BUSINESS ORGANISATION, FORMATION AND COMBINATIONS

The nature of business

What is business?
A business is an occupation or employment involving the regular production, purchase or sale of
goods and services undertaken with an objective of earning profits and acquiring wealth through
the satisfaction of human wants.
Characteristics of a business
• Sale transfer or exchange
• Dealing in goods and services
• Regularity or continuity of dealings
• Profit motive
• Uncertainty of return
Purpose of Business
Businesses has a multiplicity of objectives which are classified into two: economic objectives and
social objectives
Economic objectives
• Creation of customer
• Profit making
• Survival
• Growth
Social objectives
• Quality products and services to customers
• Fair deal to labour
• Fair return to investors
• Fair deal to suppliers
• Fair deal to government
• Fair deal to society
ORGANISATIONS
An organisation is a social unit or human groupings deliberately constructed and reconstructed to
seek specific goals. Corporations, armies, schools, hospitals, churches and prisons are included
while tribes, classes, ethnics groups, friendship groups and families are excluded. Organisations
involve social relationships. Individuals are not simply in random contact, they come together for
a specific task.
Characteristics of organisation
• The presence of two or more people with specific role to play in collaboration with other
geared towards achievement of a specific goal.
• Presence of specific goals to which everybody subscribes.
• Division of labour among organisational members which is deliberately planned to
enhance the realization of specific goals must be communicated properly.
• Pressure of power centres which control the concerted effort of the organisation and direct
them towards its goal.
• Substitution of personnel, unsatisfactory persons can be removed and others assigned their
tasks. The organisation can also recombine its personnel through transfer and promotion.
Why do organisations exist?
• Synergy: individuals can do various things and achieve them, however when they
come together, that joint effort normally creates more value.
• Economies of scale: coming together in a group covers costs of production as
overhead costs are spread over more people.
• Achievement of goals; goals are more easily achievable by more than one person
and goals are the cause of people coming together.

BUSINESS ORGANISATIONS
A business may be organized by an individual as a sole proprietorship or by an association of
persons by mutual agreement as a partnership or by an association of persons who form a co-
operative society for the purpose or by a number of persons as Joint Stock Company.

Forms of business organisations

SOLE PROPRIETORSHIPS
A sole proprietorship is a business that is run by a single individual who makes all the decisions,
although the proprietor may engage employees. The sole proprietor is personally entitled to all of
the profits and is responsible for any debts that a business incurs.
Characteristics of sole proprietorship

Ownership: The business is owned by a single individual.

Creation: Creation of a sole proprietorship is fairly simple, typically requiring that the proprietor
obtain a business license from the city or county and register the assumed name of the business if
the name differs from his own.

Transfer and termination: The law identifies a sole proprietorship with its owner, therefore the
business typically will not continue beyond the owner's life. This identification also makes the
business difficult to transfer to other parties.

Liability: A sole proprietorship does not offer the proprietor any protection from business liability.
Should the business have debts, or court judgments renders against it, the sole proprietor's personal
assets may be used to satisfy the debts

Management control: Being small in size, it is managed by the owner himself. However, he may
have some paid workers to assist him. In any case, the ultimate control rests in his hands.

Finance: The necessary capital to run the business is provided by the sole owner. However, he
may borrow from other sources such as friends or bank as need arises.

Risk: The proprietor himself bears all the risks. Nobody else has any stake in the business; owner
and the business exist together.

Relationship with customers: The sole trader tries to keep good relationship with his customers.
The customers are generally personally known to the proprietor and their orders are higher valued.

Ease of dissolution: The sole trading business is as easy to end or dissolve as is its formation. The
decision of the proprietor alone ends the business.

Advantages of forming a sole proprietorship

Ease of formation: Starting a sole proprietorship is much less complicated than starting a formal
corporation, and also much cheaper. The proprietorship can be named after the owner, or a
fictitious name can be used to enhance the business’ marketing.

Tax benefits: The owner of a sole proprietorship is not required to file a separate business tax
report. Instead, they will list business information and figures within their individual tax return.
The business will be taxed at the rates applied to personal income, not corporate tax rates.

