BUSINESS ORGANIZATIONS

INRODUCTION
This unit introduces students to the most common forms of business
organizations, namely sole proprietorship, partnership and limited
liability companies. However, emphasis is placed here on partnership
and the legal consequences which flow from the formation of such a
method. The main advantages and disadvantages of these forms of
business organizations are also discussed.

Important Concepts in Business Organizations

The following are some important concepts in business organizations:

Incorporation
The law permits the creation of artificial or legal persons. An example
of such is an incorporated company. This means that such an
organization has a legal personality separate from its members.

Legal Personality
Under The English Law, all human beings have a legal personality. A
legal personality is made up of a person’s legal rights and duties.
However, the extent of these rights and duties is dependent on
whether the person is an adult or a minor. A minor has limited rights
and few duties. By operation of the law, an incorporated company has
a legal personality

Limited/unlimited Liability
As a result of an incorporated organization having its own legal
personality, its members are not generally liable for the debts of the
organization. This however is in contrast to a partnership which does
not have a legal personality separate from the partners. Here, partners
have unlimited liability for partnership’s debts. Also, a sole proprietor
has unlimited liability for his business.

FORMS OF BUSINESS ORGANIZATIONS

Sole Proprietorship/ Trader (One-man business)

This is usually a natural person engaged in business without being
associated with others. If he engages in business and use a name other
than his name then he must register the name of the business under
the Registration of Business Name Act. The Companies Act 2004
makes it possible for a one man company to exist.

Advantages

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 1. The sole trader has full control of the business
2. There is ease of establishment
3. All the profits of the business belong to sole trader

Disadvantages
1. The sole trader alone bears all losses in the business
2. He is personally liable for all the obligations and debts of the
business
3. He provides all the start up capital and bears all the risks
4. He may be bankrupted by the creditors of the business
5. It may be more difficult to obtain loans from financial institutions

Partnership
Advantages
1. with a formal or informal association it is easy and cheaper to
form
2. start up capital and expertise can be drawn from a number of
people
3. The affairs of the partnership is private and so there are no
public disclosure requirements

Disadvantages: -
1. partners have personal liability for debts of the partnership
unless there is an indemnity clause in the agreement
2. There is more room for the abuse of powers and authority
3. It may be more difficult to obtain credit or loans as compared
to a company

Incorporated Organizations/Limited Liability Company

A corporation is an association that has been registered with the
office of the Registrar of Companies. A corporation has been defined
by Blacks Law Dictionary as: -
“An entity (usually a business) having authority under law to
act as a single person distinct from the shareholders who own
it and having right to issue stock and exist indefinitely; a group
or succession of persons established in accordance with legal
rules into a legal or juristic person that has legal personality
distinct from the natural persons who make it up, exists
indefinitely apart from them, and has the legal powers that its
constitution gives it.”

Advantages

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 1. Members’ personal assets are separate and apart from the
company’s and in the event of winding up, personal assets of the
members cannot be used to satisfy the companies debts.
2. Company has perpetual succession, that is, even if founders die
company can still survive.
3. The company has a separate legal identity and as such can sue
and be sued in its own name
4. may have tax advantages
5. company can own property in its own name
6. the rights of the minorities are usually stated and thereby
protected

Disadvantages

1. The cost to incorporate a company can be a deterrent;

2. There are statutory requirements to file accounts and inform the
authorities of changes in the constitution or shareholdings all add
to expenses;
3. The company's accounting records are made public and may be
viewed by all.

PARTNERSHIPS

A partnership may be defined as a relationship which subsists between

two to twenty persons carrying on a business in common with a view
to profit. In Joseph v McKenzie 1993 JLR, the court based the issue
of the existence of the partnership on the carrying on of the business
and not on the agreement. However, this can be compared with
another case, Miah & others v Khan 2000, a House of Lord’s
decision where the court held that partnerships are not based on the
commencement of trade but the launch of the venture and the
intention of the parties.
Partnerships can operate loosely, that is, in an informal manner or
formally. If partners decide to have a formal arrangement, their
agreement may be enshrined in a deed or articles of partnership.
Partners must be natural persons. A partnership does not have a
separate personality from the partners, therefore all partners must
have capacity to enter into contracts.

