BUSINESS LAW

 Business law - is defined as rules that govern business relationships.

 It is the body of law which governs business activity.
 It is concerned with the day to day operations of a business e.g. regulations, licenses,
contracts, accounting, taxes, etc.
 It governs the interactions between a business and its third party; - customers, vendors,
suppliers, society, etc.

Business Law applies to;-

 The rights of business persons (owners),
 Conduct of persons and businesses engaged in commerce, merchandising, trade, and sales.
 The sale and distribution of goods
 Employment contracts
 Hiring and firing of employees
 Maintaining a fairly managed and safe workplace.
 how a business entity must treat its employees
 Transactions - terms and conditions, reselling, and licensing
 Starting and running of a business - govern how to start, buy, manage and close or sell any
type of business.
 Day to day operations of a business - regulations, licenses, contracts, accounting, taxes, etc.
 Product defects and delivery delays
 Capital raising (through equity or debt)

Functions of Business Law:-

1. Defining general rules of commerce;
2. Protecting business ideas and business assets;
3. Providing mechanisms that allow business people to determine how they will participate in
business ventures and how much risk they will bear;
4. Ensuring that losses are borne by those responsible for causing them; and
5. Facilitating planning by ensuring that commitments are honoured.

Company Law
 Company Law - refers to the legislation pertaining to the formation and regulation of
companies.
 Company Law - is also known as the law of business associations.
 It is the field of law concerning companies as business associations
 It is contained Companies Act Cap 486 Laws of Kenya
 Companies Act - is the statute (Law) that regulates, governs the companies.
 A company is an artificial legal person created by complying with the provisions of the
Companies Act.

Fundamental Concepts of Company Law

 There are two fundamental concepts
1. Concept of Legal Personality
 A company must be treated as a person in its own right.
 A company is treated in law as a separate entity from the members.
2. Concept of Limited Liability
 The liabilities of a company may be limited either by shares or by guarantee.
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Foundation of Company Law
 The company law is intended for; -
1. The protection of the company’s creditors;
2. The protection of the investors in this instance being the members.

 Company law covers matters relating to: -

i. Formation of companies
ii. Registration or incorporation
iii. Governance
iv. Ownership
v. Funding
vi. Death of a corporation - dissolution of a firm
vii. Insolvency of a company

 It also determines various ways in which the company interacts with;

i. Shareholders
ii. Directors
iii. Employees
iv. Creditors, and
v. Other stakeholders.

Corporate Law
 Corporate Law - is the body of law governing the rights, relations, and conduct of persons,
companies, organizations and businesses.
 Corporate Law - treat a corporation as a separate entity from its owners.
 It is a law relating to corporations.
 Corporations – are the non-human legal persons.
 A corporation is therefore a legal person brought into existence by a process of law and not
by natural birth.
 It thus encompasses;-
viii. The formation
ix. Funding
x. Governance, and
xi. Death of a corporation.
 Corporate law regulates how corporations interact with;-
 Investors
 Shareholders
 Directors
 Employees
 Creditors
 Consumers
 Community
 Environment
 Corporate Law governs; -
i. Formation of companies
ii. Shareholder rights,
iii. Management duties
iv. Corporate operations
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 v. Mergers, and
vi. Acquisitions.

Commercial Law
 Commercial Law - is the branch of law that regulates and governs commercial transactions
and business deals.
 These laws govern the sale and purchase of goods.
 Commercial Law cover areas such as; -
 Regulates corporate contracts
 Hiring practices
 Sale and distribution of goods
 Manufacture of consumer goods
 Insurance
 Imports and exports
 Financing of certain transactions
 Banking, etc.

Finance Law
 Finance Law - covers activities such as payment instruments and credit.
 Finance law comprises regulations for the financial industry and its lenders, banks, and
institutes.
 These laws govern financial transactions and vehicles.

