Strongpreneur#Starting A Business
April 14, 2019 401
Strongpreneur#Starting A Business
April 14, 2019 401
In many countries, the most widely used forms of business ownership are the sole proprietorship, the partnership, the incorporated company, and the cooperative. Of these, the most popular is the sole proprietorship because of the clear advantages it offers in the areas of the organization, amount of capital needed, freedom of action, decision-making and profit utilization.
Although cooperatives are not still very wide-spread, particularly in the urban areas, they are nevertheless popular in the rural areas where farmers form producers’ cooperatives. The most difficult to establish in terms of legal requirements are the partnership and incorporated company. However, because of these legal requirements, these forms of business owners also tend to endure most.
Two business organizations may be in the same product market, employing the same technology, and of equal size. Yet, internal arrangements in both business organizations may be described by the cultural setting in which each is located and what the top managers in each organization want.
However, apart from such reasonable explanations, a further and a major explanation would be provided by considering the nature and form of ownership of each organization. The type of ownership often has a great influence upon the organizational structure of the enterprise, the duties and rights of members, how the enterprise may pursue its objectives, and in some cases, the very objectives of the enterprise themselves.
Consequently, a proper understanding of the business organization requires a prior understanding of the different forms of business ownership.
In Africa, a sole proprietorship (one-man business), the partnership, the limited liability company, or the cooperative society, are different ways in which the ownership of a business may be legally organized. This article discusses the important characteristics of each of these forms of business ownership.
The one-man business is the most popular and widespread form of business ownership in Africa. Under this form of ownership, business is owned by one person known in law as a sole proprietor. Such a proprietor alone provides all the capital for operating the business and usually has full responsibility for the way the business is managed.
The sole proprietor may employ one or more people to help in the running of the business. In most cases, such employees usually come from the relations of the sole proprietor.
The sole-proprietorship may be recognized by the size of the business organization itself; it is usually of small size, and most often occupies little space, usually a room.
The business name used by the sole proprietor may be the actual name of the owner of the business. In other cases, the owner of the business may choose a business name different from his name.
Apart from the advantages associated with a sole proprietorship, the individual going into business must also consider its disadvantages, before deciding that this is the best form of business ownership to establish. Although, such a decision may well be determined by the limitation on initial capital available.
The disadvantages of the sole proprietorship often lead two or more people with identical business interests to come together in a business relationship known as a partnership.
From the definition of partnership Act, the following points must be noted:
Depending on the nature of their activities in the business, we may differentiate between five kinds of partners: general, active, dormant (or sleeping), limited and quasi-partners.
The duties, rights, and obligations of each partner are determined by the kind of partner the individual is. Limited partners do not, for example, participate in the management of the business, whereas, general and active partners do. Also, nothing stops sleeping partners from changing their role and thus becoming full or active partners in the business.
An ordinary partnership is formed when an unincorporated body of two or more parties agree to come together to carry on business, for the purpose of making a profit. This agreement may be given orally, inferred from conduct, or put into writing. When written, this agreement constitutes the Article of Partnership or a Deed of Partnership. Articles of Partnership usually contain the followings:
Although it is desirable that the relations between partners be formalized and put in writing, many partnerships exist which are based on a simple understanding (a gentleman’s agreement) between the partners with no specification of the rights and obligations of partners. In this case, Section 24 of the 1890 Partnership Act provides that the partners observe the following rules:
(a) All the partners are entitled to share equally in the capital and profits of the business, and must contribute equally towards the losses, whether of capital or otherwise, sustained by the firm.
(b) The firm must indemnify every partner in respect of payments made and personal liabilities incurred by him:
(i) In the ordinary and proper product of the business of the firm; or
(ii) In or about anything is necessarily done for the preservation of the business or prosperity of the firm.
(c) A partner contributing for the purpose of the partnership, any actual payment or advance beyond the amount of capital which he had to agree to subscribe, is entitled to interest at the rate of 5 percent per annum from the date of the payment or advance.
