Study Session 2: Forms of Business Ownership

Introduction

Business can defined as an organization or entity engaged in commercial,

industrial, or professional activities with the primary objective of generating
revenue and making a profit.

Classification of Business
There are different approaches to classification of business. Include:
i. By Size: Business organisations are classified as –large, medium and,
small.

Basis of classification:
Sale/turnover, capital employed, profit, number of employees, and scope
of operation.

ii. By Functions: such as –

a. Primary function i.e. provision of raw materials
b. Secondary function i.e. converting the raw materials into finished
goods.
c. Marketing function i.e. getting the products into the hands
of the consumers
d. Tertiary function i.e. providing services such as after sales services.
iii. Types of goods i.e. durable/non-durable goods, standard/non Standard.
iv. Degree of mechanization and automation i.e. whether a business is
capital intensive or labour intensive.
v. Types of industry i.e. manufacturing, services, banking, labour company
vi. Ownership structure i.e. sole proprietorship, partnership, corporation and
co- operative society.
Business ownership refers to the legal right of individuals or entities to possess,
control, and manage a business entity with the aim of generating profits or
achieving specific goals. There are several common forms of business ownership,
each with its own characteristics, advantages, and disadvantages.

Proprietorship
This is an unincorporated business, owned managed and operates by one person.
The main features of sole proprietorship are:
- Business is owned by one person.
 - No rigorous legal procedure is required for its establishment.
- Ownership and control of business are fused.
- Owner is solely and personally liable for all losses and reaps
all its profits.
- Business is usually in small size and closely integrated with its locality.
- Capital base is usually small and generally provided by owner-manager.

Advantages of Sole Proprietorship

Owner manager pays personal attention and commitment to business

(ii) Owner manager reaps all the profits
(i) Proprietor enjoys complete independence in running the business.
(ii) Privacy is guaranteed account and books not published
(iii) Corporate taxes not paid, sole proprietor pays personal tax.
Disadvantages of Sole Proprietorship
(i) Financial limitation-no access to large capital and credit facility.
(ii) Unlimited liability-owner alone is only liable for total loss and debts of
the firm
(iii) Managerial limitation-business unable to take advantage of the skill,
knowledge and expertise of specialized staff.
(iv) Possibility of discontinuity –Business can die with the proprietor
(v) Economics of scale not possible due to small size of the firm.
Partnership
A partnership is an association of at least two and at most twenty
persons who combine to run and carry on business with a view to
making a profit.
A partnership may be formed by oral agreement or by implication or by
a written agreement known as ‘deed of partnership’
Partnership Deed
Common features of the partnership deeds include the following:
- The nature of the business
- The name of the business
- The location
- The names of partners
- The duties, rights, of each partners
- Amount of money to be contributed by partners
- Procedure for valuing non-cash assets either for purpose of
investment or withdrawal
- The procedure for sharing profits and losses
- Level of withdrawal to be allowed each partner
 - The accounting system to be used
- Procedure for settling disagreements
- Provision for dissolution
Types of Partnership
Partners may be classified on the basis of liability, degree of management
participation, and share in profit and so on.
General Partners
General partners are the owners of the business; they have the right to determine
the actions of the partnership and are active in the management and control of the
organization.
Limited Partners
These are individuals who invest in partnership and do not wish to participate in its
management. Limited partners revive returns on their investment and are not liable
for the debt of the partnership.

Silent Partners
Silent partners can be known by the public as owners of the business but
they may not take active role in managing the business
Secret Partners
Secret partners may take active role in the management of the company but
they are unknown to the outsiders as partners
Sleeping Partners
These are also called dormant partners. They are neither known as partners
by the public nor do they participate in managing the company. They only
share from the profit/loss of the business to the tune of capital contributed.
Nominal Partners
Nominal partners are those who publicize to the general public that they
are partners although they have no investment in the business, and
therefore have no right of management. They merely lend their names to
the enterprise and may be liable for certain debts of the partners.
Advantages
(i) It enjoys large capital because partners can pool their
resources together
(ii) The business benefits from the collective knowledge and
liabilities of the partners.
(iii) The business enjoys personal attention interest and duration
of partners’ i.e. effective is enhanced.
(iv) Privacy is maintained since books and accounts are not published.
(iv) It usually lasts longer than sole proprietorship
Disadvantages

(i) All partners have unlimited liabilities except in the rare case of limited
partners
(ii) A partnership is not easy to dissolve, unlike sole proprietorship. There is
a risk of collative responsibility especially in trading.
a. Partnership Inter-personal squabbles among the partners often
affect the business.
b. Partnership often comes to an end at the death or withdrawal
of a Partner.

