UMARU MUSA YAR’ADUA UNIVERSITY, KATSINA KATSINA, NIGERIA

CODE : ENT 211 :

MODULE 4 : ENTERPRISE FORMATION, PARTNERSHIP AND NETWORKING

Learning Outcomes

Upon completion of this module, students would have been able to:
ü Explore the Basics of Business Plan
ü Understand the Forms of Business Ownership
ü Appraise the Business Registration and Forming Alliances
ü Discuss the concept Joint Ventures

Writing Business Plan and Feasibility Studies

1.1 Introduction
This study session introduces you to how to write a business plan and feasibility studies. The
business plan is like the life plan for an individual. Before you begin writing your business plan you
need to identify how, where, and to whom you intend to sell a product or provide a service. You
also need to assess your competitive environment and understand how much money you need to
start your business and keep it running until it is established. Feasibility studies will be required to
address things like where and how the business will operate. They provide comprehensive details
about the business to determine if and how it can succeed, and serve as a valuable tool for
developing a good business plan.

1.2 Feasibility studies and its importance

Feasibility studies comprise comprehensive, detailed information about ones’ business structure,
the products and services, the market, logistics of how one will actually deliver a product or service,
the resources one needs to make the business run effectively, as well as other information about
the business (Women in Business, 2010). A Business Feasibility Study can also be defined as a
controlled process for identifying problems and opportunities, determining objectives, describing
situations, defining successful outcomes, and assessing the range of costs and benefits associated
with several alternatives for solving a problem (Thompson, 2005).
The importance of Feasibility Studies: According to Women in Business (2010), the information
you gather and present in your feasibility study will help you:

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It serves as the standard or yardstick for assessing performance of envisaged business. It also helps
to:
• List in detail all the things you need to make the business work;
• Identify logistical and other business-related problems and solutions;
• Develop marketing strategies to convince a bank or investor that your business is worth
considering as an investment; and
• Serve as a solid foundation for developing your business plan.
• Provides important information necessary for accurate decision making in relation to
proposed project. Even if you have a great business idea you still have to find a cost-
effective way to market and sell your products and services. This is especially important
for store-front retail businesses where location could make or break your business.

1.3 Components of Feasibility Studies

Executive Summary: The Executive Summary is a summary of all key sections of the Business
Feasibility Study and should work as a separate, stand alone document. Key points to
remember include:
Write this document after the content section of Business Feasibility Study is completed.
Although the Executive Summary is written last, it is presented first. The Executive Summary
should be no more than one page long
Product/Service: Describe the enterprises, product at service in simple language. It describes
how customers would use and buy the product or service.
Technology: As necessary, provide further technical information about the product or service.
It describes additional or ongoing research and development needs.
Intended Market Environment
Target Market:
Define and describe the target market( s).
Distinguish between end users and customers.
For business-to-business markets, include:
What industry is the target market, who is the key players, frequency of product
purchase, replacement needs versus expansion, purchasing process?
For business-to-consumer markets, include: Demographic factors, such as income
level, age range, gender, educational level, and ethnicity.
Competition
Describe direct and indirect competition (as it pertains to the target markets only).
For key competitors, give market share, resources, product and market focus, goals,
strategies, strengths and weaknesses. List all key barriers to entry.
Industry: Clearly define and describe the industry in which the enterprise operates.
Include the size, growth rate, and outlook. Define key industry segments and state where
enterprise fits in.