(d) A partner is not entitled, before the ascertainment of profits, to interest on the capital subscribed by him.
(e) Every partner may take part in the management of the partnership business.
(f) No partner shall be entitled to remuneration for acting in the partnership business.
(g) No person may be introduced as a partner without the consent of all existing partners.
(h) Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners, but no change may be made in the nature of the partnership business, without the consent of all existing partners.
(i) The partnership books are to be kept at the place of business of the partnership (or the principal place if there is more than one), and every partner may, when he thinks fit, have access to and inspect and copy any of them.
A partnership business or firm usually carries out its operations under a name, called its business name. Sometimes the names of the individual partners of the firm will also be used as the business name of the firm. Where the latter situation is the case, the Registration of Business Names Act makes it mandatory that the name is registered with the Registrar in the Ministry of Trade in that part of Nigeria where the major activities of the firm are located. In the course of registering the business name, the owners will be required to provide the following information on prescribed forms:
In addition to this information, each partner will be required to provide:
The ordinary partnership shares many of the advantages of the sole proprietorship. Like the sole proprietorship, partnership aware easy to set up and are not subject to special taxation by the government. There are, however, other major advantages, namely:
The most important of these disadvantages are:
Some of the disadvantages of ordinary partnerships can be taken care of by establishing a limited partnership.
A limited partnership is defined as a partnership which must have at least one limited partner, who shall at the time of entering the partnership contribute a sum or sums as capital or property valued at a stated amount, and who shall not be liable for debts or obligations of the firm, beyond the amount contributed.
This definition of a limited partnership is subject to the provisions of the 1968 Companies Decree already referred to, which states that no partnership, made up of more than ten persons shall be formed for the purpose of establishing a bank. Furthermore, every limited partnership must be registered, and until this is done, each limited partner in the firm has the status of a general partner.
The laws governing the resignation of limited partnerships require that the individuals provide the following information before registration.
As a general rule, limited partners do not take part in the management of the business, no one can directly or indirectly take out or receive back part of their contribution. If they do, then they become liable for the debts and obligations of the firm, up to the amount they have drawn out or received back. Although the need for partnership will normally regulate the relationship between the partners in the limited partnership, the following rules usually apply:
A partnership (whether limited or ordinary) may be dissolved in either of two ways:
A number of reasons may lead to the terminations of a partnership. The termination of the partnership without count action may be necessitated by the following reasons:
Partnerships may also be dissolved by the courts upon the application of one of the partners on the following grounds:
The third major form of business ownership is an incorporated company. Although, not as many as the sole proprietorship in number (but more than the partnership), this type of business ownership is very important in Africa. The incorporated company not only usually employs a large number of people, but it also makes mass production of goods and services possible.
A greater percentage of the wealth of the country is directly created in organizations and businesses organized under this legal form of business ownership.
The most important feature of the incorporated company is that it is endowed with the rights, duties, and powers of a human being. In other words, it is a legal person; it can sue and be sued, it takes actions and does a lot of things which are ordinarily reserved for normal people.
However, as some writers have pointed out, the incorporated company is an artificial being, invisible, intangible and existing only in the contemplation of the law. Being the mere creature of law, it possesses only those properties within the charter of its very existence. These are such as are supposed to affect the object for which it was created. Among the most important are immortality, and, if the expression is allowed, individuality; properties, by which a perpetual succession of many persons is considered the same, and may act a single individual.
The laws describing the nature, establishment, and operation of incorporated companies in Nigeria are contained in Decree No. 51, of 1968 or the Companies Act. The Act describes an incorporated company as any seven or more persons (in the case of public companies), or any two or more persons (in the case of a private company) who come together for a lawful purpose and subscribe their names to a Memorandum of Association. There are two basic types of incorporated companies – limited and unlimited.
A limited liability company is one in which the liability of the owners is restricted to the nominal value of the shares held by them, or to that amount which they have undertaken to contribute.
