SOLE PROPRIETORSHIP

Meaning
A sole trader or simply proprietorship is a type of business
organization that is owned and run by one individual and there is
no legal distinction between the owner and the business.
The owner of business is called a sole proprietor.

Characteristics:

Ownership
The business is owned by a single individual that is the individual
is the lawful owner of the properties and assets of the business.
Nobody else has any stake in the business, He enjoys all the
business profits and bears all the risks (loses) alone.

Management and control

The business is managed by the owner himself. He is the sole
decision maker and the total control of the business rests in his
hands. However, he may have some paid workers to assist him.
Finance (capital)
The capital required to start the business is provided by the
owner. However, he may raise some capital by borrowing from
other sources such as friends, family, financial institutions or
bank
Unlimited liability
This means that the sole trader is personally accountable for
debts of the business. In case he is unable to pay his debts the
creditor can lay claim on his personal Property such as car,
houses, furniture etc to pay the loan
Legal status
The sole trader and his business are considered as one. All the
assets and liabilities of the business belong to the sole proprietor.
We can say that the owner and the business exist together and
the business ceases to exist once the owner dies.

Legal formalities
The sole trader can set up or close the lawful business as and
when he likes, the operation of his business is not governed by
any special act or regulation. However, a few legal restrictions
may be there in setting up a particular type of business. For
example, to open a shop, the sole proprietor needs a trading
license from the local city council.

Advantages
Easy to form and dissolve,
It is the owners decision to form or wind up the business at any
time. There is minimal legal requirements. (Except for those
businesses which require a license from local authorities or health
department of government etc.) It is also very easy to wind up
the business.
Direct motivation
The profits earned belong to the sole proprietor alone Thus,
there is a direct relationship between the effort and the
benefits. This provides strong incentive for the sole
proprietor to work hard.

Quick decisions:
The sole proprietor alone is responsible for all decisions, the
decision making is quick since no one else is involved in decision
making this enables him to take advantage of available
opportunities right away and give immediate solutions to
problems.

Better control:
The proprietor has complete control over the management of
each and every activity of the business. Since the proprietor has
all authority with him, it is possible to run the business efficiently
and effectively. This also makes it easy make change in business
operations if necessary.

Maintenance of business secrets

This refers to the ability to keeping the future business
strategies, plans , tactics etc., secret from outsiders or
competitors. In the case of sole proprietorship business, the
proprietor is in a very good position to keep his plans to himself
since management and control are in his hands.

Close personal relation

The sole proprietor is always in a position to maintain
personal contact with the clientele and staff. This helps the
sole proprietor to know the customer tastes. It also helps in
maintaining good relationships with the staff and thus, the
business is run well.

Disadvantages
Limited capital
In a sole proprietorship business, the owner raises the capital
required for the business. It is difficult for a single individual to
raise a huge amount of capital. Most financial institutions and
banks are reluctant to lend money to sole proprietorships .The in
ability to raise sufficient capital to meet the business requirement
is a major obstacle for the growth and expansion of a sole
proprietor.

Unlimited liability
The sole proprietor has unlimited liabilities, if his business
fails to pay the expenses arising from business activities, his
personal assets may have to be used to pay for the debts.
This makes the sole proprietor cautious and unwilling to
take risks to start or expand the business activities.
Lack of continuity
The continuity of business is uncertain, it is dependent on
the life of the owner. Bankruptcy, poor health, death or
insanity of the owner brings to an end the business.

Lack of managerial expertise

one cannot be an expert in every aspect of management. It
is impossible to be an expert in administration, planning,
marketing, production management, human resource
management, finance, marketing etc; one may be good in
human resource management but may be weak in financial
management. Because of limited financial resources it is
also not always possible to employ a specialized managers
to manage different business functions e.g.(human resource
manager , marketing manager , finance manager e.t.c )
Thus, the business lacks benefits of professional
management.

Questions
a) What is a sole proprietorship?
b) Discuss the characteristics of a sole proprietorship?
c) Discuss the advantages and disadvantages of a sole
proprietorship?
d) Define the following Vocabulary
i. Sole proprietorship
 ii. Limited liability
iii. Unlimited liability

PARTNERSHIP
A partnership is an agreement between two or more people to
finance and operate a business with the common objective of
making profit. Considering the limitations of a sole proprietor one
may start a partnership firm with the purpose of pulling in people
together so that more capital is generated or making specific
skilled people partners so that informed business decisions
may be made.
Each member of a partnership is known as ‘partner’ and jointly
the members are known as a ‘partnership firm’.

