TOPIC 5: FORMS OF BUSINESS OWNERSHIP

PRIVATELY OWNED BUSINESSES

INTRODUCTION

There are several forms of business organizations. These are the sole proprietorship, the
partnership, joint stock companies, the cooperatives and joint ventures.

SOLE PROPRIETORSHIP OR SOLE TRADER

This is the simplest form of a business organization. A sole trader or a sole proprietor owns the
business alone. He provides all the necessary capital and other resources alone. He engages in
business on his own account. The business has no existence apart from the owner. It is,
therefore, not incorporated into a legal entity but a trading license is required. The law does not
recognize a sole trader as a separate entity from his business. Many businesses in Kenya are of
this type and include kiosks, general shops and restaurants.

A sole trader is entitled to all the profit and is also responsible for all the losses. This means that
the liabilities of the business are the personal liabilities of the sole proprietor as long as he is the
owner of the business. This also implies that should the business suffer losses to an extent that
the business assets are not enough to pay the debts; the sole trader will be required to pay the
debts from the private sources.

The sole trader can manage his business alone or employ people to assist him. But whether he is
assisted by other people or not, he still remains the final authority.
Sole proprietorships are usually very localized. They are most suitable for the small enterprises,
especially when they are getting started. A sole proprietorship is also simpler to start and to
manage.

Advantages of sole proprietorships

(a) It is easy to start a one-person business because there are few legal intricacies, compared
to other forms of business organizations, sole proprietorships are easier and simpler to
start and to wind up
(b) The sole trader takes all decisions alone. This means that decisions are made timely and
quickly. Implementation of decisions is also fast because very few people are involved.
(c) The sole trader enjoys all the profit from his business and this may encourage him to
work harder. He will also be more careful to avoid any losses because be knows that hew
will suffer the losses alone even from his private sources.
(d) Sole traders are in a better position to establish direct contacts both with their customers
and employees. Such contacts are more likely to lead to better understanding of
employee and customer needs and result in provision of better services. Better services
will mean greater success for the business.
(e) The sole trader is in a better position to keep his business secrets than any other form of
business ownership
Disadvantages

(a) The sole trader is personally liable for all the debts of the business. If the assets of the
business are not enough to pay the liabilities, personal property can be attached by the
creditors.
(b) Sole traders are often unable to raise sufficient capital funds. They have to rely on their
own ability to raise money to finance their own businesses. This is not always easy. The
business will, therefore, be restricted by lack of capital.
(c) A sole trader may be unable to attract and/or keep highly qualified persons who seek
opportunities to manage, operate, and share in the profit of the business. He may also not
be able to retain good employees because of inability to provide them with attractive
terms and conditions of service.
(d) Sole proprietorships suffer from lack of continuity because the life of the business is
usually limited to the life-span of the owner. This means that the business is likely to
close down if the owner becomes bankrupt, dies, is unable to run the business or is
imprisoned. However, some businesses may continue if the next of kins are also business
minded.
(e) Sole traders suffer from lack of training and/or specialization. They also have to work for
(f) long hours and all these may adversely affect performance including net incomes.

2.PARTNERSHIPS

A partnership is a relationship that exists between two or more persons jointly carrying out a
business with the objective of making a profit. Each of the persons is called a partner and the
business is referred to as a firm. A partnership is a relationship and does not, therefore, mean the
firm. In a partnership a number of people work together and there is no separate identity of the
partnership form the individual partners.

Each partner contributes money, property and labour and in turn the partners share in the profit
and losses of the business. A partnership can be formed by agreement between the partners
when they want to use their personal names to constitute the name of the firm. If the partners
want to use a name different from their own, the firm’s name must be registered with the
Registrar General’s office.

A partnership can be permanent or temporary. A permanent partnership is intended to continue

indefinitely. This means that the date of termination is not known at the time of formation. A
temporary partnership is formed for either a specific purpose or period. Upon the expiry of such
a purpose or period the partnership is automatically dissolved. There are two types of
partnerships – the general partnership and the limited partnership. In a general partnership all
partners are required to have a t least one general partner who will carry the burden of the
financial liabilities of the entire organization. In a limited partnership there must be at least one
general partner and one or more limited partners. Limited partners provide capital without
assuming financial liability beyond the amount they have invested in the organization.
Normally, a partnership can have a minimum of two and a maximum of twenty members. In
some instances, especially in forms which offer personal and professional services, the
membership can go to a maximum of fifty provided each member is a professionally qualified
person as in the case of a firm of practicing lawyers.

