Anarchy Parade

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LECTURE 4

Consideration for the choice of the form of Business Organization

You have to appreciate the fact that there are various forms of business organization that exist
in the environment. Again, business is a profit-seeking enterprise established for the purpose of
creating goods and services that meet the needs of mankind. Business plays a major role in the
lives of every individual as well as a nation.

Business activities are undertaken to improve the financial and the material welfare of the
participants. A major group analysis, group that plays an active role in business within a
capitalist economy is the entrepreneur, that is, a person who perceives investment
opportunities and takes advantages to exploit them by organizing for the business.

Selecting a form of business ownership is a landmark step in the creation of a venture. Most
entrepreneurs however are not trained in the finer points of business law. Consequently, it is
imperative that an entrepreneur carefully searches for the types of legal ownership and then
consults an attorney(lawyer), and an accountant or both to verify whether the choice addresses
their specific needs. One of the reasons small business fail is that they do not seek legal and
accounting help at the start of the business to understand how to get resources they need. To
stay in business, an entrepreneur may need help from someone with more expertise than
he/she has in certain areas, or may help to raise more money to expand. How you form your
business can make tremendous difference in your long-term success as an entrepreneur.

There are single best form of business ownership. Each form has its own unique set of
advantages and disadvantages. The key to choosing the optimum form of ownership is the
ability to understand the characteristics of each business entity and how they affect an
entrepreneur’s business and personal circumstances.

The following according to Scarborough et al (2009), are relevant issues the entrepreneur
should consider in the evaluation process:

1. Tax consideration – in a graduated tax rates, the government constant modification of


the tax code, and the year-to-year fluctuations in a company’s income require an
entrepreneur to calculate the firm’s tax liability under each ownership option every
year.

2. Liability exposure – certain forms of ownership offer business owners greater protection
from personal liability due to financial problems, faulty products, and a loss of other
difficulties. An entrepreneur must evaluate the potential for legal and financial liabilities
and decide the extent to which they are willing to assume personal responsibility for
their companies obligations.
3. Start-up future capital requirements – the form of ownership can affect an
entrepreneur’s ability to raise start-up capital. Also as a business grows, capital
requirements increase, and some forms of ownership make it easier to attract outside
financing.

4. Management ability – entrepreneurs must assess their own ability to successfully


manage their own companies. Otherwise, they may need to select a form of ownership
that allows them to involve people who possess those needed skills or experience in the
company.

5. Business goals – the projected size and profitability of a business influences the form of
ownership chosen. Business often evolves into a different form of ownership as they
grow, but moving from some formats can be complex and expensive. Legislation may
change and make current ownership options less attractive.

6. Management succession plans – entrepreneurs, in selecting a form of business


ownership, must look ahead to the day when they will pass their companies on to the
next generation or to a buyer. Some forms of business ownership better facilitate this
transition. In other cases, when the owners dies – so does the business.

7. Cost of formation – to create business ownership varies from one form to the other.
Entrepreneurs must weigh the benefits and the costs of the form they choose.

FORMS OF BUSINESS OWNERSHIP

Whether small or large, every business fits one of the three categories of legal ownership:

1. Sole Proprietorship – this is the simplest and most popular form of ownership. This type of
business is designed for a business owned and managed by one individual. Sole
proprietorship is the easiest kind of business for you to explore in your quest for an
interesting career. The sole proprietor is the only owner and ultimate decision maker for
the business.

ADVANTAGES OF PROPRIETORSHIP

1.Least Cost of business ownership to establish


2.Minimum or no special legal restriction
3.Ownership of all profit
4.No special taxes since business income and proprietor’s income are taxed as one.
5.Maximum incentive to succeed
6.Privacy
7.Flexibility of operation
8.Easy to discontinue

DISADVANTAGES OF PROPRIETORSHIP

1.Unlimited personal liability


2.Limited access to capital or expansion
3.Limited skills and abilities
4.Feelings of isolation/overwhelming of time commitment
5.Few fringe benefits
6.Limited growth
7.Lack of continuity for the business that has a limited span.