LIABILITIES OF BUSINESS
 A liability - is an obligation of a business
 A liability - is defined as the future sacrifices of economic benefits that the entity is obliged
to make to other entities as a result of past transactions or other past events
 Liabilities in financial accounting can be based on equitable obligations or constructive
obligations.
i. An equitable obligation - is a duty based on ethical or moral considerations.
ii. A constructive obligation - is an obligation that is implied by a set of circumstances in a
particular situation, as opposed to a contractually based obligation.

Business Obligations
 The business cannot afford to ignore its social responsibilities.
 The business has to shoulder the social responsibilities in order to: -
i. Better the consumers’ service
ii. Self-improvement.

Obligations towards the Stakeholders

 Every business has an obligation to the following stakeholders
1. Itself
2. Shareholders
3. Employees
4. Consumers and
5. Society

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1. Business Obligations to Itself
 Every business has to ensure that it stays in the business.
 A business must think about growth, stability and expansion.
 Earning realistic profit through lawful means increase in wealth of the organization which
leads to high production.
2. Business Obligation to Shareholders
 A company organization owes its very existence to its shareholders
 The shareholders expect reasonable returns from the business/company in form of fair
amount of dividends and that the company shall fulfill its obligation to the capital market as
well.

3. Business Obligations to Employees

 Business obligations to employees means
 Fair wages,
 Employment security,
 Social security
 Opportunity to grow with the organization
 These are expectations of every worker of any organization.
 It is the man who works and want that his potentialities should be recognized, fully utilized
and suitably rewarded.
 Management is the development of people and should create healthy work environment.
 Management should ensure that: -
 Employees are allowed to have collective bargaining
 There is workers participation in the running of the business.
4. Business Obligations to Consumers
 This is the primary objective of any business organization is to serve the consumers (the
consuming public).
 Every business has the following obligations to the consumers: -
i. Offering the goods and services at the lowest possible prices,
ii. Timely and quality supply,
iii. Best possible service,
iv. Good relations,
v. Courtesy honest advertisement, etc.
5. Business Obligations to Society
 Business is part of the society.
 A business should build its self-image to be a responsible business enterprise in order to
enjoy a good reputation.
 A business has the following obligations to the society
i. It should not fouling the air,
ii. It should not spoiling natural resources
iii. It should not destroy the natural beauty of the surrounding landscape,
iv. It should not lead to creation of slums and congestion.

LEGAL STATUS OF A BUSINESS

 Legal status of a business – is the standing of an entity or issue in the eyes of law.
 The legal status of a business depends on the type and scale of business that is going to set up

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COMPANY
 A company - is a voluntary association formed and organized to carry on a business.
 A company is any entity that engages in business.
 It may be owned by one person or a group of people.

Legislation on Company
 The Companies Act specifies the procedure for registration of a company

Registration of a Company
 The procedure for incorporation of a company entails;
1. Reservation of name-.
2. Application to register a company
3. The person incorporating the company must provide the Registrar of Companies with the
following
 Memorandum of association
 Articles of association
 Notice of appointment of directors and their particulars
 Copies of national identity cards,
 KRA pin certificates and
 3 passport photographs of each of the subscribers and directors of the company
4. The company is issued with the certificate of incorporation.

Memorandum of Association
 It is often referred to as the charter of a company or the constitution of the company
 This sets out
 The company name,
 The registered office address
 The company objectives.

Articles of Association
 This is the document which sets out the rules for the running of the company's internal
affairs.
 Content of the articles of association
 Liability of members;
 Directors’ powers and responsibilities;
 Directors’ meetings, voting, delegation to others and conflicts of interest;
 Retaining records of directors’ decisions;
 Appointment and removal of directors;
 Shares,
i. Issuing Shares;
ii. Different Share Classes;
iii. Share Certificates;
iv. Share Transfers;
 Dividends and other distributions to members;
 Members’ decision making and attendance at general meetings;
 Means of communication;

Types of Companies
 Types of companies include
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 1. Sole proprietorship
2. Partnership,
3. Limited Liability Companies
4. Unlimited Liability Companies

Sole Proprietorship
 It is also known as Individual Proprietorship
 An individual is the sole owner of the company.
 He supplies land; labour, capital, etc. individually.