The partnership terms are governed by the Kenya’s Partnership Act, 1963 or Deed of Agreement.
Where the Deed exists, it operates instead of the terms of the Act. The agreement defines the
following terms and conditions under which the partnership will operate:

(i) Name and purpose of business

(ii) Location of business and commencing date
(iii) Name, address and occupation of each partner
(iv) Status or type of each partner, e.g. limited, general, active, dormant, minor or quasi
(v) Capital to be contributed and in what ratios
(vi) Interest rates to be paid on capital (if any)
(vii) Remuneration of partners
(viii) How profits and losses will be shared
(ix) Drawings allowable each year
(x) Duties and rights of each partner
(xi) Admission, withdrawal and expulsion of partners

In the absence of a Deed of partnership, or in the event of an ambiguity in it, the provisions of
partnership act will apply, the major provisions of the act are the following:-

(i) Capital must be contributed equally, and profit should also be shared equally
(ii) No interest should be credited on capital
(iii) No interest should be charged on drawings
(iv) Each partner should take an active part in the management of the partnership and no
salaries should be payable to them
(v) All decisions should be made on the basis of majority opinions.
(vi) Major changes like change of purpose and introduction of new partners should be on
the agreement of all partners.
(vii) Book of accounts must be kept at the principal place of business
(viii) Loan advances by partners will be made at an interest rate stipulated in the
partnership act
(ix) How partners should be reimbursed if they incur liabilities on behalf of the
partnership
(x) All the partners have the right to inspect all books of accounts
(xi) The partners cannot carry out any competing business
(xii) On dissolution of a partnership, settlement should be as follows:
(a) Loan repayment
(b) Capital repayment
(c) Surplus repaid on equal profit sharing basis

TYPES OF PARTNERS
The major types of partners include:-

General partner. As discussed earlier, the general partner has unlimited liability for the firm’s
debts.

Limited partner. As stated above, a limited partner has limited liability in the partnership

Active partner. One in normal partnership practice, as a partner sharing in every way the capital
contribution, management and shares in the profit and liabilities of the business. He may be
given a fixed area of responsibility e.g. sales. He is disclosed to the public as being a partner.

Silent partner. Refers to a limited partner who does not participate actively in the management
of the organization. He is disclosed to the public as being a partner.

Secret partner. Is a limited partner who actively participates in management of the firm and is
not disclosed to the public as being a partner.

Nominal partner. Is not one of the owners or actual partners of the firm but allows his name to
be identified with the business. He does not contribute any capital nor take any part in the
management of the firm. He, however, becomes liable for the firm’s obligations in an unlimited
basis. The nominal partner lends his name to be used by the business for a fee. The business
benefits because it uses the partner’s name for promotional purposes. Such a partner must,
therefore, be a well known person who can enhance the firm’s prestige nd reputation.

Quasi partner. One who is presented to the public as a partner although he contributes no capital
and does not participate in the management of the firm. He may share the profit and liabilities of
the firm.

Minor partner. This is a person serving as a partner while he is under the statutory majority age
of eighteen years. Since he is a minor, his liability is limited to his capital. However, on
attaining the statutory majority age, he will rank as an active partner with unlimited liability.

ADVANTAGES OF PARTNERSHIPS

The advantages of partnerships include:

1. Ease of formation:- Formation of partnership is easy because all that is essentially
needed in a partnership is an agreement between the partners. The partnership agreement
is usually prepared in writing although an oral control is also acceptable. In other words
formation of a partnership is free from complicated legal requirements.
2. Additional sources of capital:- Partners can sometimes raise more capital than a sole
trader since ownership vests in a group of two or more (maximum twenty), each of whom
can contribute capital. A partnership is also likely to be more creditworthy than a sole
trader.
3. Broader management base:- Each partner may have expertise in different functions of
the firm such as finance and sales. The partners can therefore, be called upon to be
responsible for those functions in which they are specialized. This may lead to increased
 performance and profitability. Decision making and consultations are shared for mutual
benefit.
4. Ease of expansion:- Expansion can be done very easily by increasing the size of the
partnership, including addition of specialists skills.
5. Sharing of losses and liabilities:- Liabilities are better spread to a number of persons thus
reducing the burden on any one person. This spreading of risk to many encourages more
people to join partnerships because the risks are less than in sole proprietorship.
6. Duration: - Partnerships have longer durations than sole proprietorships because death or
retirement of one partner cannot interrupt the partnership where the partnership has more
than two partners and also where provisions have been made to perpetuate the
partnership.