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Business Model: Describe the proposed enterprise's business model. How will the business
generate revenue (i.e. sell the product; charge licensing, retail sales)? Will there be recurring
revenue?
Marketing and sales strategy: L ay out the ba s i c ma rketin g and sa les strategies.
Describe the pricing strategy and justification. Include the expected gross profit
margins.
Production / operating requirements: Describe enough of how and where the enterprise will
manufacture, source or create and deliver the final product or service to be able to estimate
costs. Will space be owned or leased? Will renovations be required? At what cost?
Management and personnel : List the proposed key managers, titles, responsibilities,
relevant background, experience, skills, and costs. Sketch personnel requirements: what
people will be needed now, in a year, in the long term? What skills and qualifications are
required and what financial implications result?
Regulations/environmental issues: Outline non-economic forces that might affect the
prospects of the firm: Key government regulations and the enterprise’s plans for compliance;
any environmental problems on property, plans to address the problems, and their cost
and Political stability, if applicable.
Financial Projections: Some core components of this part of the report are listed below:
Balance Sheet Projections - Three Years & Highlight Inflows of Capital; Income Projections -
Year I : Monthly or quarterly; years 2 and 3: Annually; Cash Flow Projections - Year I :
Monthly or quarterly; Years 2 and 3: Annually,
Break-Even Analysis - When will the firm begin to turn a profit, and
Cost Benefit Analysis - Will the business provide a viable return on investment for the
owner and/or the investors?
Capital requirements & strategy: How much funding (equity) will the firm need, and when?
What projected revenue or assets does the proposed business have to secure the financing?
What sources will provide the funding, i.e. investors, lending institutions etc? What ratio
of debt to equity financing will occur? When will investors begin to see a return? What
is the expected return on investment (R01)?
Final findings & recommendations
Recommendations from the feasibility study regarding the viability of putting the business
idea into practice should be honest, short and direct. When making the findings or
recommendations arising from the Business Feasibility Study discuss the viability of the
proposed business venture in terms of:
• Market Viability
• Technical Viability
• Business Model Viability
• Management Model Viability
• Economic and Financial Model Viability
• Exit Strategy Viability
A significant component of the findings should related to the likelihood of success,
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projected return on investment and how any identified risk should be mitigated.
What is the importance of market analysis in a feasibility study?
• Market analysis is central in writing a feasibilty study as it enable the potential
business owner to be aware of the market it intends to operate, it will give an
estimated market potential, the shares of the existing marketers, extent of
competition, the current strategies of the existing operators. Equipped with this
information will enable the potential entrepreneur whether to continue or look
elsewhere.
How many of the components of Feasibility Studies can you remember? Make a list of them
1.4 Business plan and its importance
The term “business plan” has different meanings to different people. Banks that release their
own planning guidlines consider formal business loan applications to be synonymous with
business plans. Venture capitalists see them as investment proposals, purely fund raising
documents. Corporate managers think of them in terms of departmental budgets and
financial forecasts.(Touchie, 2005).
According to Kuratko and Hodgetts (1998), the business plan describes to investors and
financial sources all of the events that are likely to affect the proposed venture. Details are
required for various projected actions of the venture, with associated revenues and costs
outlined. A Business Plan describes a business opportunity. It is like a road map because it tells
you what to expect and what alternative routes you can take to arrive at your destination.
Planning helps you to work smarter rather than harder. It keeps you future- oriented and
motivates you to achieve the results you want. Perhaps most importantly, the process of
completing a Business Plan enables you to determine what commitment you need to make
to the venture (Department of Trade and Economic Development, 2010)
1.5 Importance of Business Plan
When you think about what a business plan is your mind probably goes right to the bank and
the process of applying for business financing, as that is the most common use for business
plans. But if you are creating this valuable tool only as a part of a required financing package,
you are overlooking its most important function: planning (Cagan, 2006). Whether you are
new to the world of entrepreneurship or a seasoned veteran, a properly crafted business plan
can help solidify your vision. And when you are remaking an on-going venture, a written
strategy (business plan) can help ensure its success. Taking cognizance of that, there are
particular events that spur the need for a full-scale business plan. According to Cagan (2006),
they include the following:
• You plan to launch a new business.
• Your business has grown substantially.
• You want to expand your existing business into new markets.
• You want to add a new product or product line.
• You are thinking about buying a business.
Other reasons why business plan is necessary according to Department of Trade and
Economic Development (2010) are to:

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• Control future risks
• Prepare for future uncertainty
• Control business environment
• Control business growth
• Avoid sales crises
• Avoid liquidity crises
• Avoid succession crises
• Ensure people development
• Ensure work space available
• Avoid stock buying crises
According to Timmons and Spinelli, (2004), developing the business plan is one of the best
ways to define the blueprint, strategy, resource, and individual requirements for a new
venture. A good business plan must be developed with a view to exploiting the defined
opportunity, developing the opportunity and determining the resources required, obtaining
those resources and successfully managing the resulting venture (Hisrich, Peters and
Shepherd, 2008).
Writing a business plan is time consuming and financial wastage. Discus Writing Business Plan
can be labourious and financially demanding, but it is really worth the trouble. A well writing
business plan will enables an entrepreneur to control future risk, prepare for future uncertanity,
control business growth, take charge of organizational growth and development. It allows for
consistencies in decision-making.
1.6 Principles of Planning in Feasibility Studies and Business Plan
A plan must be:
Explicit: All steps completely spelled out.
Intelligible: Capable of being understood by those who will carry it out.
Flexible: Capable of accepting change.
Written: Committed to writing in a clear and concise manner.
Benefits of Planning
1. Reduces ‘firefighting’: Many small business owners spend so much time ‘putting out the
fires’ that they never have a chance to do anything else. By preparing a Business Plan you can
anticipate problems that are likely to occur and decide how they should be handled in
advance.
2. Justifies your plans and actions: Often, one decides to do something because it ‘sounds’
or ‘feels’ right. You may do something because that is the way that you have always done it.
Preparing a Business Plan forces you to prove the validity, or at least consider the reasoning
of your plans.
3. Tests your ideas on paper: It is much better to produce a Business Plan and find that the
business is likely to be unprofitable than to start the business and find out the same thing.

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4. Indicates your ability and commitment: A well-prepared Business Plan is an impressive
document. It shows outsiders such as lenders and suppliers that you understand the business.
1.7 Components of a written plan
A written Business Plan should contain the following:
1. The Business Idea: An outline and description of the product or service and background
on the industry.
2. The Entrepreneurs: A history of the founders of the business including their skills, abilities
and proposed ownership structure.
3. Business Objectives:
· What the business intends to achieve including long range goals
· The advantage of the product or service over existing competitors
· The image and character of the business to be developed.
The product or service
Technical description of the business.
1. Manufacturing:
· Description of process and machinery used
· Patents and design registrations
· Predictions on changes to the industry
· Costs of materials, machinery, etc
· Plant location and layout
· Labour availability and costs.
2. Retailing: Goods to be sold; Location; Stocking policy and procedures; and Suppliers and
potential suppliers and the sales terms.
3. Service:
· Description of service
· Qualifications necessary to enter the industry
· Industry and/or legal controls
· Processes and services to be offered
Financial information
1. Capital Needs: Fixed assets needed; Working capital needed; and Starting capital needed.
2. Sources of Finance:· Types of finance needed; and Owners funds to be used.
3. Cost of Finance: Set up costs; Current interest rates; Ability to meet borrowings and
Current returns on owners funds.
4. Financial Viability:· Projected profit and loss accounts; Break even analysis; Projected
balance sheets; Cash flow forecasts; Working capital needs; Budgets; Expenses/Sales/Income
and Taxation.

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The market
1. Market Research: Market size; Market description; Market trends; Customer profiles; and
target markets then Preliminary sales forecasts and estimated market share.
2. Competitive Position: Competitors; Unique selling position; Quality of existing products or
services and Marketing practices of competitors.
3. Marketing Program: Distribution channels; Sales outlets; Storage and transport of goods;
Pricing policy; Packaging; Sales promotions and sales strategy; Advertising strategy and costs;
Public relations.
Management and operations
1. Personnel: Numbers of staff needed; Skills necessary; Training programs.
Business organisation
1. Form of legal organisation: Sole Trader; Partnership; Company or Trust; Registration of
business name; Organisation chart.
2. Legal Considerations: Licences; Federal and State taxes; Consumer Law; Business Law;
Insurance.
3. Premises: Space required; Buy or rent contracts; Commercial lease requirements and
problems; Availability of suitable premises.
Questions to be answered in a business plan
1. Description of the business:
· What type of business are you planning (retail, wholesale, manufacturing, tourism,
hospitality, service)?
· What products or services will you sell?
· What type of business is it (new, part-time, expansion, seasonal)?
· Why does it promise to be successful?
2. Marketing:
· Who are your potential customers?
· How will you attract and hold your share of the market?
· Who are your competitors? How are their businesses prospering?
· How will you promote sales?
· Who will be your best suppliers and why?
· Where will the business be located?
· What factors will influence your choice of location?
· What features will your location have?
· How will your building contribute to your marketing strategy?
· What will your building layout feature?
3. Organisation:

