Business Structure and Types

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By: Site Engineer, Staff

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Business means commerce. It consists of all activities aimed at the production, manufacture and the distribution of goods and services. Individuals or groups of people can undertake it since every business is aimed at profit, no business can continue in existence when it is operated under loss.

Selecting a Form of Business Ownership

The three forms of business organization are:

They have their peculiar advantages and disadvantages. It is difficult for anyone to claim categorically that one form is that best guaranteed out of the three. Selecting a form of business to operate therefore is a crucial and complex decision to make requiring the potential business operator to weigh all the intrigues that are connected with each form.

Things to consider include the available resources and with the main objective of establishing the business.

Some of these objectives include:

  • Making profit
  • Staying solvent-ability to pay debts as they mature
  • Creating employment
  • Protecting the environment
  • Improving existing products
  • Meeting people’s needs at a lower cost

The decision to select the form of business organization will surely depend in part upon at least one or a combination of the above objectives. Nonetheless, whatever is the objective the potential business owner needs to be well advised that for a successful operation and survival of the form of organization chosen must be directed at earning a reasonable profit or at least stay solvent. Otherwise, continuous losses will easily exhaust the available resources and force the organization to close down.

There are different forms of business organizations. Business can be Sole Trader, Partnership, Limited Liability Company, Cooperative Society and Statutory Corporations. The Civil Service and Local Authorities form another type of business units. For our study, our emphasis will be on the first three.

The Sole Trader/Proprietorship

This type of business is also called One-Man-Business or Sole Proprietorship. It is so called because one person owns it. The title does not, however, mean that only the owner works in the business but only owns the ownership. It is the oldest form of business organization and the easiest to form. It is an ideal type of business for one who wants to be his own boss. His wife and other members of his family may aid a sole trader or he may employ other people to work for him but the management is in his hands. Examples are the retailers, hairdressers, shoemakers, tailor, lawyers, doctors etc. The main objective of the sole trader is to be his own boss while his secondary objective is profit making.

The capital to be used in the business of the sole trader depends on the nature of the business. He may obtain his capital from his savings, he may borrow from his relations, wife, and friends; the bank may also lend money to him if he is the bank’s customer.

Advantages of Sole Proprietorship

  • Ease of Formation: This type of business is easy to form.
  • The speed of Action: This is an advantage since sole proprietor does not consult one when taking a decision on any new line of policy.
  • Supervision is Personal: As the sole owner, he has a personal incentive to take proper care of his property and avoid waste.
  • Personal Attention to his Customers: He maintains personal contact with both his employees and customers since the business is not too large.
  • Nearness to Customers: The sole trader is very close to his customers.
  • Privacy: This can be regarded as an advantage when it is remembered that secrecy is an important tool that can lead a business to success. The capital and profits realized are never disclosed to the public.
  • Profits: These are never shared with anybody since the sole proprietor owns the business.
  • Pride of Ownership: This has many psychological effects on the overall performance of the sole trader two of which are an economical use of resources and devotion to duty.
  • Tax Might not be Much: This is because the sole proprietor might make a false declaration to the authorities that assess taxpayers. This attitude is however never encouraged as it makes the government lost revenue. In contrast to Limited Companies, the sole trader does not pay the special taxes levied on companies.

Disadvantages of Sole Proprietorship

  • Unlimited Liability: The sole trader is the only one that bears the risks of business and he is personally liable for the whole of the debts of his business. He may even have to borrow money to settle his debts.
  • Limited Financial Backing: It is never easy for the sole trader to get financial aid from the bank as do the larger business units. He cannot also appeal to the public for funds and this makes expansion rather very difficult.
  • Legal Entity: The business is not a separate legal entity from the owner.
  • Overworking of the Owner: As the owner has a wide range of activities, he is overworked in an attempt to give every aspect of his business maximum attention.
  • Inability to get Economies of Scale: As the business is limited in scope, goods turn slowly and stocks are limited.
  • The uncertainty of Continuity: The death of the owner may probably be the end of the business i.e continuity is uncertain.
  • Success is Dependent on Owner: Success depends on the skill and ability of the sole trader to give sound judgment.