Advantages of Sole Proprietorship

1. Easy to Start: - It does not require much consultation or legal sanction.
2. Independence: - the can make any type of transaction without any interference from any
other person.
3. Personal Incentive: - the owner has personal incentive for hard work and to get more
profits.
4. Easy to Supervise: - it has a small size or scale of business which one can easily supervise
without much difficulty.
5. Quick Decisions: - he takes quick decisions.
6. Need of Small Capital: a small amount of money is needed to start the business.
7. Direct Relations with Customers: - He can produce the goods according to the tastes of his
customers.
8. Business Secrets: - the secrets of business do not leak out.
9. No Danger of Labour Disputes: - The individual selects his/her employees personally and
comes to know their grievances or problems
10. Easy to Close: - It is easy to start such business and very simple to close it.

Disadvantages of Sole Proprietorship

1. Lack of Division of Labour: - production cannot be done efficiently and rapidly.
2. Difficulty of Large Scale Production: - the entrepreneur lacks capital and other factors of
production.
3. Unlimited Liability: - the entrepreneur is fully responsible for his profit or loss. His own
capital may be lost in case of loss.
4. High Cost of Production: - the entrepreneur cannot reap the benefits of the economies of
large scale production.
5. Difficulty of Credit: -There is much difficulty in getting finance.
6. Lack of Technical Development: - Methods of production remain backward because of
insufficient capital and other factors of production.
7. Difficultly to Face Economic Crisis: - he/she has limited factors of production at his
disposal and therefore cannot face heavy losses or economic crisis for a long period.

PARTNERSHIP:
 A partnership - is a business owned by several individuals.
 The relationship between the partners and the duties of partners are clarified in the
partnership agreement

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Types of Partners:
1. Working Partners/Active Partners: - These are the share-holders or partners, who
participate in the daily functioning of the business.
2. Sleeping Partner/Dormant/Silent: - these are partners who invests their capital in the
business but does not participate in the working of business.
3. Partners with Capital/Quasi: - These are partners who invest capital in the business but
they may or may not participate in it.
4. Partners without Capital: - these are partners who are created in the business due to the
particular skill or business ability of such persons. They do not invest capital.

Characteristics of Partnerships
1. Unlimited Liability: -
 Every partner has an unlimited liability.
 He is responsible for every type of liability apart from his own share.
 If a partner is unable to clear his liability, his burden shifts to other partners.
2. Partnership Deed: -
 Partnership is formed on the basis of a ‘Partnership Deed’
 An agreement regarding the rights and duties, salary, share in the capital, etc. of each partner
is mentioned.
3. Limit of Partnership: -
 The government can determine the maximum number of partners in a business in a country.
 The number of partners cannot exceed this prescribed limit.
4. Non-Transferability of the Shares: -
 Shares cannot be transferred to anybody else.
 No partner can sell his shares to other persons unless the other partners agree.

Advantages of Partnership
1. Careful Decisions: -decision is taken by all the partners after a great deal of discussion. It
reduces the chances for wrong decisions.
2. Division of Work: - This management of business is divided among different partners and
therefore it can lead to better supervision of the business.
3. More Capital: - More capital can be invested than in case of individual proprietorship.
4. Large Scale Production: - The sources of business are increased due to many partners.
5. Easy Credit: - It becomes easy to get credit in the partnership because the responsibility of
repayment of loans rests on all the partners.