DISADVANTAGES OF PARTNERSHIPS

The disadvantages of partnerships include:-

1. Unlimited liability:- The liability of general partners is unlimited. This means that if the
assets of the partnership are not sufficient to pay its debts, the partners are obliged to pay
the debts from their personal resources.
2. Difficulty in making decisions:- Since a partnership consists of two or more owners,
authority is divided and decisions may be difficult to reach. Delays may also occur when
reaching decisions because all the partners have to be consulted. Delayed decisions may
not be fully effective and may result in the firm losing many opportunities. Sometimes
the partners cannot compromise and the only recourse may be to dissolve the partnership.
3. Lack of continuity:- A partnership has a limited and uncertain life. A partnership can be
terminated very easily especially if the partners disagree or if one partner dies or is
incapacitated.
4. Sharing of profits:- Since partners have to share in the profits of the firm, this leads to
minimization in direct benefits accruing from personal efforts of individual partners.
This is more so where some partners may be contributing more than others to the well-
being of the firm. Also, the fact that profit is shared reduces the amount receivable by
each partner.
5. Frozen investment:- It is often difficult for a partner to withdraw his investment. The
buying out of a partner may be difficult unless specifically arranged for in the written
agreement. Partners who may wish to withdraw find it impossible to do so and this leads
to dissatisfaction and lack of commitment to the firm.
6. Limited access to capital:- Partnerships have difficulties in obtaining large sums of
capital especially long term financing. This is a serious problem especially if the firm
intends to finance major development projects.

DISSOLUTION OF PARTNERSHIPS

A partnership may be dissolved in the event of the following circumstances:-

(a) If it is a temporary partnership, such as a joint venture, at the expiry of the specified
period or on the completion of the purpose of the enterprise.
(b) If a partner notifies the other partners, in writing, of his intention to dissolve the
partnership
 (c) If a partner suffers mental ailments, is declared bankrupt or dies
(d) If the partnership business becomes unlawful (usually due to changes in the law). This
can happen if a law is introduced banning the activities of the type carried out by the
firm.
(e) A court may dissolve a partnership on application from a partner or any other interested
party under the following circumstances.
(i) If a partners acts contrary to the provisions of the partnership deed and damages the
interests of the firm;
(ii)Where the partnership cannot run at a profit;
(iii)Where the prevailing circumstances make it only fair and just to dissolve the
partnership

3.JOINT STOCK COMPANIES

A joint stock company is defined as, a corporate association of a number people for some
common object or objects. The members of a joint stock company contribute capital to form a
common stock to carry on a business, usually for profit. A joint stock company is a “corporate
body”, that is, it is created under the law and has an entity of its own, quite separate from
members who own it. Therefore, under the law, a joint stock company is a fictitious but a legal
person that can enter into contracts, own property, incur liabilities, sue other, and be sued by
others. It can only do what it has been formed to do. This means that if a company has been
formed to carry out production and marketing activities of particular goods and/or services it can
carry out only this type of business unlike an individual who can engage in any type of business
at any time.

TYPES OF COMPANIES

Companies can be grouped into two categories: registered and statutory companies. Registered
companies are those that are formed, registered and operate under the Companies Act, 1962,
Cap, 486, Laws of Kenya. These constitute the most common type of companies and are the
main subject of our discussion.

Statutory companies are created by an Act of Parliament. The powers and functions of these
companies are defined by the Acts that create them. Most companies owned by the Kenya
Government (commonly referred to as parastatal organizations) fall in this category. Examples
are the Agricultural Finance Corporation (AFC) the Industrial and Commercial Development
Corporation (ICDC) and the Kenya National Trading Corporation Ltd. (KNTC).
Registe red companies may further be classified into public, private, limited or unlimited
companies.