Partnership

A partnership is the coming together of two or more persons in a business with a view to making a profit. Partnership, according to the partnership act of 1890 (Nigeria), is defined as “the relationship which exists between persons carrying on a business in common with a view of making a profit”. A nonprofit organization is not a partnership. A partnership firm may come into existence.

  • Where two or more persons have decided to form a business i.e when none of them has any business before.
  • Where a person who is already trading decides that he needs somebody to help him carry on his business and possibly one who is in a position to introduce additional capital or expertise.
  • Where two persons already in separate business decide to amalgamate their respective concerns and form a partnership.

We have two types of partnerships namely: Ordinary or general partnership and limited partnership.

Characteristics of Partnership (General Partnership)

The partnership Act of 1890 (Nigeria) is the controlling force of this type of partnership, unless where the partners agree otherwise.

The Act provides thus:

  • Number: The minimum number is two while the maximum number is twenty persons. The exception to this number being persons who can form partnerships as an accountant, stockjobbers, stock-brokers, banking services etc. here the number can exceed twenty.
  • Liability: Each ordinary partner is liable for all the debts of the firm. This means that the liability is unlimited.
  • Equal Shares: In the sharing of profits and the contribution of capital, partners are entitled to share and contribute equally. All the same, they must contribute equally to losses.
  • Interest on Advances: Interest is paid to partners at 15% on money loaned to the partnership firm. It must be noted, however, that this interest cannot be paid before the ascertainment of profit during a trading period.
  • Management: Every ordinary or general partner is entitled an active part in the day-to-day affairs of the firm.
  • No Remuneration: A partner may not be paid for his services in the partnership unless so agreed by the partners.
  • Settlement of Disputes: Disputes may be settled by majority vote at the partnership meeting
  • Books of Partners: The partnership books are to be kept at the main place of business of the partnership where members are free to inspect and copy if they so desire.
  • Withdrawals: Partners can withdraw any amount but may pay interest on it.

Types of Ordinary or General Partnership

(a)        Active Partner

An active partner is one who takes an active part in the day-to-day management of the firm. He can be the manager, director or supervisor of the partnership firm. Normally, this type of partner qualifies for a salary (if partners so agree) since he devotes all his time to the administration of the business.

(b)        Sleeping or Dormant or Silent partner

This partner only contributes capital to the partnership firm and does not take part in the management of the business. If, for example, Mr. ABCD and Mr. QRST are partners in contracting business and Mr. ABCD is a public servant in one of the statutory corporations obviously, he will not have time to give active service in the firm like the others. Certainly, Mr. ABCD will rely on the others in whatever they do in the management of the firm. Mr. ABCD here is sleeping or dormant or silent partner in the partnership firm.

(c)        A nominal partner can be called Ostentatious Partner

This fellow allows his name to be used in the partnership, but he never takes part in the management of the firm. He must be a reputable fellow in the area where the firm is established for his name to be used. He may not share in the profit of the partnership firm.

Advantages of the Ordinary or General Partnership

  • Sharing Liability: Liability of the business is shared among the partner.
  • Increase in Capital: The partners will be able to raise more capital since they are many.
  • The possibility of Greater Specialization: This is because different partners are made to take charge of areas in which they best qualify.
  • The possibility of Many Ideas: This is because partners can advise each other and present different points of view when decision-taking is necessary.
  • Privacy: The affairs of the partnership firm remain private as no balance sheet or other documents are published.
  • Retention of Individuality: The individuality of each partner is not lost in a partnership as in a company.
  • Continuity: There might be continuity as the death of a partner may lead only to rewriting of the partnership agreement or deed.