Employment: Sole proprietorships can hire employees. This can lead to many of the benefits
associated with job creation, such as tax breaks. Also, spouses of the business owner can be
employed without having to be formally declared as an employee. Married couples can also start
a sole proprietorship, though liability can only assumed by one individual.

Decision making: Control over all business decisions remains in the hands of the owner. The
owner can also fully transfer the sole proprietorship at any time as they deem. The sole proprietor
has total control and full decision-making power over policies, profits and capital investment.

Sharing of profits: Sharing of profits all profits generated are shared by one individual

Disadvantages of forming a sole proprietorship

Liability: The business owner will be held directly responsible for any losses, debts, or violations
coming from the business. For example if the business must pay any debts, these will be satisfied
from the owner’s own personal funds. The owner could be sued for any unlawful acts committed
by the employees.

Taxes: While there are many tax benefits to sole proprietorships, a main drawback is that the
owner must pay self-employment taxes. Also, some tax benefits may not be deductible, such as
health insurance premiums for employees
Lack of “continuity: The business does not continue if the owner becomes deceased or
incapacitated, since they are treated as one and the same. Upon the owner’s death, the business is
liquidated and becomes part of the owner’s personal estate, to be distributed to beneficiaries. This
can result in heavy tax consequences on beneficiaries due to inheritance taxes and estate taxes
Difficulty in raising capital: Since the initial funds are usually provided by the owner, it can be
difficult to generate capital. Sole proprietorships do not issue stocks or other money-generating
investments like corporations do.

PARTNERSHIPS

Partnership is a type of business organization in which two or more individuals pool money, skills,
and other resources, and share profit and loss in according to terms and conditions of a partnership
agreement.
In situation of no such agreement, a partnership is assumed to exit where the participants in an
enterprise agree to share the associated risks and rewards proportionately.
Partnership is a business organization in which two or more individuals manage and operate the
business. Both owners are equally and personally liable for the debts from the business.

Partnership does not always mean two people. There are many large partnerships that have
thousands of partners.

Different kinds of Partners found in Partnership firms

Active or managing partner: A person who takes active interest in the conduct and management
of the business. He carries on business on behalf of the other partners. If he wants to retire, he has
to give a public notice of his retirement; otherwise he will continue to be liable for the acts of the
firm.

Sleeping or dormant partner: A sleeping partner is a partner who does not take active part in the
management of the business. Such a partner only contributes to the share capital of the firm, is
bound by the activities of other partners, and shares the profits and losses of the business. A
sleeping partner is not required to give a public notice of his retirement. As such, he will not be
liable to third parties for the acts done after his retirement.
Nominal or ostensible partner: A nominal partner is one who does not have any real interest in the
business but lends his name to the firm, without any capital contributions, and does not share
profits of the business. He also does not usually have a voice in the management of the business
of the firm, but he is liable to outsiders as an actual partner.

Partner in profits only: When a partner agrees with the others that he would only share the profits
of the firm and would not be liable for its losses, he is in own as partner in profits only.

Minor as a partner: A partnership is created by an agreement. And if a partner is incapable of

entering into a contract, he cannot become a partner. Thus, at the time of creation of a firm a minor
(i.e., a person who has not attained the age of 18 years) cannot be one of the parties to the contract.
But a minor can be admitted to the benefits of partnership, with the consent of all partners. A minor
partner is entitled to his share of profits and to have access to the accounts of the firm for purposes
of inspection and copy. He, however, cannot file a suit against the partners of the firm for his share
of profit and property as long as he remains with the firm. His liability in the firm will be limited
to the extent of his share in the firm, and his private property cannot be attached by creditors.

Other partners:
Secret partner who does not want to disclose his relationship with the firm to the general public.
Outgoing partner, who retires voluntarily without causing dissolution of the firm
Limited partner who is liable only up to the value of his capital contributions in the firm

Types of partnerships

Partnership simply means a business with several individuals, each of whom owns part of the
business. The relationship between the partners and the duties of partners are clarified in the
partnership agreement.

In any partnership, each partner must "buy in" or invest in the partnership. Usually, each partner's
share of the partnership profits and losses is based on his or her percentage share of ownership.
The three most used partnership types;
General partnership: A general partnership is a partnership with only general partners. Each
general partner takes part in the management of the business, and also takes responsibility for the
liabilities of the business. If one partner is sued, all partners are held liable.