Where the partners want to formalize their relationship, the following

are usual provisions in the deed or articles of partnership:

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 Name of the partnership
- Note, if the name of the firm does not consist of the surnames of all
the partners, it must be registered under the Registration of
Business Names Act – s.3.

 Commencement and duration of the business

Articles of partnership usually take effect from date deed is made. If the partners do
not want it to take effect from that date, they would have to say so expressly.

 Place of business

 Type/ Nature of business

This is the business which the partners agreed to carry on

 Assets of partnership
- Partnership land, e.g. lease of the premises, is held by the partners
since the partnership has no separate legal entity.

 Capital
- Amount of initial capital required
- The proportions in which capital will be contributed by the partners. If this is
not expressly stated there is a presumption that partners have to subscribe
equal amounts of capital.

 Profit and loss sharing

Clause dealing with the proportions in which profits and losses
(including profits and losses of a capital nature) will be shared/
borne by the partners. If there is no expressed provision, there is a
presumption that profits and losses are to be borne by the partners
in equal share.
-

 Management: structure of partnership

- It will state whether the partnership will be managed by the
partners or whether a managing partner can be appointed.
- Note a partner is not entitled to a salary but will get drawings.
However, a managing partner may get a salary for his management
duties. A regular partner is not entitled to any money until the
accounts are done.
- The proportion of votes needed to carry a resolution and the voting
power of each partner

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- The limits on the authority of the partners, i.e. acts not to be done
without the consent of other partner, for example, engaging or
dismissing employees of the partnership; ordering on behalf of the
partnership goods or property exceeding a prescribed value
Note, if a managing partner can be appointed, he should be given
the discretion (within prescribed limits) to do certain acts without
the consent of the other partners

 Accounts – at what date will annual accounts be prepared; will

annual accounts be prepared by outside accountants

 Admission of new partners

- Vote required to admit a new partner, example, majority vote or
unanimity of partners
- If a partner goes out and a new partner comes into the partnership,
the partnership has changed. However, this can be circumvented by
the insertion of the provision that the “admission of a new partner
will not dissolve the partnership”.
- Existing partners may provide that a new partner has to pay a
premium, i.e. an amount in excess of his required capital
contribution
- Note the new partner will not be liable for any liabilities incurred
before his admission. Also, he will not share in any profits accrued
before he became a partner.

 Retirement of Partners
- Retirement may be at a specified age or with notice, or a period of
notice. The clause may spell out the entitlement of the retiring
partner
- On retirement and/or admission of a new partner, new accounts are
opened and the old accounts are closed; letterheads also change
- If the name of the partnership is registered under the Registration
of Business Names Act, the Registrar must be notified of the
change (e.g. on retirement or admission of a partner) in the
particulars registered in respect of the firm – s.8.

 Expulsion of Partners
- Majority of partners may be given the right to expel a partner
- Grounds on which expulsion can occur stated, for example, grave
breach of partnership agreement, bankruptcy

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- If this clause is included, there is likely to be a clause stating that
the partnership will continue notwithstanding the expulsion of the
partner.
- Agreement may provide for the interest of an outgoing partner to
be purchased by the continuing partners, and how that interest is to
be valued.

 Dissolution
- The rules and terms for dissolution. Allows for the dissolution of the
partnership w/out the intervention of the court.

