TOPIC: SETTING UP A NEW ENTERPRISE

SUBTOPIC: FORMS OF BUSINESS ENTERPRISE

OBJECTIVES
By the end of this subtopic learners should be able to:
 Outline forms of business enterprises.
 Describe features of different forms of business enterprises.
 Analyse advantages and disadvantages of each form of business
enterprise.
 Compare and contrast forms of business enterprises.

Forms of business enterprises

 Business enterprises are divided into two main forms, which are;
private and public enterprises.
Private enterprises

 These are enterprises that are owned and controlled by one or more
individuals.
 The government has less control on the activities of private
enterprises.
 The main purpose of private enterprises is to make profit.
 Private enterprises include; sole proprietor, partnership, limited
companies, joint ventures and franchise.

Sole proprietor
 It is the most common type of business enterprise.
 It is owned and controlled by one individual.
 The owner provides capital to start the business.
 Business and the owner have no separate existence (unlimited
liability).
 All debts are at owner's risk.
 They do not pay corporate taxes on profits obtained.
 There is no or less legal requirements in formation and running of the
business.

Advantages
 The owner has complete control and makes all business decisions.
 Sole traders can open for long hours.
 The owner have personal contact with his or her customers.
 They do not publish their accounts.
 The owner enjoys all the profits.
 There are minimum legal requirements in starting up.
 There are lower start-up costs.
 Easy process when the owner decides to change into a partnership,
stop operations or pass to heirs.
Disadvantages
 Too much work and pressure in running the business.
 All responsibilities and business decisions fall on the shoulders of the
owner.
 There is poor decision making as they is no consultation.
 The owner of the business held personally liable for the debts and
obligations of the business.
 Bears all risks and incurs all the losses alone.
 Lacks continuity (death of the owner leads to closure of the business).
 Difficult in coming up with a substantial amount of money to get the
business going.

Partnership

 It is formed by 2 to 20 for trading partnership and 2 to no maximum

for professional partnership.
 Owners do not have a separate legal entity with their business
enterprise.
 Professional partnerships are special partnership formed by
professionals who are not allowed to form a company, for example
doctors or lawyers.
 Partnership operations are, governed by an agreement (oral or
written) known as a partnership deed or partnership act.
 Partners have unlimited liability which means that they may lose
personal assets in settlement of business debts.
 Trading license is required when operating as a partnership.

Partnership deed

 It is also known as partnership agreement.

 It is prepared by partners.
 It contains the following:
1. Name of the partnership.
 2. Objectives of forming a partnership.
3. The rights and responsibilities of all partners in partnership.
4. Laws that governs the partnership.
5. Profit sharing ratio.
 Where a Partnership Deed has not been drafted, the Partnership Act is
applicable.

Partnership act

 It is enacted by the government.

 It has set of guidelines (provisions) which states that:
1. Contributions of partners must be equal.
2. Majority decision should settle disputes and any difference of
opinion.
3. Profits and losses should be shared equally among partners
regardless of capital contributed.

Advantages of partnership
 Partners help each other in raising start-up capital.
 It is flexible – A partnership is easy to form and manage.
 Responsibility of running the business is shared among the partners.
 All partners are involved in decision making.
 Absence of one partner due to social problem or holiday does not affect
business operation.
 Loss is shared among partners.

Disadvantages of Partnership
 Slow decision making due to consultation.
 General partners have unlimited liability for the debts of the firm.
 Death, disagreements and mental illness of one partner can lead to
dissolution of partnership.
 Sharing of profits with lazy partners may discourage some who are
honest, resourceful and hardworking.
 Less freedom with regards to the management of the business.
 Capital raised may not be adequate to expand business activities.
Limited enterprises

 A legal enterprise (company) formed by two or more individuals.

 It is a separate legal entity meaning that the enterprise exist own its
own and is distinct from its owners.
 The main motive for forming limited companies is to make profit.
 A limited enterprise continues to exist even if one of the owners dies or
move out of business.
 The company can make legal agreements and contracts on its own.
 Capital is in form of shares.
 Ownership is through buying shares.
Share
 A unit of account for various investments.
 It is a portion of capital, which resembles a stake (ownership) in a
limited business.
 Each unit represents a prescribed value of money.
 Each share represents a voting right.

 Owners are called Shareholders.