An unlimited liability company, on the other hand, the members’ liabilities extend beyond their shareholding or the amounts they have undertaken to contribute. Thus, their personal properties may be applied to the liquidation of the company’s obligations or debts.
There are two types of limited incorporated companies.
This is the more common of the two types of limited liability companies. It is a company in which the liability of its members is limited by the memorandum to the amount, if any, unpaid on the shares respectively held by each of the members. Additionally, a subscriber to the memorandum must have at least one share and the number of shares held must be written against the subscriber’s name.
Section 2 of the Act provides that the memorandum of association shall state:
Companies limited by guarantee usually require little or no capital and are to be found mostly in non-profit making organizations; for example, in those formed for the promotion of art or religion. Increasingly, however, this form of business ownership is being explored in the professions, especially in the area of consultancy. The 1968 Companies Act makes a distinction between companies limited by guarantee without any share capital and those in which members subscribe shares. In the former case, section 3 of the act provides that the memorandum must state:
Where the company has a share capital, then the memorandum must provide the above information, as well as that required in the incorporation of companies limited by shares.
Unlimited companies are few, and they are usually formed to grant corporate status to the undertaking, or to avoid making public the accounts of the business – a normal requirement for limited liability companies. In unlimited liability companies, every member is liable for the debts of the company up to one year after he or she has ceased to be a member. Section 4 of the Act requires the memorandum setting up such a company to state:
Where the company has a share capital, the Act provides that:
Another way to classify incorporated companies is by type of ownership. Such a classification enables us to distinguish between three major types of incorporated companies: private, public and governmental.
Section 28 of the 1968 Companies Act defines a private company as one which by its articles:
A section of the Act specifies that if a private company alters its articles to exclude any of the above provisions, the company shall from the date of the alteration cease to be a private company. The company is also required within fourteen days from the date of such alteration to deliver to the Registrar of Companies for registration, a statement in lieu of prospectus.
Private companies were originally provided as a way of protecting small family businesses from the competition of large public companies.
Private companies are now commonly employed for business ownership and have continued to retain many advantages, such as:
The word ‘public’ company is sometimes used in describing state-owned companies. While suggestive of the collective character of the State, and hence also of this type of business ownership, the description in itself refers to a company are:
These are companies that are owned by the government, whether state or federal. Sometimes, as in the case of Shell (Nigeria) Limited and the commercial banks, the shares are jointly held by the government and the general public. Even in these cases, it is usual for the government to hold the controlling shares.
In order to take advantage of this form of business ownership, a company has to be incorporated, that is, it must submit to the Registrar of Companies a number of documents, and pay a stipulated fee.
The documents that must be filled are:
The Memorandum of Association and the Articles of Association are the most important among these five documents because, together, they form the constitution of the company. However, while every company requires a Memorandum of Association, not all need Article of Association.
Schedule 1 of the Companies Act anticipates and provides for these differences in four different tables called Tables B, C, D, and E.
The articles of association are the rules which govern the internal management of the company’s affairs. The regulations deal with the duties, rights, and powers of members and directors, between themselves and the entire company.
Companies that are unlimited or limited by guarantee are required to register Articles of Association with the memorandum, but companies that are limited by shares may either register their own articles or adopt Table A of the First Schedule as set out in 1968 Companies Act. Like the tables earlier referred to, Table A is a model which sets out Article for Companies limited by shares. Part I of the Table applies to public companies while Part II covers private companies.
The Memorandum of Association and the Article of Association (where these are present) must have the signature of at least two people in the case of private companies, and at least seven signatories in the case of public companies. section 17, subsection 2 of the Companies Act, 1968, further requires that a statutory declaration by a legal practitioner engaged in the formation of the company, or by a person named in the articles as a director or secretary of the company, in compliance with all or any of the said requirements, shall be produced to the Registrar, and the Registrar may accept such a declaration as sufficient evidence of compliance.