Characteristics of a partnership:

Two or more members:

A partnership is formed by at least two members are

required to start a partnership business and a maximum of
20 members. If the number of members exceeds this
maximum limit, then that business is not called as a
partnership business legally.

Partnership agreement,
The relation between the partners of a partnership firm is
governed by an agreement which may be verbal, written or
implied. If it is in writing it is known as a ‘Partnership Deed’.
This agreement must contain-

 The amount of initial capital contributed by each

partner
 Profit or loss sharing ratio for each partner
 Salary or commission payable to the partners, if
any
 Duration of business, if any
 Name and address of the partners and the firm
 Duties and powers of each partner;
 Nature and place of business; and
 Any other terms and conditions to run the
business

If the conditions are clear and comprehensive, the

possibility of disagreement between the partners is
considerably reduced

Legal Status
The Law does not recognize the firm as a separate legal entity
separate from the partners. The partnership firm is just a name
for the business. If someone take legal action against the firm, it
is as good as someone suing all the partners.
Transfer of Interest
No partner can sell or transfer his share or part or partnership of
the firm to any one without the approval of the other partners
Unlimited liability:
Like a sole proprietorship, the liability of partners in a
partnership is also unlimited. This means, if the assets of the firm
are inadequate to meet the firms liabilities, then personal
possessions of the partners, if any, can be used to meet the
business liabilities.

Each partner acts as an agent of the partnership.

Business transaction in a partnership firm can be carried on by

all the partners or any one of them acting for all and if any
partner carrying out transactions for the sake partnership
business, incurs liabilities all partners are held liable for his
dealings with third persons.

Sharing of Profit and Loss

Unless provisions are put in the partnership agreement on the

manner in which profits and losses are to be shared, all profits
and losses are shared equally amongst the partners.

Dissolution of Partnership

Unless provisions are made in the partnership deed by default a

partnership will end upon the death, disability, insanity or even
withdrawal of any one partner.
Rights of Partners

Unless provisions are made in the partnership deed, by default,

each partner has an equal right to participate in the management
and control of the business. Differences in the ordinary course of
partnership business are decided by a majority of the partners

Advantages of Partnership Firm

Simple formation process

It can be formed with Minimum legal requirements and expenses

compared to a company.

More capital is available for investment in the partnership

A partnership is owned by more than one partner hence it have

the capability to raise more capital, both internally among the
partners and externally by borrowing from financial institutions.

Better Management

The businesses benefit from a combination of complimentary

skills from different partners. When two or more people working
together have complimentary skills it is very cost-effective as
they specialize and become more efficient in certain aspects of
their business. For example One partner might be good at
managing business operation and handling clients, while another
is better at managing business finance.
Sharing of Risk:
If the business experiences financial difficulties, loses and
liabilities are shared by all partners. This reduces the risk of
losing personal assets.

DISADVANTAGES OF A PARTNERSHIP

Unlimited liability
Partners are jointly and individually liable for the actions of the
other partners, a wrong decision made by one partner may lead
to heavy liability and this will directly affect other partners.
Beside that any one of the partners can be called upon to pay all
the business liabilities from his personal properties.

Profits are share

Profits must be shared among partners. The partners decide how
to value each other’s time and skills. This is not motivating and
may lead to disagreement especially if one partner puts in less
time and effort.

Instability
A partnership has a limited life; it may end upon the withdrawal,
insanity or death of a partner

Limited Capital
The maximum number of partners in a partnership is restricted to
twenty the capital which can be raised is also limited.

Questions

a) What is a partnership

b) What are the main content of a Partnership Deed’

c) What are the main characteristics of a partnership

d) Discuss the limitations and benefits of a partnership as a

form of business

e) Define the following

i. ‘partner’
ii. ‘partnership firm’
iii. ‘Partnership deed’

COMPANY (Corporation)

A company is a separate legal entity having an existence

separate and apart from the owners.