Limited partnership: A limited partnership includes both general partners and limited partners.
A limited partner does not participate in the day-to-day management of the partnership and his/her
liability is limited. In many cases, the limited partners are merely investors who do not participate
in the partnership other than providing an investment and to receiving of a share of the profits.

Limited liability partnership: In the limited liability partnership (LLP), all partners have limited
liability. An LLP combines characteristics of partnerships and corporations. As in a corporation,
all partners in an LLP have limited liability, from errors, omissions, negligence, incompetence, or
malpractice committed by other partners or by employees. Any partners involved in wrongful or
negligent acts are still personally liable, but other partners are protected from liability for those
acts.

Advantages of a partnership include

• Two heads (or more) are better than one, thus there combination of skills
• More capital is available for the business because of contribution from partners
• Greater borrowing capacity
• High-caliber employees can be made partner

Disadvantages of a partnership include:

• The liability of the partners for the debts of the business is unlimited
• Each partner is ‘jointly and severally’ liable for the partnership’s debts; that is, each partner
is liable for their share of the partnership debts as well as being liable for all the debts
• There is a risk of disagreements and friction among partners and management
• Each partner is an agent of the partnership and is liable for actions by other partners
• If partners join or leave, you will probably have to value all the partnership assets and this
can be costly.
Dissolution of a partnership
Dissolution of a partnership is a process during which the affairs of the partnership are wound up
(where the ongoing nature of the partnership relation terminates).

Types of dissolution

Technical dissolution: A technical dissolution takes place each time there is a change in the
composition of the firm, the partnership is dissolved each time one partner leaves (and is replaced
by another), or a new partner joins. In such a case there will usually be no break in the business
of the partnership with the ‘new’ firm generally taking on the assets and liabilities of the ‘old’.

A general dissolution: A general dissolution is the full dissolution of the partnership, for example,
the cessation of trade, the bankruptcy or death of a partner or by agreement. The general
dissolution involves the winding-up of the partnership and the taking of and settling of accounts.

Causes of general dissolution

• The mutual agreement of the partners which may be an ad hoc agreement, or an agreement
enshrined in the partnership agreement. For example, it was agreed that the partnership
would be dissolved after a particular date or after a certain event). Such an agreement may
be implied rather than actual.
• By the serving of a notice by a partner where such an action provided for in partnership
agreement.
• The exercise of a specific power in the partnership agreement. For example, the partnership
agreement allowed a majority of the partners to seek dissolution.
• The exercise of a power in the legislation.
• One of the events provided for in the legislation (e.g., the death or bankruptcy of a partner)
subject to contrary agreement
• Fraud, misrepresentation, rescission or illegal activity.
• By an order of court. For example, the mental incapacity or other ill-health of a partner.
• Where the business may only be carried on at a loss

JOINT STOCK COMPANIES

A joint stock company is a voluntary association of persons incorporated into a business , having
joint capital divided into transferable shares of a fixed face value, with limited liability, a common
seal and perpetual succession.
Features of Joint Stock Company
• Voluntary association of persons incorporated
• Artificial person i.e. a company is a legal person created by law and enjoys many
rights of a natural person.
• Common seal
• Independent legal entity
• Limited liability
• Transferable of shares
• Perpetual succession

