management
of the firm, disagreements are very likely resulting into
unnecessary delays.
3 Joint Stock Companies
A joint stock company may be defined as ‘legal
person created to engage in business, capable
of owning productive assets, entering into
contracts and employing labour in the same
way as an individual.’

Certain steps have to be taken for these

companies to be incorporated (created).

After incorporation they get corporate

personality and legal identity.
Methods of Incorporation
Companies can be incorporated by:
a Statute : i.e. by Act of Parliament. These
companies are known as Statutory Bodies.

Examples include:
• Malawi Housing Corporation (MHC),
• Electricity Supply Corporation of Malawi (ESCOM),
• Agriculture Development, Marketing Corporation
(ADMARC),
• Malawi Broadcasting Corporation (MBC),
• University of Malawi, etc.
b The Granting of Royal Charter: These
institutions are known as Chartered
Companies;

e.g. Chartered Association of

• Certified Accountants (ACCA),
• Chartered Institute of Bankers,
• Chartered Institute of Management
Accountants (CIMA).
c Registration: This is the commonest
method of incorporation.

After incorporation and the issue of a

certificate of incorporation from the
Registrar of Companies, the company
comes into being.
Companies formed by registration are of
three types.

These are:
a Unlimited Company
These have corporate personality, but the liability
of members is unlimited. This type is very rare.
b Companies Limited by Guarantee
Members of these companies undertake to be
liable for the debts of the company up to a stated
limit, i.e. they guarantee to pay a stated amount in
circumstances where the company is unable to
meet its debts.
c Companies limited by Share
The liability of the members is limited to the
amount paid or agreed to be paid on the shares.
Companies Limited by Share are of two
types, namely:

• a Public Limited Companies

• b Private Limited Companies
Differences between Private Limited Companies and Public
Limited Companies:

(i) Public Limited Companies can ask the public to buy

shares in the company while Private Limited Companies
cannot.

(ii) At least two persons are required to form a company. A

Private Limited Company cannot have more than fifty (50)
members but there is no maximum number of members in
the case of a Public Limited Company.

(iii) The shares in a Public Limited Company can easily be

transferred while those of a Private Limited Company can
only be transferred upon the consent of the members.
General Characteristics of Companies Limited
by Share

1. Profit Motive
They operate with the aim of making profits

2. Capital
The capital is subscribed by the members who do
so by buying shares in the company.
3. Profit Sharing
The members share the profits of the company in
the form of dividends.
4. Limited Liability
The liability of the members is limited to the
amount paid/payable on the shares.
5. Legal Entity
The company is a separate legal entity from its
owners i.e. it is regarded as a person created by
law. It can sue or be sued. It can contract in its own
name.
6. Transferability of Membership
It is possible through the transfer of shares
7. Continuity
The company has a continuous existence
independent of its members.

8. Separation of Ownership from Management

That is to say the managers of a company are
different from the owners.

9. Control
This is exercised by the shareholders through the
appointment of a board of directors.
Regulation of Joint Stock Companies
(i) By Companies Act

These are principal statutes relating to such things

as:

• Formation of company
• Keeping of proper accounting records
• Appointment of auditors
• Dissolution of company, etc
(ii) Company Powers

The powers of a company are contained in

the Memorandum of Association and the
Articles of Association.
(iii) Investigation of Companies

If the shareholders believe that the

directors are not conducting the affairs of
the company properly, they may ask the
Department of Trade and Industry to
appoint inspectors to investigate the
concerned issue.
Formalities of Registration
Limited companies must be registered with the
Registrar of Companies.

To comply with the Registrar’s requirements which

are laid down in the Companies Act, the promoters
of the company must present the Memorandum of
Association and the Article of Association.
The Memorandum of Association
This governs the relationship of the company with
the “outside world.” Its main contents include:

(i) The company’s name which must contain the

word ‘LIMITED.’ This is a warning to anyone
dealing with the company that they cannot look
beyond the company and its resources for the
redress of any grievance (the concept of limited
liability;

(ii) The physical and postal addresses of the

registered office of the company;
(iii) The restrictions, if any, upon the
business to be carried on by the company;

(iv) A statement of the limited liability of

members (for the benefit of potential
creditors as well as shareholders).

(v) The Authorised Share Capital of the

company and its division into shares of a
fixed amount (also the classes of shares of
the company).
Articles of Association
These control the internal running of the company.
The Articles cover such things as:

• (i) The procedure of calling for a General Meeting;

• (ii) How directors are going to be appointed;
• (iii) The rights and obligations of the directors;
• (iv) The borrowing powers of the company;
After these two documents have been
completed, they are sent to the Registrar
who, after approving them, will issue a
Certificate of Incorporation.