Public companies
These companies must have a minimum membership of seven but there is no maximum number.
Their shares are freely transferable usually through the Nairobi Stock Exchange. Shares and
debentures are open for public subscription. Certificates of trading and annual audit of accounts
are compulsory. The minimum number of directors is two. They may have limited or unlimited
liability.
Private companies
They can be described as an advanced form of partnership. The minimum membership is two
and the maximum is fifty excluding past and present employees. Their shares are not freely
transferr able. They cannot offer shares or debentures to the public for subscription. They must
have at least one director. They commence business on receipt, of certificate of Incorporation
from the Registrar of Companies. Presentation of prospectus and audited accounts is not
compulsory for private companies.

Limited and Unlimited Companies

In a limited company, the liability of members is limited to a stated amount, usually to the face
value of shares a member holds in the company. The liability of unlimited companies is
unlimited like those of sole traders and general partners. There are, however, no unlimited
companies in Kenya.

Companies limited by guarantee

Some companies may have no share capital in which case the liability of its members may be
limited to a sum guaranteed by them. The associations of trade and professional people such as
the Kenya Association of Manufacturers (KAM) and the Kenya National Chamber of Commerce
and Industry (KNCCI) are usually registered as companies without share capital and therefore
limited by guarantee. This means that if such a company is wound up and its assets are not
found sufficient to meet its debts, the members would be required to contribute up to the
maximum of the amount guaranteed by them at the time of taking membership.

FORMATION OF A COMPANY

Persons intending to form a joint stock company are required to furnish the Registrar of
Companies with the following documents:
i. Memorandum of Association
ii. Article of Association (or adoption of model articles, termed Table A in the Act)
iii. List of directors, with details of names, addresses, occupations, shares subscribed and
statement of agreement to serve as directors
iv. A statement signed by directors stating that they agree to act as such
v. A declaration that the necessary requirements of registration have been duly compiled
with. This declaration can be signed by the company secretary or by one of the
directors or promoters of the company.
If these documents are found to be in order by the Registrar of Companies, he may ask the
promoters of the company to pay the necessary registration fees. After payment of the fees, a
certificate of incorporation, giving legal entity to the company is issued.

THE MEMORANDUM OF ASSOCIATION

This is the most important document to be prepared when forming a company. It lays down and
defines the powers and limitations of the company. The document governs the relationship of
the company with outsiders and any person dealing with the company needs to know it contents.
It contains the following six clauses:

i. Name clause:- This clause states the name of the company ending in “Limited”. The
name of the company should not be confused with a name of another existing
company. The name should also not give a false idea of the nature of business.
Names with political connotations are normally not acceptable.
ii. Situation clause:- This clause states the domicile of the company, that is, where the
registered office is situated. It is enough to mention the name of the country only.
All official communications would be channeled to the stated place.
iii. Objects clause:- This is the most important clause. It sets out specifically all the
aims, objectives and purposes of the proposed company. Once incorporated, the
company can operate only within the objects stated in the memorandum of
association. Any dealings made by the company which are not within the objects laid
down in the memorandum of association are void by law.
iv. Capital clause:- This clause sets out the share capital the company wishes to have.
The total value of all the shares is called the nominal share capital. After the
registration is completed, the company can raise this amount by selling shares. It is
then referred to as authorized or registered share capital. The following information
must also be given in this clause:-
(a) Total amount (b) types of shares and the units (shares) into which the share
capital is divided. The number of units to be shown by each type and (c) the
value of each share in each separate group
v. Liability clause:- This clause states that the liability of the shareholders shall be
limited.
vi. Declaration clause:- This clause states the willingness of the promoters to form
themselves into a limited company. This declaration must be signed by at least seven
persons (the promoters) in the case of public limited companies and two persons in
the case of private limited companies. These persons must agree to take at least one
share each. The names, addresses and number of shares taken up by each promoter
must also be included.