Disadvantages

  • Liability of the Partners is Limited: This means that each partner is liable for the total debts of the partnership firm regardless of the proportionate share that his investment may be of the total investment in the partnership firm.
  • Difficulty in Obtaining Capital: Partners may experience difficulty in obtaining capital beyond the means of the partners.
  • The difficulty of Accepting New Partners: Existing partners may find it difficult to accept new partners.
  • Disagreements: The disagreements of the partners may hamper the progress of the firm.
  • Discontinuity: There might be no continuity technically as the death of a partner ends the partnership unless it is reorganized.
  • Legal of the Firm: The action of one partner binds the others legally.
  • Non-legally of the Firm: The partnership firm is not a legal entity since it does not exist separately from the individual members.

Limited Partnership

A limited partnership is another type of partnership. For a limited partnership to be effective there must, at least, be one ordinary partner who will be responsible for the debts of the firm in case the firm goes into liquidation.

The limited partnership has members whose liabilities are limited amount contributed as capital in the firm. If for, example, a limited partner invests N10,000 in the firm he is not responsible for the debts of the partnership firm above the N10,000 he invests. The N10,000 is the limit of his liability in the partnership. The limited partner should normally have no right to take part in the management of the firm. He cannot manage a business for which he cannot be held liable in case of liquidation.

Characteristics of the Limited Partnership

The limited partnership, unlike the general ordinary partnership, is governed by the Act called the Limited Partnership Act, it is this Act that brought about this type of partnership.

  • The limited partner contributes to the capital of the firm and shares in the profits, as do the other partners.
  • The limited partner does not take part in the running of the firm although he has the great advantages of limited liability i.e his liability in the partnership firm is limited to the capital which he agrees to invest in the partnership. When a limited partner’s liability is limited that of the general partner is unlimited thereby making him the greatest risk bearer in the business.
  • The limited partner cannot bind the firm in any trading contract. The ordinary or general partners possess this right of contract. It is then not possible that the limited partner should take part in the management of the firm.
  • All changes in connection with the limited partnership must be registered with the Registrar of (Joint Stock) Companies.
  • The withdrawal of capital by a limited partner may not be possible. It can only be done through the consent of the other partners.
  • The dissolution of a limited partnership may not be possible at the death or bankruptcy of a limited partner.

Partnership Deed or Agreement

When people come together to carry on business with a view to making a profit they may have what should guide their activities that are to say that the partnership is formed by consent. The guiding principles may be oral or written. The deed of the partnership is an agreement setting out the term of the partnership. This agreement is prepared to be the guiding principle to the partners in case of dispute. The deed varies with the nature of the business.

The terms may include:

  • The names of the partners.
  • Nature of the business to be carried on.
  • The capital and how it is contributed, that is whether in cash or assets or both.
  • Agreement on how the profits realized or losses incurred should be shared.
  • A decision on interest to be paid on capital contributed by partners.
  • The amount which a partner can be permitted to withdraw yearly in anticipation of profits and the interest to be paid on the amount so withdrawn if any.
  • Salaries to be paid to partners (if any) who perform special duties to the firm.
  • The method of the audit.
  • The amount to be paid to a partner who retires and method of calculating this amount.
  • Method of goodwill calculation on the retirement of a partner.
  • Arbitration method in case of dispute e.g. to resolve it by majority vote.
  • The duration of the partnership since a partnership can be formed to carry out a definite business programme.
  • Freedom of partners.

Dissolution of Partnership

In the law of partnerships, dissolution takes place when a change occurs in the composition of its members. In certain cases, there may be technically dissolution when for example, a new partner is admitted to an already existing partnership the admission, however, will not lead to cessation of business but rewriting of the partnership deed to incorporate the change in membership.

Dissolution may take place when any of the following occurs

  • When a partner gives notice to his co-partners of his intention to dissolve the firm. This might be as a result of continual disagreements between some of the partners with a resultant lack of harmony.
  • An occurrence of an event, which makes the existence of the partnership illegal. An example can be when war is declared it might be illegal for a nation to remain in partnership with an enemy alien.
  • On the death of a partner.
  • On the bankruptcy of partners.
  • When a partner becomes lunatic the partners can apply to the courts for dissolution.
  • At the expirations of the terms for which the partnership was entered into. This occurs when a fixed term was agreed upon.
  • When the business of the partnership can no longer be carried on profitably. This happens when it sustains losses in all its transactions.