The promoters of a public limited company

can thereafter issue a prospectus inviting
members of the public to subscribe to the
capital of the company.
The Capital of Limited Companies

Ways of raising capital including:

• (i) issue of shares

• (ii) long-term loans
• (iii) short-term loans e.g. overdrafts
• (iv) retained profits
Share Capital
Promoters of a company limited by share
attract contributions from all kinds of
people and institutions by offering them
shares in the business.

Every person who buys a share in a

company becomes a part-owner of the
company.
The following terms should be noted:

1 Nominal or Authorised Share Capital:

this is the maximum amount of money a
company is allowed to raise by issuing shares.

2 Issued Share Capital: the company may

not wish to issue the maximum number of
shares at the outset. The nominal value of the
shares issued is referred to as the Issued
Capital
3 Called-up Capital: When the shares have
been issued the company does not always need
the full amount to be paid immediately. The
proportion of issued share capital that the
company asked the shareholders to pay is known
as the Called-up Share Capital.

4 Paid-up Capital: This is the proportion of

issued share capital that has been paid for. If the
company fails, the holders of shares which are
not paid up are required to pay the difference
between the nominal value of issued share
capital and the paid-up value of their shares.
Types of Shares

The authorized shares of a company may be

divided into many different types of shares,
the common types are:
a Preference Shares
Preference Shares carry a prior right to a share in
the profits of a company.

The holders of these shares must receive their

dividends before holders of other types of shares.

They rank after lenders of the company.

The rate of return (dividends) on preference shares

is a fixed percentage of their nominal value.
Types of Preference Shares

(i) Basic Preference Share- holders of which

receive a fixed dividend out of profits before
anything is paid to ordinary shareholders.
(ii) Cumulative Preference Shares if a dividend
is missed in one year due to lack of distributable
profits, the right to the dividend is carried forward
to the next year.

(iii) Participating Preference Shares - these do

not only carry a fixed rate of dividend but also
entitle their holders to a further share of the profits
once they reach a certain level.
b. Ordinary Shares

The dividend on ordinary shares is not fixed and

entirely depends on the profitability of the
company and the policy of directors with regard to
the amount of profit to be retained in the company.

The dividend may be very high or zero.

The ordinary share capital or a company is also

known as the “Equity”.
Loan Capital
A company which is faced with the need for
additional capital may choose to obtain it not by an
issue of shares but by borrowing.

A person who lends money to a company is a

creditor not a shareholder.

He/She is not a member of the company and if the

company should fail, he/she will have the right to
be paid before any distribution is made to the
shareholders.
DEBENTURES
A company may borrow by issuing DEBENTURES.
These are not shares.
Debenture holders do not share in the membership of a
company.
A debenture is a written acknowledgement of a loan made to a
company.
It normally contains provisions for the payment of interest and
the repayment of the loan.

The rate of interest is fixed and it is paid before preference or

ordinary shareholders receive their dividend.
They are normally secured against property owned by the
company so that in the event of the company’s failure,
debenture holders are assured of getting their money.
If debenture holders do not get their annual interest, they can
force the company into liquidation.
Dissolution of a company

A company can stop existing in two main ways.

1 Striking Off
This is an informal way of ending a company due to
non-compliance with regulatory framework.

The company stops trading and pays off its

creditors.
Its directors resign.
This may occur when the Registrar of Companies
wants an annual return and reports from the
company, and gets no response.
As a result he/she will just strike off its name from
his/her register hence the name Striking Off.
2 Winding Up
A company may wind up voluntarily or involuntarily
a Voluntary Winding Up
A company may be wound up voluntarily:
(i) When the period fixed for its duration expires;
(ii) If an event occurs, on the occurrence of which
the
Memorandum or Articles provide that the company
is to be dissolved.
(iii) If the shareholders believe that the company is
not going to continue a special resolution is passed
to dissolve the company
The shareholders will appoint a Liquidator who will
have the following functions:

• - to sell all company property or assets

• - to pay off all the creditors
• - to distribute the balance among the shareholder,
etc
b Involuntary/Compulsory Winding Up
A company winds up involuntarily if it is forced to
do so by a court order.
Advantages of Joint Stock Companies
a Ability to Raise Capital
These companies can raise a large amount of
capital because it is subscribed by many members.
b Transferability of Membership
This is possible by transferring shares.
c Limited Liability
The liability of the members is limited to the
amount of capital subscribed or payable on the
shares.
d Economies of Scale
Since they have a large amount of capital and they
operate on a large scale they can exploit the
economies of scale.
Disadvantages
a Formal Procedures are required to set up a
business as a company hence it takes longer to
start business as a company.
b Publicity the books of the company are open to
the general public for inspection.
c Divorce of Ownership from Management i.e.
day to day running of the business is done by
people different from the owners.
d Slow Decision Making all members have to
take part in the decision-making process of the
company. This may result into unnecessary delays
to reach a decision.
4. STATUTORY CORPORATIONS OR PARASTATALS
These are created by Acts of Parliament.
Their powers and objectives are defined by those specific
Acts of Parliament which created them.
They deal with a broad range of activities.
They are mainly concerned with public utilities like water,
electricity, communication, etc.
These are utilities or activities that provide the basic
essential services to the nation which would otherwise be
inefficiently or inequitably provided by the private sector.
Parastatals placing in particular sectors can be viewed as an
arrangement whereby the government can maintain control
over policy in a given area giving a means of access to a
variety of skills and methods of operation not open to the
civil services.
Some of these parastatals are seen to be:
• 1. Commercially viable
• 2. Others potentially viable
• 3. Others are surviving only with the continued
support of a subvention from the state.
Parastatal organisations play a role on behalf of the
government and most of them demonstrate and
prove reasons for their existence.

If not, they may be dissolved by the government.

Parastatal organisations may therefore, be seen as

agents of economic and social development.
Categorical Grouping of Parastatals
Parastatals in Malawi are grouped into three
categories. Its functional grouping is by:
• a Commercial
• b Quasi-commercial (part-commercial)
• c Sub vented
(i) Commercial Category
This group covers all those statutory corporations that are
expected to show some return in terms of profit on the capital
employed.

They operate like ordinary private sector enterprises.

Examples in this category include:

• Agriculture Development, Marketing Corporation (ADMARC)
• Malawi Housing Corporation (MHC)
• Electricity Supply Corporation of Malawi (ESCOM)
• BWB (Blantyre Water Board)
• LWB (Lilongwe Water Board)
(ii) Quasi-Commercial Category (Part-Commercial/Semi
sub vented)

These are developmental by nature but are expected to be

financially self supporting after an initial start-up phase.
Examples include
• STA (Smallholder Tea Authority)
• SCA (Smallholder Coffee Authority)
• SSA (Smallholder Sugar Authority)
• Malawi Tobacco Research Authority (MTRA)
(iii) Subvented Category
This category is assumed to be permanently dependent on
state or other support to fund the greater part of their
activities.
Examples include:
• - University of Malawi (UNIMA)
• - Malawi Broadcasting Corporation (MBC)
• - MANEB (Malawi National Examinations Board)
• - Malawi College of Accountancy (MCA)
• - Malawi Bureau of Standards (MBS)
• - Malawi Institute of Education (MIE)
• - Malawi Institute of Management (MIM)
Control of the Parastatal Sector
The Government controls the parastatal sector through the
following intermediary institutions:

a The Department of Statutory Corporations in Office of the

President and Cabinet (OPC)

b The Treasury in the Ministry of Finance

c The parent or technical ministries e.g. Ministry of

Agriculture for ADMARC
The Department of Statutory Corporations in the OPC was
created in 1982. It was charged with the following
responsibilities:
i. to monitor parastatal performance and planning
ii. to monitor financial and personnel management of parastatals
e.g. supervising staff establishments and terms of services.

The Treasury role is

• a to budget the financing of investments

• b to budget grants and subsidies

The relationship with parastatals is not generally formally

instructed
Parastatal Boards
In Malawi parastatals boards are appointed by the State
President .

The board normally constitutes:

• a. Representatives from Parent Ministries.

• b. The Department of Statutory Corporations
• c. The Treasury – ex-officio
• d. And a number of private individuals who have skills and
experience.

Parastatal Chief Executives are also appointed by

Government.
Board’s Responsibilities

• a To work on the formulation of policy recommended.

• b To execute good approved policies

Problem Areas
• Role definition
• Performance monitoring
• Policy direction
• Terms of employment
• Political interference/influence
• There is no clear demarcation between commercial and
development objectives and no standard procedures have
been developed for addressing the situation.
• Those with only development roles to play lack definition,
and there is no accepted procedure for assessing the need
for, or value of, individual annual subventions.
5. Co-operative Societies
The word Co-operative suffers from having two meanings.
In one sense it is as vague as working together or ready to
help.

In the other sense it is a precise definition of particular kind

of business organization.

A Co-operative Society is an association of persons,

producers or consumers, who come together voluntarily to
achieve some common purpose e.g. joint trading.
Main features of Co-operative Societies
• a Open membership

• b Democratic control (one man, one vote)

• c Distribution of surplus

• d Political and religious neutrality

• e Cash trading

• f Promotion of education
Forms of Co-operative Societies
There are many forms but most of them fall under the following
major forms.