Disadvantages of Partnership
1. Lack of Mutual Confidence: - it lacks mutual confidence among the partners.
2. Personal Disputes: -it leads to several personal disputes which in turn, disturb the proper
functioning of the business.
3. Difficult to Separate: -No partner can sell his shares to others according to his wishes. One
cannot separate from the business without the permission of other partner/s.
4. Delay in Decision: - Sometimes partners do not agree with each other on a particular issue
and the decision may not be reached for lack of consent of all.
5. Difficult to Close: - difficulty arises in the distribution of assets when partners want to close
down the business.
6. Uncertainty: -The existence of the partnership is quite uncertain. The business is generally
closed down due to the misunderstandings or the death of a partner.

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Limited Liability Companies
 A limited company - is a type of company which allows an entrepreneur to keep their own
assets and finances separate from the business itself.
 This is a corporate structure whereby the members of the company cannot be held personally
liable for the company’s debts or liabilities.
 Companies are limited in the sense that they are held accountable to the debts of the
Company to a certain extent.
 This means that people who have invested in the business (the shareholders) are only
responsible for any company debts up-to the amount that they have invested in the shares and
no more.
 It is therefore a good way for a business to get investment without risk to a personal wealth.
 A company may be limited by
i. Shares
ii. Guarantee
 Limited by shares company - if the liability of its members is limited to the amount, if any,
unpaid on the shares respectively held by them.
 Limited by Guarantee Company - if the liability of its members is limited to such amount
as the members may respectively thereby undertake to contribute to the assets of the
company in the event of its being wound up.

Forms of Limited Liability Companies

They are of two forms
i. Public Limited liability companies
ii. Private Limited liability companies
 They are both separate entities from their owners

1. Public Limited Liability Companies (PLC)

 Public corporations are those whose securities are traded publicly on the stock exchange, for
example, Safaricom.
 These types of companies must be tightly regulated and must publicly disclose their true
financial position so that investors can determine the worth of their stock.
 They have unlimited number of shareholders,
 Public Company must have at least seven persons to form a public company.
 There is no restriction as to transfer of shares.

2. Private Limited Liability Companies ((Ltd)

 This is a privately held business which simply means their stock is not publicly traded.
 This type of business limits the number of shareholders to 50 and restricts shareholders from
publicly trading shares.
 A private company – is a company which by its articles:-
i. Restricts the right to transfer its shares.
ii. Limits the number of its members to fifty not including persons who are in employment of
the company.
iii. Prohibits any invitation to the public to subscribe for any shares or debentures of the
company.

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Types of Private Limited Liability Companies ((Ltd)
1. Private company limited by shares (Ltd) – The members’ liability is limited to the amount
unpaid on shares they hold
2. Private company limited by guarantee – The members’ liability is limited to the amount they
have agreed to contribute to the company’s assets if it is wound up
3. Private unlimited company – There is no limit to the members’ liability

Distinction between a Public Company and a Private Company

Public Company Private Company

1. Minimum number
1. Minimum number of members 1. is Minimum number of members is
of members seven. two.
2. Maximum There is no limit on the maximum
2. A private company cannot have
number of number of members more than fifty members.
members
3. Commencement It cannot commence its business A private company can
of business immediately unless it has been commence business as soon as it
granted the certificate of is incorporated
commencement of business.
4. Invitation to A public company by issuing a A private company cannot extend
public prospectus may invite public to such invitation to the public.
subscribe to its shares
5. Transferability of There is no restriction on the A private company by its articles
shares transfer of shares. must restrict the right of members
of transferring the shares.
6. Number of A public company must have at A private company may
directors least three directors have two directors.
7. Statutory meeting A public company must hold a there are no such obligations in a
statutory meeting and file with private company
the registrar a statutory report
8. Name A public company has to use the A private company must include
words “ltd” at the end of its name. the words “private ltd” at the end
of its name.

Unlimited Companies
 There is no limitation on the liability of members to pay the debts of the company
 The members are jointly and personally liable for the debts in case of winding up.
 However such companies are rarely incorporated nowadays but they may be necessary
i. Where the risk of insolvency is small
ii. Secrecy in relation to financial affairs is important; or

CO-OPERATIVE SOCIETIES:
 A co-operative society – is a business started on cooperative basis by a few persons, who are
known to each other.