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 · Who will manage the business?
· What qualifications will you look for in a manager?
· How many employees will you need and what are their job descriptions?
· What are your plans for employees’ hiring, salaries and wages, benefits, training and
supervision?
· How will you manage finances?
· How will you manage record-keeping?
· What consultants or specialists will you need?
· What legal form of ownership will you choose?
· What licences and permits will you need?
· What regulations will affect your business?
Summary and conclusion for module 2 study session 3
• Developing the business plan is one of the best ways to define the blueprint,
strategy, resource, and individual requirements for an on-going venture.
• A properly crafted business plan can help solidify your vision.
• When you are undertaking a new venture (feasibility studies), or remaking an old
one (business plan), a written strategy can help ensure its success.
• Business Plans and Feasibility studies are required as controlled process for identifying business
problems and opportunities, determining objectives, describing situations, defining
successful outcomes, and assessing the range of costs and benefits associated with several
alternatives for solving a problem.

2. FORMS OF BUSINESS OWNERSHIP

In this session you will agree with me that different forms of businesses operate around you.
Some are very small, run by a single person without any assistance, others engage few other
people. These businesses can be categorized differently, for example they can be classified
as sole propietorship, partnership, limited liability companies, cooperative societies. All these
various forms of businesses are what you will learn in this study session. In addition, you will
also learn the legal requirement for establishing each category and also the regulatory agency
that regulate the activities of companies in Nigeria.
Learning outcomes for module 1 study session 4
At the end of this study session 4 you should be able:
4.1 Define and use correctly all the key words printed in bold
4.2 Define sole proprietorship; discuss its advantages and disadvantages. (SAQ 1-4)
4.3 Explain partnership, types, formation, dissolution of partnership.(SAQ 4-6)
4.4 Explain limited liability companies (SAQ4-9)
4.5 Explain co-operative societies and types (SAQ 10)

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2.1 Consideration for the choice of the form of Business organization
You have to appreciate the fact that there are various forms of business organizations that
exist in the environment. Again, business is a profit-seeking enterprise established for the
purpose of creating goods and services that meet the needs of mankind. Business plays a
major role in the lives of every individual as well as a nation (Oluwafemi, 2000). Business
activities are undertaken to improve the financial and the material welfare of the participants.
A major group that plays an active role in business within a capitalist economy is the
entrepreneur, that is, a person who perceives investment opportunities and takes advantages
to exploit them by organizing for the business (Lawal, 1993).
Selecting a form of business ownership is a landmark step in the creation of a venture. Most
entrepreneurs however are not trained in the finer points of business law. Consequently, it is
imperative that an entrepreneur carefully searches for the types of legal ownership and then
consults an attorney (lawyer), and an accountant or both to verify whether the choice
addresses their specific needs (Scarbough Wilsion and Zimmerer, 2009). One of the main
reasons small businesses fail is that they do not seek legal and accounting help at the
beginning. Nickels, Mchugh and Mchugh (2005) stated that one of the key to success in
starting a new business is to understand how to get the resources you need. To stay in
business, an entrepreneur may need help from someone with more expertise than he/she has
in certain areas, or may help to raise more money to expand. How you form your business
can make tremendous difference in your long-term success as an entrepreneur.
Although an entrepreneur may change the form of ownership later, this change can be
expensive, time consuming, and complicated.
There is no single best form of business ownership. Each form has its own unique set of
advantages and disadvantages. The key to choosing the optimum form of ownership is the
ability to understand the characteristics of each business entity and how they affect an
entrepreneur’s business and personal circumstances.
The following, according to Scarborough et al (2009), are relevant issues the entrepreneur
should consider in the evaluation process:
Tax consideration: In a graduated tax rates, the government’s (that is Local, State and Federal)
constant modification of the tax code, and the year-to-year fluctuations in a company’s
income require an entrepreneur to calculate the firm’s tax liability under each ownership
option every year.
Liability exposure: Certain forms of ownership offer business owners greater protection from
personal liability due to financial problems, faulty products, and a loss of other difficulties. An
entrepreneur must evaluate the potential for legal and financial liabilities and decide the
extent to which they are willing to assume personal responsibility for their companies’
obligations.
Start–up and future capital requirements: The form of ownership can affect an
entrepreneur’s ability to raise start-up capital. Also as a business grows, capital requirements
increase, and some forms of ownership make it easier to attract outside financing.
Management ability: Entrepreneurs must assess their own ability to successfully manage
their own companies. Otherwise, they may need to select a form of ownership that allows
them to involve people who possess those needed skills or experience in the company.
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 Business goals: The projected size and profitability of a business influences the form of
ownership chosen. Business often evolves into a different form of ownership as they grow,
but moving from some formats can be complex and expensive. Legislation may change and
make current ownership options less attractive.
Management succession plans: Entrepreneurs, in selecting a form of business ownership,
must look ahead to the day when they will pass their companies on to the next generation or
to a buyer. Some forms of business ownership better facilitate this transition. In other cases,
when the owner dies –so does the business.
Cost of formation: The cost of formation to create business ownership varies from one form
to the other. Entrepreneurs must weigh the benefits and the costs of the form they choose.