ARTICLES OF ASSOCIATION

This document lays down the rules and regulations for the internal organization of the company
as follows:
i. The different types of shares and the rights and powers of each separate class or type
ii. Transfer of shares procedure
iii. Classes of loan capital issued and their rights and powers as well as the transfer
procedures.
iv. Kinds of meetings and the methods of calling and conducting meetings
v. Details concerning directors as to numbers, election or appointment, qualifications
and disqualifications, powers, duties and liabilities in the management of the
company.
vi. Appointment of the secretary to the company under the Act, remuneration, powers,
duties and responsibilities
 vii. Details of the procedures for keeping records of share and loan registers, meetings of
all types, accounting and audit.
viii. Arrangements for the declaration and distribution of dividends on share capital and
interest on loan capital
ix. Rules governing the appointment of auditors
.
Articles of Association can be altered by a meeting of shareholders. The resolutions seeking
alteration must be passed by the majority vote and it must be forwarded to the Registrar of
Companies.
It is important to note that a company can choose not to prepare its own Articles of Association
and instead adopt the standard article of association in “Table A” of the companies Act, 1962,
Cap. 486.

Shares
A share can be defined as a unit of capital of a joint stock company. This unit of capital has a
face value which is also referred to as nominal value.
There are basically two types of shares, ordinary shares and preference shares. Ordinary shares
do not carry a fixed rate of return or dividend, while preference shares do. Preference shares
have a first priority on dividends, but the dividend payable to them is limited to a certain
percentage. After the preference shares have been paid dividends, the ordinary share are
allocated the balance of dividends. In years of good business, the ordinary shares can get far
more dividends than preference shares but in years of bad business, ordinary shares can go
without any dividends. In most cases, only ordinary shareholders have a right to vote on
important issues concerning the company such as the election of directors.

TYPES OF PREFERENCE SHARES

Cumulative preference shares

These shares are entitled to dividends whether the company makes a profit or not. If the
company makes a loss, the dividends for the year are carried forward to the following year.
When the company eventually makes a profit, the accumulated dividends will be paid to the
preference shareholders. This means that during the following year when the company makes
profit, the preference shareholders get two years dividends. The dividends can keep on
accumulating for many years till they are paid.

Non-cumulative preference shares

These shares are entitled to dividends only during the year when profit is made and dividends are
declared.
Redeemable preference shares
These shares can be bought back (redeemed) by the company after a specified period has
expired. During that period, profit is paid cumulatively or non-cumulatively in accordance with
the terms of issue.

Irredeemable preference shares

These shares cannot be bought back by the company. They can only be sold to other people
directly or through the stock exchange. The dividends are also paid either cumulatively or non-
cumulatively in accordance with the terms of issue.

DEBENTURES

A company can borrow money from the members of the public by selling debentures. A
debenture is a document or a loan investment that shows that a company has borrowed specified
sum of money from the person named on the document. The company undertakes to pay a fixed
rate of interest for the loan. The rate of interest on debentures is often lower than on preference
shares. Debenture holders will be paid interest whether the company makes a profit or not.
If the company is to be liquidated, debenture holders will have a claim on the assets of the
company after the creditors, but before preference shareholders and ordinary shareholders.
Debenture holders do not take part in the day-to-day running of the company.

Types of debentures

(i) Mortgage debentures: These are secured, that is some company property is pledged
against them. The implication of this fact is that in the event of the company’s
liquidation, the proceeds of the sale of the pledged property are used to pay off the
holders of mortgage debentures.
(ii) Naked debentures: These are unsecured debentures. Unsecured debentures can be said
to be backed by all the assets of the company and they are also said to have a floating
charge on all the assets of the company. If the company is being liquidated, the holders
of naked debentures rank among the ordinary creditors of the company.
(iii) Redeemable debentures: These debentures can be bought back (redeemed) by
the company within a specified period.
(iv)Irredeemable debentures: These debentures cannot be bought back by the company. The
money borrowed against them remains outstanding till the company is liquidated.

Advantages of companies

i. Limited liability: This means that even if the company is unable to pay its debts, the
shareholders cannot in accordance with the law lose more than the value of their
investment in the company. This is a great protection against financial risk. It is an
advantage that companies have over partnerships and sole proprietorships.
ii. Transferability of ownership: Ownership in a company can be transferred very
easily. Shareholders in public limited companies can sell their shares to other people
whenever they wish.
iii. Continuous existence: The legal existence of any company is not affected by the
death of any shareholder unlike the sole proprietorship and partnership. If a
shareholder dies, his shares revert to his lawful heirs.
 iv. Greater ease of raising capital: Companies can raise capital with greater ease than
sole proprietorships and partnerships. This is possible because companies can invite
the public to buy shares. Most members of the public can afford to buy the shares
because they are divided into small units of say Kshs.5; Kshs.10; Kshs.20.
Companies can also borrow large sums of money at low interest rates because of their
legal status and also because they have securities.
v. Specialized management: Because of its size and scope of operations, a company can
afford to hire well qualified employees who can manage the company efficiently.
vi. Board of directors management: The companies are managed by boards of directors.
A board of directors may be formed in such a way that experts in various fields are
included. Decisions of these experts are normally better than a one person’s decision.
Boards of directors are known for discussing policy issues thoroughly and hence risks
of -*hasty decisions can be avoided.
vii. Economies of scale: Large sums of capital enable large-scale operations which result
in reduced costs per unit produced and consequently higher profit. Large scale
operations also facilitate specialization which leads to efficiency in operations.