• a Consumers’ Co-operatives

• b Producers’ Co-operatives

• c The co-operative Credit (Credit Union)

• d Agricultural Co-operatives

• e Marketing Co-operatives

• f Co-operatives of Housing Societies

Consumers’ Co-operatives
The first successful co-operative society was found in 1844 by
the Rockdale textile workers.

The aim was to provide factory workers with cheaper food than
they could buy in other shops.

So the society was buying foodstuffs at wholesale prices and

selling them to members across the counter at market prices.

The profits or surplus made are distributed among the members

in proportion to the value of their purchases.

Mainly the purpose of consumers’ co-operative is not to make

profit but to distribute reliable goods at a reasonable price.
Producers’ Co-operative
A producers’ co-operative is a form of business unit owned by
the workers. The members elect some of their members to
manage it, the profits made are then distributed among the
members as dividends on sales, with bonuses to employee.

Producers’ co-operatives carry out an industrial or

agricultural production process with the members sharing the
work, profit and management.

That is, the member is a co-worker, co-partner and co-

director. The society takes all the functions of the
entrepreneur i.e. planning and organization of production,
buying raw materials, marketing finished products and fixing
the remuneration to the worker.
6 Credit Unions
These are organizations whose members have other
membership in common such as employees of a factory.

A credit union lends money to its members and borrows

money from both its members and outside sources e.g.
Malawi Union of Savings and Credit Cooperatives (MUSCCO).
Advantages of Co-operatives Societies
(i) Stability of trade which results from the loyalty of
members who support the movement.

(ii) It is democratically managed. The members elect the

committee of management. One man one vote.

(iii) There are no conflicts of interests since the customers

and profit receivers are the same and one person.
Disadvantages
(i) Lack of business experience of many members of the
committee. So the chief difficulty is to secure efficient
management, for popular election is not the best method of
securing the most effective managers.

(ii) They compete unfairly against other retail traders,

because their profits are exempted from corporation taxes
which fall on the profits of other business undertakings.

(iii) Some co-operative societies use some funds for political

purposes.

(iv) Method of promotion is set conducive to efficiency

7 Building Societies
These institutions are registered under the Building Societies Act.

a Their main function is to assist people to purchase houses by

instalments.

This they do by allowing suitable people to borrow the purchase price

against a mortgage on the property.
Houses are expensive to buy but if payment is spread over a period of
twenty years house purchase is like the payment of rent. Building
Societies accumulate funds in order to be able to lend money to their
members for the purchase of houses, repayment of the loan being
spread over a long period, during which the society holds a mortgage
on the property.

b They accept money from the public, pay interest on it, permit easy
withdrawal, and generally provide a popular and convenient investment
service.
8 Multinational Companies
These are very large companies which operate in
several parts of the world.

Although production and marketing take place in

different countries direction remains at the centre.

Each part may be merely a branch of the company

but frequently there is a subsidiary company and
local board of directors in each country.

Examples of such companies are Toyota with

Toyota Malawi as its subsidiary.
Multinational companies have developed due to:
• A .a need to avoid tariffs which reduce markets for
export.

• B. a need to achieve greater efficiency by

producing locally as compared with exporting.

• C. need to reduce costs and competition by

producing where raw materials and market are
found.

• D. a need to avoid losing business to licenced

producers who might turn into competitors.
Advantages

• a Multinational companies are able to transfer

capital resources and managerial skills from
developed countries to developing countries.

• b Multinational Companies also help to transfer

technology from country to country.
c They help to broaden economic opportunities
within a host country by locating plants in
depressed regions for example Lonrho’s sugar
producing plants in Nchalo and Dwangwa.

d They create employment for the host country’s

people.

e Multinational companies enable the production of

goods which are directly suitable for local markets.
Disadvantages
• a There are often conflicts between multinational companies
goals and the host country’s goals when the multinational
company is seeking to maximize its profits while the host
country is seeking to maximize the welfare of its citizens.

• b Multinational companies can avoid paying proper taxes by

transferring funds through price mechanisms.

• c Multinational companies are often able to pay wages

which may be much higher than those paid by local
companies and government thereby creating dissatisfaction
in the host country over wages.

• d Multinational companies are also responsible for

transferring foreign culture some of which are not good and
acceptable in certain host countries.
Disadvantages
• a There are often conflicts between multinational companies
goals and the host country’s goals when the multinational
company is seeking to maximize its profits while the host
country is seeking to maximize the welfare of its citizens.

• b Multinational companies can avoid paying proper taxes by

transferring funds through price mechanisms.

• c Multinational companies are often able to pay wages

which may be much higher than those paid by local
companies and government thereby creating dissatisfaction
in the host country over wages.

• d Multinational companies are also responsible for

transferring foreign culture some of which are not good and
acceptable in certain host countries.