2.2 Forms of Business Ownership

Whether small or large, every business fits one of three categories of legal ownership, sole
proprietorships, partnership, and corporations (Brone and Kurtx, 2009).
2.2.1 Sole Proprietorship
The sole proprietorship is the simplest and most popular form of ownership. This form of
business ownership is designed for a business owned and managed by one individual. Sole
proprietorship is the easiest kind of business for you to explore in your quest for an interesting
career. The sole proprietor is the only owner and ultimate decision maker for the business. The
sole proprietorship has no legal distinction between the sole proprietor status as an individual
and his or her status as a business owner. The simplicity and ease of formation makes the sole
proprietorship the most popular form of ownership in Nigeria. One approach when naming a
business is to visualize the company’s target customer. What are they like? What are their ages,
gender, lifestyles and location? What makes our company competitive or unique to those
customers? Although sole proprietorships are common in a variety of industries, they are
concentrated primarily among small businesses unit such as repair shops, small retail outlets,
and service providers, for example, such as painters, plumbers, and barbing saloon.
Advantages of proprietorship: Following are the advantages of proprietorship
i. Least cost of business ownership to establish
ii. Minimum or no special legal restriction
iii. Ownership of all profit
iv. No special taxes since business income and proprietors’ income are taxed as one.
v. Maximum incentive to succeed
vi. Privacy
vii. Flexibility of operation
viii. Easy to discontinue
Disadvantages of proprietorship: Following are the disadvantages of proprietorship
i. Unlimited personal liability
ii. Limited access to capital for expansion
iii. Limited skills and abilities
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 iv. Feelings of isolation /overwhelming time commitment
v. Few fringe benefits
vi. Limited growth
vii. Lack of continuity for the business that has a limited life span.
2.2.2 Partnership
Another option for organizing a business is to form a partnership. A partnership is a legal
form of business with two or more owners. Partners legally share a business assets,
liabilities, and profits according to the terms of a partnership agreement. The law does not
require a written partnership agreement, also known as the articles of partnership, but it is
wise to work with an attorney to develop an agreement that documents the status, rights
and responsibilities of each partner. The partnership agreement is a document that states
all of the terms of operating the partnership for the protection of each partner involved.
Banks often want to review the partnership agreement before lending the business money.
A partnership agreement can include any legal terms the partner’s desire. The standard
partnership agreement will likely include the following information:
i. Name of the partnership
ii. Purpose of the business
iii. Location of the business
iv. Duration of the partnership
v. Names of the partners and their legal addresses
vi. Contributions of each partner to the business, at the creation of the partnership and
later.
vii. Agreement on how the profits or losses will be distributed.
viii. Agreement on salaries or drawing rights against people for each partner.
ix. Procedure for expansion through the addition of new partners.
x. Distribution of the partnership asset to the partners.
xi. (11) Sale of the partnership interest
xii. Absence or disability of one of the partners
xiii. Voting rights
xiv. Decision making authority
xv. Financial authority
xvi. Handling tax matters
xvii. Alteration or modifications of the partnership agreement.
xviii. Termination of partnership
xix. Distribution of assets upon dissolution of the partnership
A Partnership can be regarded as an improvement on sole proprietorship form of business
organization, the minimum number of people that can form a partnership is two, while the
maximum is twenty, with the exception of partnerships comprising professionals; for
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example, lawyers, accountants, doctors, to mention just a few. Notably, most partnerships
are usually formed by professionals and those that engage in service oriented business
concerns.