Disadvantages of companies

i. Legal restrictions: A company can only operate in accordance with its memorandum
and articles of association. This may sometimes be too limiting especially if a
company wishes to engage in more profitable activities which are not covered by the
above documents and there is not enough time to alter the document.
ii. Complications in formation: Forming a company is more costly, complicated and
time-consuming. It is more costly because of the legal fees paid to the lawyer who
prepares the memorandum and articles of association. There is also the cost of
registration. The process is complicated because adherence to certain rules is a
necessity. These rules include those regarding the minimum number of shareholders
and the minimum amount of capital.
iii. Impersonality and lack of secrecy: Unlike the sole proprietorship and partnership, the
dispersed ownership of the company leads to impersonality and consequent avoidance
of personal interest and responsibility. The owners (shareholders) do not have a
direct control over the running of the business. They feel alienated from the company
and left to be interested only in dividends and value of shares.
The required publication of financial reports allows others to obtain useful
competitive information. This means that it may not be possible to maintain
confidentiality in some aspects. In a competitive environment certain confidentiality
is certainly very important but unfortunately public companies may not be able to
keep confidentiality.
iv. Slow and expensive decision making: This is so because of the nature of the decision
making process in companies. In companies, all important decisions are normally
taken by the directors and the more important decisions by the shareholders. This
process is slow and often expensive.
v. Direct control by owners is not possible: The owners (shareholders) do not control
the company directly. Their control is of a very indirect character because direct
control is vested in the board of directors. The shareholders ability to influence the
 company policy is usually minimal, restricted usually to their voice and vote during
the annual shareholders meeting. Practically, the shareholders endorse almost all the
board’s recommendations during the annual general meeting. This may lead to a
dangerous situation if the board’s decisions are not viable.
vi. Taxation: The Company is a taxable entity for income tax purposes. It pays taxes
separately from the owners. A corporation tax is levied on the net profit of the
company. Earnings distributed to shareholders in the form of dividends are also
taxed. This amounts to double taxation because the same profit which belongs to the
shareholders is taxed twice.

WINDING UP A COMPANY

A company can be terminated voluntarily by the shareholders, the creditors or by the court.
If the shareholders decide to wind up the company, the directors are required to file a Declaration
of Solvency with the court. This document states that the company’s assets will be sufficient to
pay off its debts. The shareholders will appoint a liquidator who will sell all the assets, pay
creditors and distribute the rest of the money to the shareholders. In theis case the liquidation is
a voluntary winding up.

If a declaration cannot be filed by the directors because the assets are not sufficient to pay off the
company’s debts, a meeting of creditors is called. The creditors will appoint a liquidator to wind
up the company. The liquidator sells the assets and pays the creditors. If the sale of the assets
realizes less than the amount payable to creditors, then a composition or dividend will be made
to discharge the liabilities at the highest percentage possible. Shareholders will in this case
forfeit all their investments. If there remains a surplus after paying off all debts in full, then
shareholders will receive a repayment of capital or a dividend rate equating cash available to
total share capital issued. In this case the liquidation is said to be “creditors voluntary winding
up”.
Where the court is satisfied that the company is unable to pay its creditors and its continued
existence would only result in further accumulation of debts, it can order a liquidation. In this
case the court appoints an Official Receiver who winds up the company by following the
procedure outlined above.

1. CO-OPERATIVES

A co-operative organization can be defined as an organization of members who come together to

carry out economic activities and to share proceeds equitably on the basis of cooperative
principles. All co-operatives must adhere to the co-operative principles. These principles are
formulated by the International Co-operative Alliance – ICA, which is a world-wide
confederation of all co-operative organizations. These principles are: open membership,
democratic administration, interest on capital, disposal of surplus, education and co-operation
with other co-operatives.