Corporation
The corporation form of business ownership came into existence due to the
inability of unincorporated organizations, such as sole proprietorship and
partnership to raise the required funds for investment as demanded by the
dynamic technological environment. The corporate form of ownership was
strengthening in 1819, when Chief Justice John Marshall of the U.S
Supreme Court defined a corporation as “an artificial being invisible,
intangible and existing only in contemplation of law.
Types of Companies
A company may be limited or unlimited. Limited liability companies may
be limited by shares or guarantee.
A company limited by shares is having the liabilities of its member’s
limited by the memorandum to the amount paid or the shares respectively
held by them.
A company Limited by guarantee is one having the liability of its
member limited to the amount members have agreed to respectively
contribute to the assets of the company in meeting the obligation of the
creditors in the event of the company winding up.
An unlimited company is the one having unlimited liability of its
members, this implies that each member is personally liable for the debts
of the company in the event of the company winding up.
Features of a Private Company
The following are the features, of a private company:-
i. Has at least two and maximum number of fifty members
ii. Prohibits invitation to the public to subscribe for shares.
iii. Restricts transfer of shares, except by
permission of the company
iv. Does not publicize annual reports and accounts of the company.
Features of a public company:
Features of public Company include:
(i) Have at least seven members and no upper limit.
(ii) Invites the public to subscribe for shares of the company
(iii) Allows for liquidity of shares i.e. they are easily
transferred and converted to cash.
(iv) Publishes the annual reports and accounts of the company
for public consumption.
Advantages of a corporation:
a. Creation of Capital: Corporation has greater financial capability since
capital can always be raised by selling shares.
b. Limited liability: the liabilities of members are limited to amount of money
put into the business.
c. Continuous life: Unlike the other forms of business organization, which are
most often dissolved by the death of partners, the corporation’s life is not
affected by the death of a member of stockholders
d. Ease of transfer of ownership: the shares are transferred from one person
to the other formal transfer of share certificates titles is normally handled by
a financial agent e.g. banks stockholders
e. Authority and power of a corporation is centralized and delegated.
f. Management ability: Corporations are known to employ the best
executives to man their affairs.
Co-operative Societies
Co-operative society is a business organization managed on the basis of democracy
to optimize social and economic benefits for its members.
Features of a cooperative society

- Membership of co-operative society is voluntary.

- Management of the organization is based on the principle of democracy.
- Co-operative societies are formed not only for profit motive, but also
to render service to their members.
Examples of Co-Operative Societies
(i) The thrift and credit societies.
(ii) Agricultural co-operatives
(iii) Consumer-co-operatives
(iv) Artisan societies.
Principles and rules of Cooperative Society

The rules and regulations governing the operation of cooperative

societies are referred to as “Rochdale principles’
They include:
 (1) Open or voluntary membership.
(2) Democracy-voting on the basis of one man one vote.
(3) Limited interest on capital.
(4) Patronage rebates. i.e. payment of dividend on the basis of
purchases made by members
(5) Cash sales.
(6) Co-operative education
(7) Cooperation among the co-operators
(8) Neutrality in race, religion and politics

Corporation
A public corporation is one organized by the government for the purpose
of conducting public affairs. They are quasi corporation in that they do not
rest solely on profit making and are maintained by public revenue. They
do not possess shareholders and are not incorporated, but established by
the acts of parliament or decrees.
In Nigeria, public corporations are generally known as public enterprises
or parastatals
Examples:
- Nigerian Railway corporation (NRC)
- Nigerian Airways Authority NAA)
- Nigerian Ports Authority (NPA)
- Power Holding Company of Nigeria (PHCN) etc.
They have independent board of directors appointed by the government.
Reasons for public corporation:
(1) To prevent monopoly and exploitation of the public
(2) To avoid duplication of facilities and prevent waste of resources
(3) To take care of large capital requirements
(4) To promote even development
(5) To generate revenue for government for political reasons.