Part-II Entrepreneurship

Chapter-3
Organization Structure and
Management
 Forms of Ownership and Legal
Requirements
• There most common forms currently in wide
use by small business are shown in the
following figure as
1. Proprietorship,
2. Partnership,
3. Corporations, and
4. Cooperatives
 The Sole Proprietorship Option
• Advantages of Sole Proprietorship
– The sole proprietorship has a number of
advantages:
– Ease and low cost of formation and
dissolution
– Owner-ship of all profits and personal
incentive
– Freedom and promptness of action
– Business secrecy
– Social desirability
– Pride of ownership
 Disadvantages of Sole proprietorship
• Unlimited liability-the risk of losses.
• Limited financial resources
• Limitations in managerial ability & other special
skills and abilities.
• Uncertain future.
• Demands on time (overwhelming time commitment)
• Difficulty in hiring and keeping high achievement
employees.
• Few fringe benefits
 The Partnership Option
• A partnership form of organization
represents the second stage in the evolution
of the forms of business organizations.
• It grows essentially to meet the requirement
of expanding business which calls for more
capital, increased risk, and more managerial
ability that were considered as limitations of
the individual proprietorship
 … The Partnership Option
• A partnership is a business run by two or
more persons where their relationship is
based on agreement participating in the
profits and losses arising out of it. Or it is an
association of two or more persons to carry
on as co-owners of a business for profit.
 Characteristics of Partnership
• Formation
– This form of business requires the existence of
two or more persons entering in to contractual
relationships.
– The agreement between the parties is desirable
to be written and signed, to prevent
misunderstanding among the parties.
– This contract is called memorandum of
association, articles of partnership deed or
partnership contract.
 … Characteristics of Partnership
• According to the 1960 commercial code of Ethiopia article 284, the memorandum of
association contains the following:
– The name, address and nationality of each partner;
– The firm name;
– The head office and branches, if any;
– The business purpose of the firm;
– The contributions of each partner, their value and their method of
valuation;
– The service required from persons contributing skill;
– The share of each partner in the profits and losses, and the agreed
procedures for allocation;
– The managers and agents of the firm;
– The period of time for which the partnership has been established.
 … Characteristics of Partnership
• Capital contribution
– Every partner shall make a contribution, which may be in
the form of money, receivables, property or skill. The
contribution to be made for the business shall be equal
unless otherwise agreed.

– Any person capable of contracting may legally become a

business partner.
– Individuals may become partners without contributing to
capital or sharing in the assets at the time of dissolution.
Such persons are partners only as to management and
profits.
 … Characteristics of Partnership
• Management
• If there is no agreement as to the pattern of
managing the business, every partner has the
right to take active part in the management
of the business affairs.
 … Characteristics of Partnership
• Duration
• Legally a partnership comes to an end or terminated for
various reasons.
• It is terminated when any of the general partners
withdraws dies or become no longer to be a partner.
• However, if the remaining partners agree to continue
under the original name of the firm and style, they can
continue after settling the claims of the outgoing partner.

• The partnership can be dissolved prior to the expiry of

term when they agree to terminate.
 … Characteristics of Partnership
• Other legal characters.
– Unlimited liability
– Utmost good faith. A partnership agreement is
based on mutual confidence and trust of the
partners. The parties must, therefore, be just
and honest to other partners. They must disclose
all the facts and render true accounts relating to
the business of the firm and not make any secret
profits. They should not be deceptive.
… Characteristics of Partnership
– No separate entity.
– Restriction on transfer of interest.
– Unanimity of consent No change may be made in
the nature of business and no partner can act out
of the specified way or make major and special
decision without the consent or agreement of all
the partners.
 Kinds of Partners
• A general partner-assumes unlimited liability and is
usually active in managing the business. Most partners
are general partners.
• A limited or special partner-assumes limited liability,
risking only his/her investment in the business. Limited
partners may not be active in management, and their
names are not used in the name of the business
• A secret partner - takes an active role in managing a
partnership but whose identities are unknown to the
public, i.e., the general public does not know of this
person’s partnership status.
 Kinds of Partners
• A silent partner - as opposed to a secret partner, silent partner
his identities and involvement is known to the general public,
but is inactive in managing the partnership business.
• A dormant or sleeping partner-is neither known to the general
public nor active in management.
• Nominal partners - are not actually involved in a partnership
but lend their names to it for public relations purposes but
invest no money in the firm & play no role in its management.
These are not partners but who claim they are or allow others
to think of them as partners. Such individuals may assume
some of the responsibilities of general partners.
 Kinds of Partners
• Senior partners - assume major roles in management
because of their long tenure, amount of investment
in the partnership, or age. They normally receive
large shares of the partnership's profits.
• Junior partners - are generally younger partners in
tenure, have only a small investment in the firm, and
are not expected to make major decision. They
assume limited role in the partnership's
management and receive a smaller share of the
partnership's profits.
 Types of Partnership
• The most common ones are:
1. General Partnership, and
2. Limited Partnership.
 Advantages of a partnership
• Ease of starting