Types of Partnership: There are four types of partnership, on the basis of liability of partners
(1) General partnership: This is a partnership in which all owners share in operating the
business and in assuming liability for the business’ debts.
(2) Limited partnership: This is a partnership with one or more general partners and one
or more limited partners. Limited partnership is one in which certain partners are liable only
for the amount of their investment. This is a special kind of partnership governed by
partnership Act of 1907. The purpose of a limited partnership is to allow one or more
individuals to provide capital on which a return is expected. In case of liquidation, the limited
partners only lose the capital.
(3) Master Limited Partnership (MLP): This is a newer form of partnership which looks
much like a corporation in that it acts like a corporation and is traded on the stock exchanges
like a corporation but it is taxed like a partnership and thus avoids the corporate income tax.
(4) Limited Liability Partnership (LLP): LLP limited partners risk losing their personal
assets to only their own acts and omissions of people under their supervision. This newer type
of partnership was created to limit the disadvantage of unlimited liability.
Types of partners on the basis of the involvement in partnership: An entrepreneur interested
in being involved in partnership form of business should endeavor to understand the types of
partners that he/she can choose to be in this form of business. Partners may be
classified on the basis of liability, degree of management participation in management share
in the profit and so on. The following types of partners are organized
1) General partner: A general partner is an owner (partner) who has unlimited liability
and is active in managing the firm.
2) Limited partner: A limited partner is an owner who invests money in the business but
does not have any management responsibility or liability for losses beyond the investment.
3) Silent partners: These are partners who are known by the public as owners of the
business, but they may take no active role in marketing the business.
4) Secret partners: These are partners who take active role in the management of the
company but they are unknown to the outsiders as partners.
5) Sleeping partners: These are also known as dormant partners, they are 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.
6) Nominal partners: These kinds of partners are publicly known that they are partners
although they have no investment in the business and therefore have no rights of
management. They merely lend their names to the enterprise and may be liable for certain
debt of the partnership.
o How is a general partner different from a sleeping partner?
• A general partner is an owner (partner) who has an unlimited liability and is active in
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 the management of the form, a sleeping partner on the other hand do not participate
in the day to day running of the business, they only share in the profit
/loss of the form. Most often they are not known to the public and partners
Advantages of Partnership: The following are the advantages of Partnership
• Easy to establish
• More financial resources
• Shared management and pooled /complementary skills and knowledge
• Division of profits
• Minimum governmental regulation/limited legal restrictions
• Flexibility
• Freedom from double taxation
• Secrecy
• Longer survival

Disadvantages of Partnership: The following are the diadvantages of Partnersip

• Unlimited liability
• Division of profits
• Disagreement among partners especially with regard to authority and control
• Difficult to terminate because partners are bound by the law of agency
• Restrictions on transfer of ownership
• Lack of continuity
2.2.3 Dissolution and Termination of a Partnership
Partners expect their business relationships are going to last forever. However, most do not.
There are possibilities that problems may occur when the entrepreneur realizes he or she is
not in charge of his or her own company. Even when partnerships work, there are always
fears that the partners will develop different business goals. Partners may dissolve or
terminate the partnership. Thus dissolution occurs when a general partner ceases to be
associated with the business. This may be as a result of:
i. Expiration of a time period or completion of the project undertaken as
delineated in the partnership agreement.
ii. Expressed wish of any general partner to cease operation.
iii. Expulsion of a partner under the provisions of the agreement.
iv. Withdrawal, retirement, insanity, or death of a general partner (except
when the partnership agreement provides a method of continuation).
v. Bankruptcy of the partnership or of any general partner.
vi. Admission of a new partner resulting in the dissolution of the old
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 partnership and establishment of a new partnership.
vii. A judicial decree that a general partner is insane or permanently
incapacitated, making performance or responsibility under the partnership
agreement impossible.
viii. Mounting losses that make it unpractical for the business to continue.
Impropriety or improper behaviour of any general partner that reflects negatively on
the business. (Adapted from Scarborough et al 2009 pg 87). Termination on the
other hand is the final act of intentionally closing the partnership as a business. This
can occur after the partners have agreed to cease operations and all affairs of the
partnership have been concluded.
2.2.3.1.1 How is Sole Proprietorship different from partnership?
• Sole proprietorship is a business established and run by the owner for purpose of
meeting needs and making profit, while partnership is a business run by between 2
and 20 partners for purpose of meeting needs and making profit