Dissolution of Partnership by the Court of Law

Dissolution might be obtained from the court of law in the following instances:

  • When the court is convinced that one of the partners is permanent of unsound mind.
  • When a partner other than the partner suing becomes in any other way permanently incapable of performing his part of the partnership contract.
  • When a partner other than the partner suing has been found guilty such conduct which in the opinion of the court, is calculated prejudicially to affect the carrying on of the business.
  • When a partner, other than the partner suing willfully or persistently commits a breach of the partnership business that it is not reasonably practicable for the other partners to carry on the business in partnership with him.
  • When in any case, circumstances have raised which in the opinion of the court, render it just and equitable that the partnership is dissolved.

 Public Joint Stock Companies or Public Limited Liability Companies

The word company has varied meanings attached to it. However, its meaning at any moment will depend on the context. A partnership firm using the word ‘company’ does not use the word company to be a company as but to show that apart from the partners mentioned there are others in the partnership firm.

The company is legally defined as ‘an artificial person with rights and liabilities’. A Joint Stock Company may be defined as an ‘association’ of persons whose purpose is for carrying on a business and the persons contribute money to common stock and in return for money contributed share in the profit, if any, of the business in form of what is called dividend. Furthermore, a joint stock company is quite distinct from the members. In other words, the company is a legal personality.

It can sue and can also be sued to court for any action which is illegal. The debts of joint-stock companies are not those of its shareholders or members since the company is a separate legal entity. This is why the company is regarded as a legal personality.

Type of Companies

We shall first of all attempt to know how the companies we have today came into existence.

The Chartered Companies

Chartered companies form the oldest type of companies that came to be in England in those years of Queen Elizabeth I. These companies came into existence as a result of the charter granted to them by the Crown an example is Bank of England. Nowadays, only associations of non-commercial purpose receive a charter in England. An example in Nigeria is the Institute of Chartered Accountants of Nigeria which got its charter through a Decree.

Statutory Companies

They are companies formed by special acts of parliament. These statutory companies are monopolistic in their services. Examples are Nigeria Airways and Aviation Authority, National Electric Power Authority, and Nigerian Coal Corporations. Some of them in Nigeria came recently into being as a result of Military Decrees (when the Military was ruling the country). Examples are Housing Corporations, Water Corporations, and Agricultural Corporations. These companies, however, provide some public services in return for the monopoly they enjoy.

Registered Companies

These companies are the most common or we may rightly say, the usual type of companies. They are registered under the various Acts of Parliament. Such Acts as 1908, 1929 and 1948 (in England), and 1968 and 1973 Decrees (in Nigeria) which govern the establishments of companies in Nigeria.

Under registered companies we have the following types:

  • Unlimited Companies: Companies limited by guarantee and companies limited by shares.
  • Unlimited Companies: Very few of this type of companies exist in reality. The liabilities of the members are unlimited. They are for non-trading undertakings. Examples are educational institutions
  • Companies Limited by Guarantee: Here, the liability of the members according to the memorandum is limited to the amount which members of the company have undertaken to contribute or guaranteed to contribute to the assets of the company on its winding up.
  • Companies Limited by Shares: The liability of the members according to the memorandum is limited to the amount unpaid on their shares, it could be a public or a private company.

Formation of a Public Company

The formation of a company invites the services of a solicitor. This is because Acts of Parliament or Decrees establish companies and as such legal technicalities must be adopted in their formation.

The law establishing registered companies tries to state the number of people who can form these companies. It states that any seven or more persons may form a public company while any two or more persons may a private company. For the establishment of the company to be legal the persons must be associated for a lawful purpose.