FORMATION AND OPERATION

Co-operatives are registered by the commissioner for co-operative development (hereafter
referred to as CCD) who is empowered to do so by an Act, the CCD can also refuse to register a
co-operative society. Co-operative societies are normally registered with limited liability.
All co-operatives are required to operate in accordance with the Act, Co-operative societies
rules, 1972 and the relevant by-laws. The co-operative Societies Rules 1972 are a subsidiary
legislation by the minister responsible for co-operatives in 1972 in accordance with section 84 of
the Act.

Co-operatives are also required to operate in accordance with the relevant by-laws. There are
different by-laws for different types of co-operatives. For example, there are different by-laws
for farming co-operatives, housing co-operatives and savings and credit co-operatives. These
by-laws are prepared by the CCD and must be adopted by the co-operatives before registration.
A co-operative cannot change its by-laws without CCD’s approval.

A co-operative should have a minimum of ten members but no maximum is set. The ten
members must sign the application form for registration.
All major decisions of co-operatives must be made at the general meetings by a majority vote.
This means that the co-operative management committee must get members approval before
taking any major action. Each member has one vote irrespective of the share capital the member
has in the co-operative and also irrespective of the activities carried out between the member and
the co-operative. This is because a co-operative is an association of people, but not capital, as is
the case in joint stock limited companies where voting is on the basis of share which a member
has in the company.

The structure of co-operatives in Kenya

The structure of co-operatives starts with the primary co-operative, followed by the unions, then
the countrywide co-operatives and at the apex is the Kenya National Federation of Co-operative
Ltd.

Primary co-operative in Kenya

These are the registered societies whose membership is restricted to individual members. These
members must have a common economic objective or interest. Let us take the example of a
consumer co-operative. The members of a consumer co-operative join together and agree to
contribute capital to set up a retail shop from where they would be buying their provisions. Such
co-operatives enable members to realize economies of scale by, for example, sharing the cost of
running the shop and by buying provisions at lower prices.
Each co-operative has a committee of at most nine members, a manager and other paid staff.

Co-operative unions (Secondary Societies)

Co-operative unions are made up of primary co-operative societies. Unions act as coordinating
bodies usually operating in a given area or serving a particular type of a cooperative society. The
primary cooperatives subscribe capital and this enables the unions to have resources, facilities,
equipment and better trained staff to carry out various duties. Taking farming co-operatives as
an example, unions carry out the following functions: bookkeeping, bulk purchase of farm
inputs, stationery and other supplies, credit and savings facilities, education of staff committee
 members and the members of primary cooperatives affiliated to the union. Examples of co-
operative unions in Kenya are the giant Murang’a District Co-operative Union and central Meru
Co-operative Union.

Countrywide co-operatives
The countrywide (nationwide) co-operatives act as an umbrella for all the unions and primary co-
operative societies handling the particular commodity in the case of agriculture. Relevant
examples here include the Kenya Co-operative Creameries (KCC), the Kenya Grain Growers
Co-operative Union (KGGCU), and the Kenya Planters Co-operative Union (KPCU). Other
nationwide co-operatives provide specific services to co-operatives on a nationwide basis.
Examples include Co-operative Bank of Kenya which provides banking services to all
cooperatives, the co-operative insurance services (CIS) which provides insurance services to all
co-operatives and the Kenya Union of Savings and Credit Co-operatives (KUSCCO) which
serves all the savings and credit co-operatives throughout the country.

The Kenya National Federation of Co-operatives (KNFC)

The KNFC is the national annex body to which the various types of co-operative organization
are affiliated. The membership comprises mainly country-wide co-operatives, cooperatives
unions and big primary co-operative societies operating in areas without co-operatives unions.
The KNFC represents co-operatives in Kenya at the International Co-operative Alliance.

The KNFC was established in 1964 to serve as the national co-operative representative
organization, to unify co-operative movement, to educate its members, and to assist in the
improvement of various cooperative activities.