2.3 Limited Liability Companies

The incorporation of companies differs from one country to the other. Each country has a
body of laws that guide the registration and operations of companies. In Nigeria, the
Companies and Allied Matter Act (CAMA) of 1990 is the major law that guides formation and
registration of companies in Nigeria.
2.3.1.1 Formation of Company and Capacity of Individual
According to Section 18 of CAMA 1990, two or more persons may form and incorporate a
company by complying within requirements of the act. It also specifies the category of people
that can come together to form a company. Section 20 states that anyone in these categories
is not qualified:
i. he is less than eighteen years of age;
ii. he is of unsound mind and has been so found by a court in Nigeria or elsewhere;
iii. he is an un-discharged bankrupt;
iv. he is disqualified under Section 254 – which says a person is convicted by a High Court of
any offence in connection with the promotion formation or management of a company,
etc.
2.3.2 Types of Companies: three types of companies can be identified
• Limited by shares
• Limited by guarantee
• An unlimited company.

A company is said to be limited by shares, if the liability of its members limited by the
memorandum to the amount, if any unpaid on the shares respectively held by them.
A company is said to be limited by guarantee if the memorandum to such amount as the
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members may respectively thereby undertake to contribute to the assets of the company in
the event of its being wound up.

A company is said to be unlimited when the members do not have any limit on the liability of
its members.
2.1.1 Private liability Companies
The private liability company can be formed by minimum of two persons and maximum of
fifty persons excluding employees of the company both past and present (according to Section
22 Subsection 3). The total number of members of a private company shall not exceed fifty,
not including persons who are bonafide in the employment of the company or were while in
that employment and have continued after the determination of that employment to be,
members of the company. The articles of the private company must restrict the transfer of its
shares, i.e. the share of the company is not transferable through public offer for subscription.
The law also requires the name of private company to end with the word “limited”.
The public liability company is a company where the shareholders are members of the public.
The shares are generally freely transferable. Public companies are large trading concerns with
minimum membership of two but no maximum. The name of a public company is expected
to end with Public Limited Company (PLC).
o Explain limited liability companies?
• Limited liability companies are companies incorporated or registered in Nigeria that is
regarded as an artificial person, such company can sue and be sued. They can take the
form of private or public companies.
2.1.2 Legal Requirement for Registration of Companies
The Companies and Allied Matter Acts specified the documents of incorporation, in section
35 of the acts to include:
i. Memorandum of Association;
ii. Articles of Association;
iii. Notice of the address of the registered office and head office;
iv. Statement of the lists and particulars of the first directors of the company;
v. Statutory declaration of compliance with the provisions of the acts
vi. Any other document that may be required by the Corporate Affairs
Commission (CAC), e.g. tax certificate of the directors, etc.
If the promoters have met the requirements of the CAC, a certificate of incorporation or
certificate of registration would be issued and immediately the company becomes an artificial
person or legal entity.
Memorandum and Articles of Association: These two documents constitute the basic
constitution of a company. They are in fact the main incorporation documents. The provision
of the Articles of Association is subsidiary to that of the Memorandum of Association. In
other words, Memorandum of Association is superior to the Articles of
Association. Wherever there is a conflict between the provisions of the two, that of