Characteristics of Co-Operative Society:

1. Voluntary: -It is formed on voluntary basis. A person becomes a member of the co-operative
society out of his own desire or will.

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2. Equal Rights: -Every member of the co-operative society has equal rights and he/she is
given equal opportunity in the management of the society.
3. One for All and All for One: - Every member co-operates with others in the functioning of
the enterprise.
4. Self- Sufficiency:-A co-operative enterprise is started with the initial aim of self-sufficiency.
5. Mutual Help:-The main motto of the co-operative society is mutual help and to impart the
training of honesty and co-operation among the members.
6. Honorary:-The directors of the co-operative society are elected from among its own
members who work
7. Democratic Principle: - it functions according to democratic principles. Its office-bearers
are properly elected by its members.
8. Joint Benefits: - Members are acquainted with each other and they work for a common end
or joint benefit.
9. Economy: - Cooperative enterprise is started on economical basis. Investment is done up to a
certain limit. Expenditure is incurred according to own financial resources.

Advantages of a co-operative society

1. Less Capital: - Persons or workers with small capital can start business under the co-
operative enterprise.
2. Reduction in Inequalities: - A co-operative enterprise helps in reducing the inequality of
income and wealth in the country. It avoids exploitation as the profit is distributed among the
share-holders.
3. Incentive to Hard Work: - When workers start business on co-operative basis and get their
due profits, it sets an incentive for hard work.
4. Training in Management: - It imparts training in management because the workers
themselves manage the business.
5. End of the class Conflict: -it abolishes the difference between the employers and the
employees. There is no chance of conflict, because the workers themselves are the members
of the cooperative.
6. Habit of Thrift: -It encourages thrift among the members. They do not do superfluous
expenditure and save more to invest in the business.
7. Less Scope for Manipulation: - The accounts of a co-operative enterprise are checked by
the auditors which reduces the chances of manipulation of the accounts.
8. Democratic: - it is managed on democratic principles. Office-bearers are properly elected by
its members.
9. Less Expenditure: - A co-operative enterprise involves less expenditure as its management
is done by the directors on honorary basis.
10. Savings: - It encourages savings among the members of the society, because they can make
profit by investing their savings in the business.
11. MoraI and Social Benefit: - It encourages the spirit of co-operation among the members of
the society.

Disadvantages of a co-operative society

1. Unnecessary Criticism: - Every member wants to have complete knowledge about
management, because he has equal rights. After knowing it, he starts criticising the directors
unnecessarily which creates difficulty in the management.
2. Lack of Efficient Managers: - It is not necessary that elected directors may be efficient
having complete knowledge of management. Generally, the efficient managers are rarely
found in a co-operative society.

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3. Lack of Interest: - If the co-operative society fails to fulfil the requirements of its members
they lose faith in the society. They develop an indifferent attitude towards the enterprise.
4. Inability to Face Economic Crisis: - A co-operative society has limited resources and thus
is unable to face economic crisis.
5. Less Capital: - A co-operative society is generally started by poor persons who lack capital
6. Mutual Distrust: - The election of the co-operative society brings in the party system which
results in the mutual distrust and disputes.
7. Corruption: -The directors of the society create corruption and favouritism in the working
and the management of the enterprise by helping their relatives and friends.

Parastatals
 A parastatal – is a company or agency owned or controlled wholly or partly by the
government
 Parastatals are government owned companies, boards or organizations which help the
government to run essentials functions of the government.
 They are usually managed by board of directors who are appointed by the president of the
republic of Kenya.
 Government parastatals are usually managed and funded through the respective ministries of
the government.
 Examples of governmental Parastatals include Kenya meat commission, new Kenya co-
operative creameries and Kenya Pipeline Company.

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