• Increased sources of capital and credit

• Combined managerial skills (improved

decision making potential)

• Definite legal status

 Advantages of a partnership
• Personal supervision

• Reduced risk

• Motivation of important employees

 Disadvantages of a partnership
• Unlimited liability
• Lack of harmony
• Lack of continuity (instability)
• Limited capital availability (size limitations)
• Investment withdrawal difficulty (frozen
investment)
 The Corporation Option
• Corporations are towers on the business landscape.
• While proprietorships are many in number, they are
generally small in size.
• In comparison, corporations are few in number, but
generally large in size.
• Because corporations tend to be large, they play a
powerful role in the economy of our country.
– For example, corporations employ millions of people and
provide consumers with many of the goods and services
they need and want.
•
 The Corporation Option
• The most widely quoted definition for joint
stock company or corporation is given as
– an artificial person (being an association of
natural persons) authorized and recognized by
law, with distinctive name, a common seal,
comprising of transferable shares of fixed values,
carrying limited liability and having a perpetual
or continued or uninterrupted succession life.
Characteristics of The Corporation
• Separate legal entity
• Limited liability
• Transferability of shares
• Death and Withdrawal of shareholders
• Common seal
• Separation of ownership from management
 … Characteristics of The Corporation
• Supervision A company is created by the legal process
of incorporation. It exists as an artificial person until it
is formally dissolved by removal of its name from the
register at the company registry. While it exists it is
subject to detailed regulation; for instance, it must
prepare and deliver to the registry annual accounts
and an annual return (a summary of its situation). The
Registrar of Companies, the Department of Trade and
Industry and the courts all may have power of
regulation and investigation over companies.
 … Characteristics of The Corporation
• Written constitution A company has no mind of its own to
decide what to do. The structure of divided control between
directors and members must be clearly defined. A company
therefore has a written constitution. On the creation of a
company, the promoters must file certain documents with
the Registrar of Companies. These include the Articles of
Association and the Memorandum of Association. The
articles contain details of how the company will be run from
day to day, for example the duties of directors, the rights of
each class of shares, and procedure at meetings. The
memorandum lays down the constitution of the company, for
example; its name, authorize capital and objects.
 … Characteristics of The Corporation
• The Corporate Charter In most states, three or
more persons are required to apply to the
secretary of state for permission to incorporate.
• After preliminary steps, including required-
publicity and payment of the incorporation fee
and initial franchise tax, the written application
is approved by the secretary of the state and
becomes the corporation’s charter.
 … Characteristics of The Corporation
• A corporation charter typically provides for the following:
• Name of the company
• Formal statement of its formation
• Purposes and powers- that is, type of business
• Location of principal office in the state of incorporation
• Duration (perpetual existence, 50-year life and renewable charter, etc.)
• Classes and preferences of classes of stock.
• Number and par (or stated value) of shares of each class of stock authorized.
• Voting privileges of each class of stock
• Names and addresses of incorporators and first year’s directors.
• Names and addresses of, and amounts subscribed by, each subscribe to capital stock.
• Statement of limited liability of stockholders (required specifically by state law in
many states)
• Statement of alterations of directors’ powers, if any, from the general corporation law
of the state
 Structure of Company Management
• We can have three groups that comprise the
corporate structure namely,
– the shareholders or stockholders,
– the board of directors and
– the officers or chief executives of the
corporation.
 Share Holders
• Ownership is divided into equal parts called shares.
• One need only buy a share in order to become a
stockholder.
• Each stockholder receives a certificate from the
corporation, which shows the number of shares owned.
• Ownership in a corporation is evidenced by stock
certificates, each of which stipulates the number of
shares owned by stockholder.
• An ownership interest does not confer a legal right to
act for the firm or to share in its management.
 … Share Holders
• It does evidence the right to receive
dividends in proportion to stockholdings-but
only when they are properly declared by the
board of directors.
• Pre-emptive right- ownership of stock
typically carries the right to buy new shares,
in proportion to stock already owned, before
the new stock is offered for public sale.
•
 … Share Holders
• Shareholders are the ultimate owners of a corporation
and their ownership is proportionate to the number of
shares they have in the corporation.
• Theoretically, the shareholders, as owners, are the
ultimate governing body of the corporation, they do
influence the management activity through their given
group and individual rights since the supreme
authority in the corporation is the body of
stockholders.
• They have the right to approve or disapprove any and
all corporate actions.
 … Share Holders
• To mention some of the group rights:
– To determine the corporate policy. For instance, broad
policies covering retirement plans for officers and
employees, stock options for key personnel;
– To vote on election of board of directors. Regardless of
their holdings, all stockholders have a right to vote for the
board of directors. This voting usually occurs on annual
bases, with each person permitted one vote for every
share owned. Shareholders who can not attend the annual
meeting in person vote by proxy, signing and returning a
slip of paper that authorizes management to vote on their
behalf;
 … Share Holders
– To determine the composition of directors;
– To vote on amendments in the corporate charter
as well as in the structure of the corporation;
– Selection of the outside auditors of the firm.
 … Share Holders
• Some of the individual rights also are like:

– To transfer ownership to others;

– To buy and/or sell stocks;
– To receive dividends. Dividends are profits that are
distributed to stockholders. The decision to distribute
profits is made by the ruling body of the corporation;
– To share in the net proceeds (cash received from the
sale of all assets less the payment of all debts) should
the corporation go out of business or is dissolved.
 Board of Directors
• is the ruling body of the corporation.
• are elected body representing the body of
shareholders and chief governing body of the
corporation.
• The board consists of members who possess
business experience, technical knowledge, financial
standing and reputation for integrity & fore sight.
• The board has ultimate authority in guiding
corporate affairs and making general policy.
•
 … Board of Directors
• They perform core functions and have
powers to make major decisions, sets major
policies, and establish general objectives, i.e.,
board of directors formulate long range
strategies, approves plans from top
management, and sets the major policies
within which all operations will be carried
out.
 … Board of Directors
• The board has the power to make major management
decisions (contracts) with regard to investment,
expansion, etc.
• It has the power to, vote on major management decisions
such as authorizing money to build a new factory,
develop a new product line, or buy a new subsidiary
which may involve billions of dollars in large corporations.

• The board also makes further recommendations of

dividends. The board is empowered to declare stock
dividends.
 The Officers or Chief Executives
• The officers of a corporation are the top
executives determined by the board of
directors through either election or
appointment.
• These include president, chief managing
director, or chief executive officer, vice
presidents, secretary and treasurer.
… The Officers or Chief Executives
• They are directly responsible for achieving the
corporate objectives by giving directions and guidance,
controlling and supervising the overall activities of the
organization.
• In addition, the officers are responsible, within limits
set by the board for directing day-to-day corporate
activities in a manner that conforms to the policies,
strategies establishes by the board.
• They are accountable to the board of directors. Thus,
they have to report performance regarding the
operations.
 Advantages of a Corporation
• Financial strength
• Limited liability
• Scope of expansion
• Managerial efficiency
• Ease in transferring ownership
• Legal-entity status
 Disadvantages of a Corporation
• Difficulty of formation
• Lack of owner's personal interest.
• Delay in decision making
• Oligarchy and fraudulent management
• Lack of secrecy
• Relative lack of credit
 Key Differences Between Public and
Private Ltd. Company
1. The public company refers to a company that is listed
on a recognised stock exchange and traded publicly. A
Private Ltd. the company is one that is not listed on a
stock exchange and is held privately by the members.
2. There must be at least seven members to start a public
company. As against this, the private company can be
started with minimum two members.
3. The is no ceiling on the maximum number of members
in a public company. Conversely, a private company can
have a maximum of 100 members, subject to certain
conditions.
 ….Key Differences Between Public and
Private Ltd. Company
4. The is no ceiling on the maximum number of
members in a public company. Conversely, a
private company can have a maximum of 100
members, subject to certain conditions.
5. A public company should have at least three directors
whereas the Private Ltd. company can have a
minimum of 2 directors.
6. It is compulsory to call a statutory general meeting of
members, in the case of a public company, whereas there
is no such compulsion in the case of a private company.
 ….Key Differences Between Public and
Private Ltd. Company

7. In a Public Ltd. Company, there must be at least five

members, personally present at the Annual General
Meeting (AGM) for constituting the requisite
quorum. On the other hand, in the case of a Private
Ltd. Company, that number is 2.
8. The issue of prospectus/statement instead of the
prospectus is mandatory in case of a public
company, but this is not the case with the private
company.
 ….Key Differences Between Public and
Private Ltd. Company
9. To start a business, the public company needs a certificate
of commencement of business after it is incorporated. In
contrast, a private company can start its business just after
receiving a certificate of incorporation.
10. The transferability of shares of a Pvt. Ltd. company is
completely restricted. On the contrary, the shareholders of a
public company can freely transfer their shares.
11. A public company can invite the general public for
subscribing shares of the company. As opposed, a private
company has no right to invite public for subscription.
• Read more: http://
keydifferences.com/difference-between-public-company-and-private-company.ht
ml#ixzz4Vd4kIFw3
 Cooperatives
• A Cooperative is a business owned and
operated by its user-members for the
purpose of supplying them selves with goods
and services it is an organization owned by
members /customers who pay an annual
membership fee and share in any profits (if it
is profit making organization). Owners,
managers, workers, and customers are all the
same people.
 Cooperatives
• These cooperatives are formed to give
members more economic power as a group
than they would have as individuals.
• The best example of such cooperatives is a
farm cooperative. The idea at first was for
farmers, to join together to get better prices
for their food products.
 Cooperatives
• A cooperative is an enterprise owned and controlled by all
those who work in it.
• It can register and have limited liability for its members, but
has to adopt the following principles:
– members have an equal vote in decisions;
– membership is open to everyone who fulfils specified conditions
(e.g. number of hours worked);
– assets controlled, and usually owned jointly by members;
– profit shared equally between members with limited interest
payable on loans made by members;
– share capital remains at its original value- members benefit from
participation, not investment.
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