The documents to be prepared for people wishing to form and own a company may include the followings:

We, therefore, turn our attention to know the contents of the two documents mentioned above.

The Memorandum of Association

This document contains the external relations of the company. It has six main clauses as follows:

  • Name: The name of the company with ‘limited’ as the last word.
  • Objective: The objectives of the company must have to be stated because the company cannot go beyond its scope of operations unless changes are made which can only be affected by the special resolution of the shareholders.
  • Domicile: The place of the registered office of the company the domicile of the company.
  • Authorized Capital: The amount of the authorized specifying its division into shares.
  • Association: A clause in which the subscribe memorandum declare their intention to be of the company.
  • Statement of Liability: A statement that the liability of its members is limited.

Articles of Association

This document deals with the internal rules or regulations concerning the internal management of the company. The founders must sign the document drawn.

It has the following as the contents:

  • The duties right and powers of directors.
  • The issue, transfer, and forfeiture of shares.
  • Method of dealing with any alterations in the amount of capital.
  • Procedure for calling general meeting and method of voting.
  • Procedure in dealing with the division of profits and the payment of dividends.
  • Method of audit and other internal affairs of the company.

Registration of a Company

After preparing the two documents mentioned above, other documents must have to be drawn before the company can be registered.

Such other documents include:

  • A list of the persons who have consented to be directors.
  • A statement of the nominal share capital of the company.
  • A statutory declaration of compliance signed by a solicitor engaged in the formation of the company, or a person named in the articles as a Director or Secretary.

A Certificate of Incorporation

When the necessary documents have been drawn and submitted to the Registrar of Companies in accordance with the company law a ‘Certificate of Incorporation’ is issued. This certificate is to recognize the company as a corporate body and is thereby allowed to commence normal business. It is the company’s birth certificate.

The certificate is displayed in the company’s registered office with these information:

  • The name of the company.
  • The company’s registered number.
  • A statement showing that it has been registered in accordance with the law.

It is pertinent to note here that when a private company is incorporated, that is registered in accordance with the law it can commence business. On the other hand, a public company must obtain a second certificate, often called the ‘Trading Certificate’ before it can commence business or exercise its borrowing powers.

Prospectus

When a company is formed, the founders or promoters are faced with the problem of finding the capital for the commencement of the business of the company. They will like the public to subscribe to the shares. In order to let the public have insight into the company, a prospectus is used.

The prospectus is given a statutory definition which states:

Prospectus means ‘any prospectus notice circular advertisement or other invitation offering to the public for subscription or purchase any shares or debentures of a company’.

It is ‘an invitation to offer’ inviting prospective investors to apply for shares on or before a given date. The pieces of information it contains are so detailed that it enables investors to forecast the viability of the company which consequently induces them to invest in the company. The prospectus states the capital of the company details of shares, names, and addresses of the directors, time of opening of subscription lists and the amounts payable on application and allotments of the shares.

Private Joint Stock Companies

Private Joint Stock Company came into being as a result of the 1967 companies Act. A private Joint Stock Company is an ideal business unit for members of a family. This company can be defined as one which, by its article of association.

  • Restricts right to transfer its shares.
  • Limits the number of its members to fifty excluding past and present employees.
  • Prohibits any invitation to the public to subscribe to its shares or debentures.

Differences Between a Public Company and a Private Company

  • Membership requirement of the private company is two and it may be husband and wife whereas, in the public company, it must be at least seven persons and no upper limit.
  • A private company is entitled to start a business as soon as it is established, but this is not so with the public company which starts a business only after it has obtained a certificate to start from the office of the Registrar of Companies which normally is preceded by statutory meeting as required by law.
  • It is relatively cheaper to form and operate a private company than it is to form and operate a public company.
  • Publicity requirement is much less with a private company than with a public company.
  • A private company does not invite the public to subscribe to shares or debentures while the public company can invite the public to subscribe to its shares.
  • A private company restricts the right to transfer its shares while this is not so with the public company.

 

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