Characteristics

Limited liability
Companies Liability is limited to the properties of the company
and the owners are not personally liable for the debts of the
company. If a company fails, shareholders normally only stand to
lose their investment and the staff loses their jobs, but neither
will be further liable for company debts.

Separate legal personality

A Company is recognized by the law as an artificial person, it

have rights and responsibilities like actual people. It can own
properties and make legally binding contracts (i.e it can sue and
be sued. Companies can even be convicted of criminal offences,
such as deception, corruption and destruction of property.)

Perpetual lifetime
Accompany is its own legal person, as long as it fulfills the legal
requirements, it can exist beyond the life span of any of its
shareholders and staff. It existence is not affected by the death,
insanity, incapacity or withdrawal of any shareholder or
management staff.

Delegated management,

The management of a company is assigned to the board of

directors who have authority and responsibility to make decisions
and carry out business activities on behalf of shareholders

Membership:
A Private limited company having a minimum number of
two (2) shareholders and maximum of fifty (50) and a Public
Limited Company, have minimum is seven (7) shareholders
and the maximum is unlimited.

Advantages
Limited liability
Because it is considered a separate legal entity, the shareholders
have limited liability and their personal assets of are not at risk
for satisfying company debts or liabilities. Because of the limited
protection provided to the owners a company is able to take risks
and also to attract a large number of small investors to invest in
the company. .

Dissolution
Since corporations have a perpetual existence, the dissolution
of a company does not happen automatically it is determined by
the state it can be dissolved voluntarily or involuntarily. The
management of a company are given the responsible of paying
creditors and outstanding claims, and distributing the remaining
assets to shareholders

Economies of scale

Companies produce in large quantities therefore they experience

economies of scale; economies of scale are factors that cause a
producer’s average cost per unit to fall as he produces in large
quantity. Due to this a large business can pass on lower costs to
customers through lower prices and increase its share of a
market. Secondly, a business could choose to maintain its current
price for its product and accept higher profit margins. This further
opens the scope for expansion.

Professional Management:
Companies are able to raise large amount of capital in
comparison with other forms of business also because of its scale
of production its activities are multifaceted and this requires
professional expert to manager to run every department. This
increases it effectiveness and efficiency.

Raising Capital
the ability to issues shares makes it easy for a company to raise
capital investment. It's also easier to get loans approved from
banks and other financial lending institutions. This is because
people have a positive perception of companies as having long
term financial stability.

Transferring Ownership
The existence of shares also simplifies the sale of your business
interests in the future.
Perpetual life
death or illness of an owner or director, does not affect the
operation of a business, the business continues for an indefinite
period.

Disadvantages
Legal requirements

The formation of a company involves compliance with the legal

requirement as stipulated in the company Act and compliance
with several other Laws. Compliance with legal and accounting
requirements places a significant burden on companies in terms
of staffing, expenditure and time. Non-cooperation of these laws
will result to a heavy penalty. This affects the smooth
functioning of the companies

Lack of control by the owners

Companies are managed by Board of Directors. This means the

shareholders have little or no say over day to day management of
the company. Since the share holders are widely dispersed
communication with them may became a problem and they may
suffer from lack of information and all of them may not
participate in decision making. Companies are also seen separate
entity from the shareholder , the company assets and finances
 are also detached from the owners , therefore the owners
cannot "borrow" money from the company accounts or use its
assets.

Double taxation

Company earnings are subject to double taxation, whereby,

company profits are taxed, and then the dividends paid to
shareholders from the "net" profits are also taxed.

No secrecy

Unlike sole proprietorships and partnerships, limited liability

companies are subject to strict legal requirements, e.g. the filing
of annual returns, appointment and removal of directors, winding
up, etc. by the government .Other people, including competitors
can see your accounts and other information that you are
obligated to file.

Unit questions

 If you opened your own business what form of business

ownership would you use and why?
 What are the advantages and disadvantages of the different
types of business ownership?
 What are the differences between a Company and a
partnership
 Differentiate between a partner and a shareholder.
 Discuss your understanding of the following vocabulary in
the unit discussed.
a) company
b) limited liability
c) memorandum of association
d) certificate of incorporation
e) Shareholder
f) partnership
g) sole proprietorship
h) shares
i) unlimited liability
j) Separate legal personality
k) Economies of scale
l) Board of Directors
m) Double taxation