 Arbitration – reference of disputes to arbitration

Other clauses that may be included in the agreement include:

 Bank Account – name of firm’s bankers; who will sign cheques
 Loan by partner – terms as to repayment and interest
 Insurance – whether firm insures against specified risks, e.g.
professional negligence, sickness and/or accident insurance

The following terms are implied in a partnership agreement unless

expressly excluded:
 Right to take part in the business and to have the assistance of co-
partners; no remuneration, compensation for additional burden.
Note agreement must expressly provide that partner to devote
whole of his time and attention to business

 Right to have business carried on according to the agreement;

nature of the business can only be changed with unanimous
agreement; majority carries in ordinary matters
 Right to prevent admission of a new partner; partner may assign his
share of profits or mortgage one’s share; majority may not expel
any partner.
 Indemnity for loss or expenses incurred in course of business.
 Access to accounts, and partners entitled to copy of books of
accounts
 Equal share of capital, profit and loss

Fiduciary Relationship
The partnership relationship is a fiduciary one, that is, the partners are
placed in a position of utmost good faith/trust with each other. As a
result of this, they must owe each other the following duties:

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 (a) Partners must account for benefit – no secret profit to be made
(b) Partners should not be engaged in competing business
(c) Partners must not act to the disadvantage of the partnership
(d) There must be full and frank disclosure

Types of Partnerships
A partnership may be a general partnership or a limited partnership. A
general partnership may be defined as a business organization in
which all the partners have unlimited liability. A limited partnership on
the other hand has at least one partner with unlimited liability and one
partner with limited liability. A limited partnership must be registered
under the Partnership (Limited) Act while a general partnership needs
no registration. It is now a requirement that the business must be
registered under the Business Name Registration Act.

Types of Partners
1. General partner – a partner who is publicly and actively involved
in the management of the business. He has unlimited liability

2. Limited Partner – a partner who does not participate in the

management of the business. His liability is limited to his capital
contribution in the business

3. Sleeping partner – a partner who contributes capital and takes a

share of profit without participating in the management of the
business. He is not generally known to members of the public,
however, he has unlimited liability.

4. Silent partner – a partner who takes no active part in a firm but

who is known to the public as a partner. He shares profit and loss
and has unlimited liability.

5. Salaried partner – is not a partner for the purpose of

management or sharing profit but his name appears on the letter
head and business documents as a partner when in actual fact,
he is an employee. For the purpose of liability to outsiders, he
will be regarded as a partner.

6. Partner by holding out – a person can become liable for the debts
of a business as if he were a partner if he represents or allows
someone else to represent that he is a partner when he is not.

Authority of Partners:

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The general rules of agency apply to partnerships. A partner is an
agent of the partnership and of the other partners. A partner may
therefore act either with express, implied or apparent authority to bind
the partnership and the other partners.

General Partners have implied authority to do the following:

1. buy the usual or necessary goods

2. sell the goods of the firm
3. receive debts and give receipts
4. hire employees or agents
5. make statement about the firm’s business
6. settle claim against the firm
7. purchase or cancel insurance
8. receive notices on behalf of the firm

In addition to the above, if the partnership is a trading partnership, the

partner has the implied authority to do the following:
9. make, accept and issue negotiable instruments
10. borrow money or pledge credit of the firm
11. pledge goods of the firm
12. create an equitable mortgage
13. employ a solicitor for the firm

A partner can only do the following with express authority:-

1. bind the firm by deed

2. give guarantee in firm’s name
3. accept property in satisfaction of a debt
4. bind the firm by submission to arbitration

For a partner’s apparent authority to bind the firm, the following must
be present:-

1. The act/contract must relate to the ordinary or usual business of

the firm
2. The act must be what a single partner usually does in carrying on
the usual business of the firm
3. The partner must act in the firm’s name and not in his own
name.

See Mercantile Credit v. Garrod

Liability of Partners and Partnerships:

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The partners and partnership are liable for acts of a partner if that
partner is acting within authority (express, implied or apparent) and
the act is within the scope of the partnership business.
A creditor has only on right of action. He may sue the firm jointly or an
individual separately. If he sues one partner alone, he cannot later sue
the partnership if the one he sued is unable to satisfy his claim.
However, if the Articles of Partnership provide that liability of the
partners is joint and several, a creditor may sue the partners
separately and successively and avoid the rule of one right of action.