Types of companies
Companies incorporated under a special royal charter: these are the companies that originated
from UK, were set up through Royal or Special Charter. Example The Imperial British East
African Company.
Company incorporated under the companies Act: the companies Act lays down procedures by
which a company can be brought into existence. Anybody wishing to incorporate a company can
do so by taking the step prescribed. These include companies limited by shares, limited by
guarantee and unlimited companies.
Company limited by shares: these include private limited companies, public limited companies
and government companies.
Private limited company: this is a company which by its Articles of Association makes the
following restrictions:
• Restricts the transfer of share
• Limits the number of members to 50 excluding past and present employees
• Prohibits invitation to the public to subscribe to its shares or debentures
Public limited company: is that company which by its Articles of Association doesn’t impose
any of the restriction imposed by private companies.
• Is limited by shares
 • Minimum number of members is seven no maximum/upper limit
• It can offer its shares and debentures to the public at large to subscribe.
• Has to hold statutory meeting and file statutory report
• Cannot commence business without a certificate of commencement of business.
The government company: these companies are formed as a result of joint ownership of a
company by the government and the private sector.
• Accompany limited by shares
• Government must own at least 51% of the paid share capital
• May have other features of private and public company or not at all.
Companies limited by guarantees: these companies are in most cases non-trading companies
and include associations and clubs. They may or may not have share capital and are governed by
a board of Governors rather than board of directors. They are formed just like any other company
under the companies Act but members do not subscribe to shares.
Statutory companies: these are companies incorporated under a special statute that lays down the
duties and obligations of the company and the specific laws that will govern its activities.
• It is fully owned by the government
• Its established by a specific law usually for a specific purpose and the law lays down the
rules governing the company
• It is a company with features like any other already mentioned.
Advantages of joint stock companies
✓ Limited liability
✓ Continuity
✓ Transferability of shares
✓ Large financial resources
✓ Advantages of large scale operations
✓ Professionalization of management
✓ Public confidence
✓ Tax benefits
Disadvantages
✓ Difficult and costly formation
✓ Delays in decision making
 ✓ Lack of secrecy
✓ Excessive regulations
✓ Oligarchic management (companies are usually controlled by a few persons who may
abuse their positions at the cost of the majority of shareholders).

COOPERATIVE ORGANISATIONS
A cooperative is an association of persons usually of limited means who have voluntarily joined
together to achieve a common economic end, through the formation of a democratically controlled
business organisation, making equitable contribution to the capital required and accepting a fair
share of risks and benefits of the undertaking.
Features of a cooperative organisation
• Voluntary association
• Capital is raised from members by way of share capital
• Control and management by members
• Service motto i.e. to render services to members
• Disposal of surplus
• Fixed return on capital
• Corporate status i.e. enjoys a separate and independent status distinct from that of its
members.
• State control
Types of cooperatives
Consumers’ cooperatives societies: they are formed by ordinary consumers for obtaining their
day-to-day requirements of consumer goods at reasonable prices.
Producer cooperatives: also called industrial cooperatives, they are Associations of small
producers formed with the objective of countering efforts of large producers to squeeze them out
of business.
Marketing cooperatives: also called sales cooperatives, they are association of independence
procedure organized for the purpose of arranging for the sales of their output. These cooperatives
usually perform important functions of marketing.
Housing cooperatives: these are associations of persons with the aim of securing ownership of a
house or obtaining accommodation at fair and reasonable rent. They are found mostly in urban
areas.
Credit cooperatives: they are association of persons with moderate means formed for the purpose
of extending short-term financial accommodation to them at a favorable terms and developing a
habit of thrift among them.
Other cooperatives societies can be formed in any other trade or area depending on the needs of a
particular group of people. For instance in;
✓ Transport
✓ Processing
✓ Labour and construction
✓ Diary , etc
Advantages
• Ease of formation
• Limited liability
• Democratic management
• Continuity
• Social service
• Reduce inequalities
• Government assistance
Limitations
✓ Limited capital
✓ Lack of secrecy
✓ Government interference
✓ Poor management
✓ Lack of harmony and motivation
Research about corporations
FORMATION AND MANAGEMENT OF STOCK COMPANIES
The process of forming a company is called floatation and involves two stages: that of promotion
and registration.
1. Promotion
Promotion is a process of exploration, investigation and the organisation of the necessary
resources, including financial, human, physical and managerial ability with an object of initiating
a business. People who undertake this exercise are usually entrepreneurs. They fore see gain
through particular business opportunity and take steps to translate the opportunity into a business,
which must be registered as a company.
2. Registration or Incorporation
Registration is the legal process through which the separate corporate entity of a company is given
recognition by law. To secure incorporation or registration of a company, a promoter must prepare
and file with the Registrar of companies the following.
• Memorandum of Association, duly signed
• Articles of Association, duly signed
• A statutory declaration by an Advocate or an Attorney or Chartered or Certified Accountant
engaged in the formation of the company.
• A list of persons who have consented to be the directors of the company
• Particulars regarding directors
• Prospectus in case of public limited company.
The promoter would have also checked with the registrar to find out whether the name they had
proposed was available or not.
When the registrar is contented that all documents are in order and all requirements have been met
with fees and duties payable are paid, he will cause the company to be registered. He will issue a
certificate of incorporation.