 Shareholders enjoy limited liability, that is, they only lose the amount
of capital invested in the enterprise when the company becomes
insolvent.
 Limited companies pay corporate tax to the government.
 Limited company exist in two forms - Private and Public limited
company.
Private limited enterprise

 It is formed by at least 2 to 50 shareholders under Zimbabwe

Companies Act.
 The Company Act governs the formation and commencement of the
company.
 Company name ends with "Pvt" and "Ltd”, for example, Colmat Pvt
Ltd.
 Legal documents such as Articles of Association, Memorandum of
Association and Statutory Declaration are submitted to the registrar of
companies.

Control and Management

 The shareholders appoint a Board of Directors at Annual General

Meeting (AGM) to run the enterprise.
 Shareholders use voting rights to pass resolutions.
 They do not publish their annual accounts to the public but file with the
registrar of companies for Value Added Tax purposes.
 Strict on transfer of shares, they do not issue shares to the public on
stock exchange but sell them to friends and families only (Private
Placement).

Raising Capital

 Private placement (selling shares to family and friends only).

 Plough back profits.
 Obtaining loans from bank and finance houses.
 Leasing assets.
 Factoring debts (selling trade receivables/ debtors to factor agent).
 Debt finance.

Distribution of Profits

 It is used to pay dividends to shareholders.

 Part of the profit is ploughed back into the business through acquiring
assets.
 It is used to pay taxes, service loans and overdrafts.
 It is used to sponsor corporate social responsibility.
Advantages of private limited enterprises

 Shareholders enjoy limited liability.

 Separate legal entity helps the company to make contracts on its own.
 A private limited company can sue or be sued in its own name.
 It can raise capital by selling shares.
 There is continuity of the business even if one member (shareholder)
dies.
 Shareholders retain control of company as they do not sell shares to
the general public (avoiding dilution of ownership).
 They do not publish their financial accounts to the public.

Disadvantages of private limited enterprise

 Too many legal formalities are needed to start up the business.
 There is limit in raising capital through issuing of shares since the
enterprise is not listed on the stock exchange.
 Audits are carried annually, which is expensive.

Public limited enterprise

 An enterprise formed by at least two or more shareholders, that is,

there is no limit on the number of shareholders.
 It ends with public after name or an abbreviation 'plc.’
 It is ideal for very large business.
 A public limited enterprise is listed on stock exchange (a public market
where share stocks are sold and bought).
 Membership is open to the public and invitation is through a
prospectus.
 Prospectus is the document used by shareholders to advertise shares
to potential investors.
 It is governed by Companies Act.
 Examples include ABS Holding plc, Barclays bank plc and Ok
Zimbabwe.

Raising Capital
 Through selling shares and issuing debentures to the public.
 Through borrowing from banks and finance houses.
 Ploughing back profits.
 Debt factoring.
 Leasing assets.

Control and Management.

 They differ with private limited enterprises on that:
 Their annual accounts must be audited and debated in
parliament.
 Their accounts must be published to the public and submitted to
the registrar of companies.
 They elect a board of directors to run the company.
 Disposal of profits and Liability of shareholders is similar to
shareholders of private limited companies.

Advantages of public limited enterprise

 Shares are, freely transferred on stock exchange.
 There is no limit on the number of shareholders since membership is
open to the public.
 They acquire more capital by selling shares to the public.
 They enjoy economies of scale.
 Shareholders enjoy limited liability.

Disadvantages of public limited enterprise

 It is mandatory that public limited enterprises publish their accounts to
the public, hence there is no privacy.
 Other competitors can use the published information to enhance their
competitiveness.
 Lot of legal requirements in starting up, which is costly and time
consuming.
 Stock exchange registration exposes the company to takeovers.
 It promotes dilution of ownership since shares are sold to the public.
Joint venture

 It is an agreement or contract between two or more enterprises to

work together in a particular project.
 They agree to work together and share costs, resources and reduce
risks to achieve a specific goal.
 Partners in a joint venture can decide whether the enterprise will
operate as an incorporated or unincorporated business.
 Members share capital, expenses, experience and profits on the project
they engage into.
 Partners can have other businesses which is separate from this joint
venture.
 Joint venture is different from merger in the sense that there is no
dilution of ownership between the engaged enterprises.
 When they accomplish their goal, partners can decide to sell the
venture.

Advantages of joint ventures

 Partners share experience and gain skills.