2. Partnership – another form of organizing a business is to form a partnership. A partnership


is a legal form of business with two or more owners. Partners legally share a business
assets, liabilities, and profits according to the terms of a partnership agreement. The law
does not require a written partnership agreement, also known as the articles of
partnership, but it is wise to work with an attorney to develop an agreement that
documents the status, rights and responsibilities of each partner. The partnership
agreement is a document that states all of the terms of operating the partnership for the
protection of each partner involved. Banks often want to review the partnership agreement
before lending the business money. A partnership agreement can include any legal terms
the partner’s desire. The standard partnership agreement will likely include the following
information:

A.) Name of the partnership


B.) Purpose of the business
C.) Location of the business
D.) Duration of the partnership
E.) Names of the partners and their legal addresses
F.) Contribution of each partner to the business, at the creation of the partnership and
later
G.) Agreement on how the profits or losses will be distributed
H.) Agreement on salaries or drawing rights against people for each partner
I.) Procedure for expansion through the addition of new partners.
J.) Distribution of the partnership asset to the partners
K.) Sale of the partnership interest
L.) Absence or disability of one of the partners
M.)Voting rights
N.) Decision making authority
O.) Financial authority
P.) Handling tax matters
Q.) Alteration or modification of the partnership agreement
R.) Termination of the partnership
S.) Distribution of assets upon dissolution of the partnership

The minimum number of partnership is two, while the maximum is twenty.

TYPES OF PARTNERSHIP

1. General partnership – this is a partnership in which all owners share in operating the
business and in assuming liability for the business debts.

2. Limited partnership – this is a partnership with one or more general partners and one or
more limited partners. Limited partnership is one in which certain partners are liable
only for the amount of their investment. This is a special kind of partnership governed
by Partnership Act of 1907. The purpose of a limited partnership is to allow one or more
individuals to provide capital on which a return is expected. In case of liquidation, the
limited partners only lose the capital.

3. Master Limited Partnership (MLP) – this is a newer form of partnership which looks
much like a corporation in that it acts like a corporation and is traded on the stock
exchanges like a corporation but is taxed like a partnership and thus avoids the
corporate income tax.

4. Limited Liability Partnership (LLP) – risk losing their personal assets to only their own
acts and omissions of people under their supervision. This newer type of partnership
was created to limit the disadvantage of unlimited liability.
Types of partners on the basis of the involvement in partnership:

An entrepreneur interested in being involved in partnership form of business should endeavor


to understand the types of partners that he/she can choose to be in this form of business.
Partners maybe classified on the basis of liability, degree of management participation in
management share in the profit and so on. The following types of partners are organized;

1. General partner – a general partner is an owner (partner) who has unlimited liability and
is active in managing the firm.

2. Limited partner – is an owner who invest money in the business but does not have any
management responsibility or liability for losses beyond the investment.

3. Silent partners – these are partners who are known by the public as owners of the
business, but they may take no active role in marketing the business.

4. Secret partners – these are partners who take active role in the management of the
company but they are unknown to the outsiders as partners.

5. Sleeping partners – these are also known as dormant partners, they are either known as
partners by the public nor do they participate in managing the company. They only
share from the profit/loss of the business to the tune of capital contributed.

6. Nominal partners – these kind of partners are publicly known that they are partners
although they have no investment in the business and therefore have no rights of
management. They merely lend their names to the enterprise and may be liable for
certain debt of the partnership.

ADVANTAGES OF PARTNERSHIP

1. Easy to establish
2. More financial resources
3. Shared management
4. Division of profits
5. Minimum governmental regulations/limited legal restrictions
6. Flexibility
7. Freedom from double taxation
8. Secrecy
9. Longer survival
DISADVANTAGE OF PARTNERSHIP

1. Unlimited liability
2. Division of profits
3. Disagreement among partners especially with regard to authority and control
4. Difficult to terminate because partners are bound by the law of agency
5. Restriction on transfer of ownership
6. Lack of continuity

LIMITED LIABILITY COMPANIES

The incorporation of companies differ from one country to the other. Each country has a
body of laws that guide the registration and operations of companies.

FORMATION OF COMPANY AND CAPACITY OF INDIVIDUAL

Two or more persons may form and incorporate a company by complying within requirements
of the act. It also specifies the category of people that can come together to form a company,
the following categories is not qualified:

1. He is less than eighteen years of age


2. He is of unsound mind and has been so found by a court
3. He is un-discharged bankrupt
4. A person who is convicted by a high court of any offense in connection with the
promotion formation or management of a company

TYPES OF COMPANIES

1. Limited by shares – if the liability of its members limited by the memorandum to the
amount, if any unpaid on the shares respectively held by them.

2. Limited by guarantee – if the memorandum 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

3. Unlimited – when the members do not have any limit on the liability of its members.

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