Contracts:
Partners are principals to the other partners and agents for the
partners or for the partnership. They are liable to parties who have
dealt with one partner as a principal is liable to third parties who have
dealt with an agent. All partners are liable for contracts one partner
makes for the partnership in the name of the partnership if the partner
acts in the scope of his or her express, implied and apparent authority.

Negligence:
If a negligent act of a partner injures a third party, all partners are
liable for the act if the partner acted within the scope of his or her
express, implied or apparent authority. The negligence of one partner
becomes the negligence of all.

Intention Torts and Fraud

All members of the firm are liable for intentional torts within the
authority of the firm’s business or if they are authorized by the other
partners (See Hamlyn v. Houston). Fraud practised by one partner
makes all partners liable if the fraud is committed within the ordinary
course of the firm’s business or is authorized by the other parties.

Crimes
A partner who commits a crime while he is carrying out partnership
business is personally liable. Neither the firm nor its members have
liability for the crime unless the members authorize it or participated in
it in some way.

Rights of Partners:
All general parties may participate equally in the management of the
partnership regardless of the amount of capital they contributed to it.
However, a majority of votes of partners normally decides
management issues.

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Under the right of management, partners may inspect records, books
of account and documents of the firm maintains. A partner may also
copy books and records.

Shares of Profit:
Each partner receives a share in the firms’ profits in accordance with
his or her agreement with the other partners. In the absence of an
agreement for the division of profits, the court will imply that the
partners intended profits to be divided equally without regard to the
amount of capital contributed by each partner. When a partner dies,
his or her share of the profit passes to his or her executors for
distribution to heirs and beneficiaries.

Compensation/Indemnity
A partner may not receive money for performing services on behalf of
the partnership, his or her pay should come from a distribution of the
firm’s profits. But partners may agree to compensate a partner for
services he or she performs beyond those normally expected of a
partner. Also, a surviving partner may be paid for winding up the
affairs of a partnership.

Distribution of the capital:

Each partner has the right to receive a share of the firm’s property
when the firm is dissolved. Each partner receives his or her share after
the firm pays all creditors and repays all loans made to the partnership
by the partners.

Action against Third Parties

Partners are jointly liable for debts to the partnership. This means that
all partners must join in a suit against a third party who owes a debt to
the firm. But all partners do not have to join if one of the partners give
up an interest in the claim.

Dissolution of Partnership
Partnership may be dissolved either by court order or without the order
of the court.

Dissolution without a court order:

Under the following circumstances, a partnership may be dissolved
without an order of the court:
1. by expiration of time, if the partnership was entered for a fixed
term
2. by death or bankruptcy of a partner, unless the partnership
agreement provides otherwise

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 3. by termination of a venture, if partnership was entered for a
single venture
4. by subsequent illegality of the business
5. by notice of a partner if partnership is for an indefinite duration

Dissolution with court order:

Under the following circumstances, a partnership may be dissolved
with a court order:
1. Mentally incapacity of a partner
2. Permanent incapacity of a partner
3. Misconduct of a partner affecting business
4. Willful and persistent breach of partnership agreement
5. Any just and equitable ground

Disposal and Distribution of Assets

On dissolution, every partner is entitled to have the property of the

partnership applied in payment of the firm’s debts and liabilities and
surplus divided as shares. On dissolution, assets are applied as follows:
1. Payment to outside creditors of partnership
2. Payment of debts owed by partnership to partners
3. Return of capital to partners
4. Distribution of residue in same proportion as profits are shared

Subsequent to dissolution of a partnership, the winding up process

begins. Winding up is the process of settling partnership affairs after
dissolution.

On dissolution there is usually public notification, for example, notice in

the press. There is also usually an equitable lien on the firm's assets to
pay the firm's debts and then each partner's personal debts.

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