MEMORANDUM AND ARTICLES OF ASSOCIATION

The memorandum of association of a company is its charter and defines the limitations of the
powers of the company. It contains the fundamental conditions upon which alone the company is
allowed to be incorporated.
The purpose of the memorandum is to enable the shareholders, creditors and those other people
who deal with the company to know why it was formed, what it is authorized to do and generally
the range of activities permitted by law.
Contents of the memorandum
The memorandum contains six clauses as follows:
• The name clause. This clause states the corporate name of the company and word “limited”
must be the last word of every company limited by shares.
• The registered office clause: this clause states the country in which the registered office of
the company is to be situated
• The objective clause: this sets out the objects with which a company is formed. The
company can only do those activities which are specified in this clause
• The liability clause: this clause contains the statement limiting the liability of members to
the amount if any; of the unpaid part of the shares they hold.
• Capital clause: this clause states the amount of share capital a company is going to be
registered with and the division of this capital into shares of fixed value.
• The association clause: this clause contains a signed declaration by the persons whose
names, addresses and descriptions are given stating that they are desirous of being formed
or associated into a company and that they have agreed to purchase the qualification shares
if any.

Articles of association
The Articles of Association of a company contain the rules and regulations of the conduct
of the business of the company and the internal management of the company.
The article proceed is to define the duties, the rights and the powers of the governing body
as between themselves and the company at large, and the mode and form in which the
business of the company is to be carried on and the mode and form in which changes in the
internal regulations of the company can from time to time be made.
Contents of the Articles
✓ Appointment, duties, remuneration and powers of directors, at times also including
the Managing Director
 ✓ The issue of shares and share certificates including procedure of transfer and
transmission of shares
✓ The rights attached to different classes of shares and all other issues relating to
shares like conversion of shares into stock.
✓ Meeting of members, proxies, polls, voting rights
✓ Meeting of directors, proceedings thereof, resolutions, payment of dividends and
creation of reserves.
✓ Keeping of books of account, and appointment of powers, duties and remuneration
of auditors
✓ Arbitration and winding up, etc.
Additional formation requirements for public limited companies
The prospectus
A prospectus is any document described or issued as a prospectus and includes any notice, circular,
advertisement or other documents inviting offers from the public for the subscription or purchase
of any share or debentures of a body corporate.
Contents of the prospectus
✓ Objects of the company
✓ Names, addresses, description and occupation of the signatories to the memorandum and
the number of shares subscribed by them.
✓ Numbers and classes of shares, if any
✓ Number of redeemable preference shares and the date redemption, if any
✓ Number of qualification shares take by a director
✓ Remuneration of directors if any
✓ Names, addresses and occupation of directors or proposed directors and managing directors
or proposed managing directors
Allotment of shares
Allotment is the acceptance by a company of a subscriber’s application. It is effected by
sending each successful applicant an allotment letter stating how many shares have been
allotted to him. Within one month of any allotment, a company must file with the registrar of
companies, return of allotment stating the number and nominal value of shares allotted , the
 names, addresses and subscription of the allotted amount paid, or due and payable on each
share
Certificate of commencement of business
Private limited companies can commence business immediately on incorporation. However,
public limited companies have to wait they have been issued with a certificate of
commencement of the business. The certificate will be issued after the following conditions:
✓ The company has issued a prospectus and filed a copy with the registrar
✓ The minimum number of shares which have been paid for cash has been subscribed to
and allotted.
✓ Every director has paid, in respect of his qualification share an amount equal to what
is payable on share offered to the public on application and allotment
✓ A statutory declaration by the secretary or one of the directors or any other person so
authorized.

ASSIGNMENT ONE
a) Explain the term business combination and give reasons for the causes of combination
b) Business combinations may take a wide variety of forms ranging from loose informal
agreements among producers to a complete fusion of business. Discuss.
c) Explain why business combinations have been controversial but at the same time useful in
many companies.