 It enables businesses to save money since they share resources.
 It promotes good relations between companies that work together.
 It is flexible - businesses can engage in other different projects.
 The joint venture can easily be terminated after completion of the
project.
 Risk is shared among different enterprises.

Disadvantages of joint ventures

 Due to complexity in structure they suffer from:
 Management problems.
 Decision making problems, partners may fail to agree when making
decisions.
 They may be difference in corporate culture, that is, partners may
differ in the way they integrate and run their business leading to
conflict.
 Other partners may not be fully engaged in the project.
 It is a business enterprise that uses brand names, promotional logos
and trading methods of an existing successful business.
 It is an agreement in which one enterprise (franchisor) allows another
(franchisee) to use its trade name for a fee.
 Franchise is the business enterprise.
 Franchisor the owner of trade name.
 Franchisee is the enterpriser that uses the trade name.
 A license is issued to the franchisee by the franchisor on condition of
meeting all requirements needed.
 Franchisee remains the owner of the enterprise.
 Examples of franchised enterprises include KFC, Spar super markets,
Innscor and McDonalds, Pick and pay supermarket, etc.

Roles of the franchisor:

 Gives the franchisee licence to use his/her brand name.
 Provide necessary information to the franchisee on how to conduct the
business.
 Can provide ingredients to use so that the franchise can produce the
same products in terms of quality.
 Provides training to the franchisee to maintain standards.
 Controls how products are marketed and sold.

Advantages of franchising

To the franchisee
 Business failure is less likely to occur since the franchisor uses well-
known brand name.
 The franchisee does not incur advertising costs because the franchisor
carries a collective advertising for its members.
 Relationship with suppliers may have been established.
 Training of staff, setting up a shop and other necessary ongoing advice
can be undertaken by the franchisor.

To the franchisor
 Quick method of expanding the business without using more capital.
 Source of income since the franchisee will pay for the licence.
 Franchisor is relieved in stress which is associated by managing an
enterprise.

Disadvantages of franchising

To the franchisee
 Licensing restricts the franchisee to sale the enterprise.
 Profits can be limited due to annual fees paid to the franchisor.
 Decision-making is centralised.
 They can receive financial assistance from franchisor which attracts
high interest rates.

To the franchisor

 Profits made by franchisee are not remitted to the franchisor.

 If one of the franchisee tarnishes the image of the business then the
image of the franchisor may be tarnished.
 Lot of capital is required to undertake franchise operations.

Public enterprises
 It consist of companies owned and controlled by the government for
the benefit of serving people (community).
 Their main purpose is to provide affordable goods and services.
 They provide goods and services that are not provided by the private
sector.

Public corporations
 Public corporations are owned and controlled by the government
through appointed ministers.
 Established by an Act of Parliament.
 They are managed by a board of directors appointed by government.
 Government provides capital for the business functions through selling
bonds, stock and other sourcing methods.
 They provide essential goods and services at affordable prices.
 They are non-profit making business.
 They use their surplus (profits) to re-invest in the communities they
serve.
 They employ external audit and the results are debated in parliament
and published annually in the press.
 Examples of public corporations include National Railways of
Zimbabwe, Agricultural Marketing Association and Grain Marketing
Board.

Local authorities
 The central government controls rural, district, town and city council.
 Local governments are set up to administer an area (council).
 They provide amenities (services) to communities they serve for
example: water purification, refuse collection, sewage disposal, road
construction, etc.
 Day to day management is carried by councillors who are elected by
residents of communities in which they live.

Advantages of public corporations

 Responsible for the provision and distribution of basic goods and
services at a cheaper price.
 Reduces rate of unemployment.
 There is no duplication of services.
 It reduce burden to the taxpayers since they inject cash inflow to the
government.
 Everyone in the society has the right to buy shares since they are sold
on stock exchange.
 A change in government does not affect the corporation.

Disadvantages of public corporations

 They are associated with wide organisational structure, which leads to
inefficiency.
 Operates at below full capacity and sometimes are inefficient and
wasteful.
 Tend to provide poor quality goods and services because of monopoly.
 There is lot of political control and interference.
Difference between private and public sector business

Private sector Public sector

Ownership Individual and Controlled by state
Organisations
Motive To make profit To provide goods and
services at affordable
prices
Price Market forces of demand By the state
determination and supply
management Private board of directors Board of directors
elected by shareholders appointed by
government