ICA Africa Confederation of Co-operative

Regional savings & Credit Association ACCOSCA
(Continental)

International Co-operative
Alliance

Kenya National Federation

of Co-operative

CBK KGGCU KNHC NACHU KPCU KCC KCCU KUSCCO

UU U
Consumer
wholesale union

Structure of the co-operative movement

Commodity and District Co-operative Unions

2. JOINT VENTURES Savings and credit

Societies not Affiliated marketing Consumer co- co-operative
affiliated to Unions Societies operative societies societies (SACCOS)
A joint venture can be described as a merger or partnership usually of two or more participating
firms which have joined forces together. Firms in the same country may merge for managerial
or financial reasons. In international business, where firms carry out business outside their home
countries, joint ventures will be between a foreign firm and a local firm.

Joint ventures have both advantages and disadvantages. Some of them, especially those
applicable to joint ventures between local firms have been discussed under “Partnerships” and
will therefore not be repeated here. This section will thus be concerned with the advantages and
disadvantages applicable to joint ventures between a foreign firm and a local firm.

Advantages
i. Market access: This becomes possible in joint ventures because many countries, both
developed and developing may require some degree of local participation of firms
operating in their country. To fulfill such legal requirement, foreign firms have to get
into joint operations with the local firms of the host country. Joint ventures are also
necessary in cases where firms cannot qualify to sell to some buyers, especially
public organizations, unless they have local participation. Joint ventures also give
firms a local outlook and therefore better public image. This may mean more
acceptance of the firm’s products by the consumers.
ii. Better knowledge of the local market: Foreign firms will get into a joint venture
arrangement with a local firm because the latter has better knowledge of the local
market. The local firm is more familiar with the country’s laws, regulations, buyer
behaviour, competition, trade and industry practices. All this information is vital for
the success of any company.
iii. Better distribution system: Foreign firms will join with local firms in order to use the
well established local firm’s distribution channels. This is more applicable where a
distribution strategy requires setting up of specialized middlemen.
iv. Financial advantages: A part from resulting in increased capital for the firm because
there are more contributors of capital, a joint venture arrangement may also mean
easier access to the local capital market. It is not uncommon to find many countries
requiring foreign firms to get into joint venture arrangement in order to be allowed to
operate in the host country. This may also result in lower taxes.

Disadvantages
i. Sharing secrets: A joint venture arrangement will mean that all the partners have
access to important secrets of the organization. Some firms, especially those having
high technology advantages, may not like sharing their secrets with other firms. This
is more so where there are fears that the local firm can pull out of the joint venture
arrangement and set up an independent rival firm using the technology acquired
during the arrangement. This is made worse by the fact that if the local firm pulls out
of a joint venture arrangement, it may not be possible for the foreign firm to operate
on its own in that country.
ii. Different objectives: A foreign firm may be having the objective of maximizing its
profit as soon as possible while the local firm may be interested in the long term
 investments which may mean less profit in the short-run and more profit in the long-
run. In such a case, decision making becomes difficult because of conflicting goals.
iii. Fear of nationalization: firms which enter into partnership with the government or
with a government firm like a parastatal may fear that eventually they might be
nationalized, that is, taken over wholly by the government. Such fears may be
justified given the rate of nationalization of firms in developing countries.

Summary

The chapter has shown that there are different types of privately owned business. The
commonest of these are the various types of sole proprietorships, partnerships, limited liability
companies, and co-operative societies. The principal elements, advantages and disadvantages of
each of these different types of business were briefly reviewed in the chapter.

DISCUSSION AND REVIEW QUESTIONS

1. What is proprietorship?
2. Briefly discuss the advantages and disadvantages of sole proprietorship.
3. What is a partnership?
4. Outline the contents of a partnership agreement as required by the Kenya Partnership Act
of 1963.
5. “A partnership may have different types of partners”. Discuss.
6. Critically discuss the principal advantages and disadvantages of partnerships
7. Outline the conditions under which a partnership can be dissolved.
8. What is a joint Stock Company?
9. Briefly discuss the characteristics of different types of companies.
10. Persons intending to form a joint Stock Company are required to furnish the Registrar of
Companies with specific documents. What are these documents and what are their
purposes?
11. Discuss the merits and demerits of different types of shares of a joint Stock Company.
12. What are debentures?
13. Critically discuss the pros and cons of Joint Stock Companies.
14. What are the different ways of winding up companies?
15. What is a cooperative organization?
16. Discuss the structure of cooperatives in Kenya.
17. What are the merits and demerits of joint ventures?