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Memorandum of Association takes pre-eminence prevails.
Contents of Memorandum of Association: Section 27 of CAMA 1990 specified the content
of the Memorandum of Association. The content include among others:
i. Name of the company: For a private company to end with (Ltd); public
company to end with (PLC), i.e. both are limited by shares. If limited by
guarantee to end with limited by guarantee or (Ltd/GTE). No two different
companies must have an identical name;
ii. The address of the registered office of the company must be located in Nigeria;
iii. The object of the company – the type of business and contract the
company can lawfully enter into;
iv. The restriction, if any, on the powers of the company;
v. Share capital clause – minimum share capital required for private
company is N10,000, while that of public company is N500,000;
vi. Liability closure – the statement whether the liability of its members are
limited or unlimited or limited by share or guarantee;
vii. Subscription clause – the subscribers of the memorandum are required to
subscribe nothing less than 25% of the company’s share capital. Each
subscriber must write his full names, signature, profession or status as well as
address on the column provided.
Content of the Articles of Association: The Articles of Association prescribe the rules and
regulations for the internal management of the affairs of the company. The Articles of
Association regulates the rights, duties, and obligations of the members among themselves
and also the rights, duties and obligations of the members to the company and vice-versa.
Other items contained in the document include:
i. Membership;
ii. Meetings, notices of meetings, conduct of meeting;
iii. Directors, their qualifications, disqualification powers, duties, etc;
iv. The company borrowing powers;
v. Company Secretary;
vi. Custody of the company’s common seal.
Advantages of Limited Liability Companies
a. It has a legal entity;
b. Limited liability of shareholders
c. Ability to attract capital
d. Ability to continue indefinitely
e. Transferable ownership
f. Separation of ownership from management
g. The death of a shareholder does not mean the end of the company;
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 h. Accessibility to large capital which enhance growth.
Disadvantages of limited liability companies
a. When company becomes very large, there is no personal relationship between the
customers and the owners;
b. Official red tapism may delay decision making;
c. Chain of command becomes long which lead to communication breakdown.
d. Cost and time involved in the incorporation process
e. Double taxation
f. Charter restrictions
g. Extensive legal requirement and restrictions
h. Potential for diminished management incentives
i. Potential loss of control by the owners
j. Difficulty of termination
k. Possible conflict with share stockholders and board of directors

2.1.2.1.1 How is private ompany different from public company?

• Private company has a maximum number of 50 persons, shares are not subscribed to
or transferable by the public and the name must end with “limited” while public
company do not have any maximum number of subscribers, shares are publicly
subscribed to and transferable through the stock exchange market.
3. Co-operative
A form of business ownership which involves a collective ownership of a production, storage,
transportation or marketing organisation is what is referred to as a co-operative. Some
individuals dislike the notions of having owners, managers, workers and buyers as separate
parties with separate goals for business organisation. They envision a situation whereby
people will co-operate with one another as an association and share the wealth more evenly.
This is what necessitates the form of business ownership referred to as cooperatives.
• Types of Co-operative
Consumer/producer co-operative
Workers co-operative
Finance co-operatives
Co-operatives allow small businesses to obtain quantity discounts on purchases, reducing
costs and enabling the co-operative to pass on the savings to its members.
Summary
It goes without saying that it is not easy to choose the best form of business organisation. Its
evidence is outlined in this study session that an entrepreneur may participate in the business
world in a variety of ways. He/She can start a sole proprietorship, partnership, limited liability
company (private or public), or cooperative, There are advantages and disadvantages to each,

17
but whichever one is selected there are risks. Before you decide which form is good for you,
you need to
• Assess the nature, goals and anticipated future of the business.
• Determine the resources, capabilities, and risk level of the
owner.
• Review your current and expected tax situation.
• Understand the laws of your state and other jurisdictional
regulations relating to forms of business ownership.
• Involve professional advisers, such as an attorney and an
accountant to advise and assist with the decision process and
take the appropriate action (Scarborough et al, 2009

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Cagan, M ( 2006) Business Plan: Create a Business Plan to Supercharge your profit.
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Hisrich, R.D., Peters M.P. and Shepherd D.A. (2008) Entrepreneurship (7th ed.) New York:
McGraw-Hill Companies Inc.

Kuratko, D. F. and Hodgetts, R. M (1998) Entrepreneurship: a Contemporary Approach (4th

ed). New York: Harcourt- Brace College Publishers.

Ogundele, O.J.K. (2012) Management and Organization: Theory and Behaviour, Lagos:
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Thompson, A ( 2005) Entrepreneurship and Business Innovation: The Art of Successful Business Start-
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Timmon, J.A and Spinelli, S. (2004) New Venture Creation: Entrepreneurship for the 21st
Century. New York: McGraw-Hill/Irwin.

Touchie, R.D ( 2005) Preparing a Successful Business Plan. Ghana: EPP Book Services.
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www.womeninbusiness.about.com/od/busnessplan/a/feasibilitystud.

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