The Registrar must also satisfy himself or herself that all other requirements have been; that is, that the business is formed for a lawful purpose, that the name of the company is not prohibited, and that the Memorandum and Articles of Association do not violate the Act, etc. When satisfied, the Registrar issues a certificate of incorporation, thus granting to the Company perpetual life and other rights, duties, and powers of a person.
The fact that the limited liability company dominates most aspects of our lives shows that it has a number of distinct advantages. The major ones are as follows:
As a summary, let us now compare the various forms of business ownership with each other by concentrating on their major and distinguishing characteristics, such as the ease and cost of formation, ownership of profits, liability of ownership, and so on.
Sole Proprietorship – No legal procedures and no required costs.
General Partnership – Can be simple but a lawyer should draw up articles of partnership.
Incorporated Company – Incorporation fee required, and legal assistance needed.
Sole Proprietorship – Undivided
General Partnership – Divided among two or more partners
Incorporated Company – Belong to the corporation, but may be distributed to stockholders.
Sole Proprietorship – Extremely high since success need not be shared.
General Partnership – Very high, but success must be shared.
Incorporated Company – High only if managers are also owners.
Sole Proprietorship – Entire fortune available to satisfy business debts.
General Partnership – Entire fortunes of all owners available to satisfy business debts.
Incorporated Company – Individual owners not liable for business debts.
Sole Proprietorship – Limited to wealth and borrowing ability of one person.
General Partnership – Limited to wealth and borrowing ability of two or more persons.
Incorporated Company – Unlimited as long as investors will buy its bonds and stocks.
Sole Proprietorship – No special taxes as a sole proprietorship.
General Partnership – No special taxes as a partnership.
Incorporated Company – Taxed by states and by the federal government.
Sole Proprietorship – No opportunity for employees to become a part-owner.
General Partnership – Opportunity for employees to be admitted to partnership.
Incorporated Company – Opportunity for employees to advance on merit.
Sole Proprietorship – Frequently inferior as the owner is responsible for all activities.
General Partnership – Better than sole proprietorship as two or more owners bring diverse talents.
Incorporated Company – Frequently high, particularly if size allows for hiring specialists.
Sole Proprietorship – Immediate action by one person’s legal framework.
General Partnership – Slightly slower than a sole proprietorship if partners consult one another.
Incorporated Company – Much slower on all matters that must be referred to the board of directors.
Sole Proprietorship – Decision made at will by one person.
General Partnership – Frequently difficult as the value of the partner’s interests must be determined.
Incorporated Company – Requires action by the Board of Directors and legal steps with the state.
Sole Proprietorship – Based on the good health or life of the owner.
General Partnership – Limited to the life or good health of any and all partners.
Incorporated Company – Can be perpetual.
The last major form of business ownership that we shall consider is the cooperative. The cooperative society can be defined as a family of people who unite, with equal rights and duties, to overcome difficulties that affect them all.
They work together for their common economic and social advantage and sharing the business risks, they run an enterprise to which they delegate one or more of their economic functions, according to their common needs as producers or consumers.
Of all the various types of cooperatives, the agricultural cooperative is the most common.
Cooperatives are incorporated under the laws of each state which create an appropriate ministry or section within a ministry to deal with all matters relating to cooperative development. Generally speaking, the formation of a cooperative follows the steps outlined below.
Registration is granted when the Chief Registrar is satisfied that:
The major advantage of the cooperative society is that its members are frequently, intensely loyal and committed to it. Additionally, it has all the advantages of a private company. It qualifies for government help, support, and patronage, and dividends are not usually subject to taxation. On the other hand, the major limitation of the cooperative may stem from organizational problems and lack of member’s knowledge of appropriate and effective management techniques and principles. Usually, however, these limitations can be corrected through the education of members in one or more of the educational programs, arranged by the government in cooperative studies. Additionally, government officials trained in cooperative management may be seconded to the cooperative society to assist the members in the effective control and management of the cooperative society.
Apart from these major forms of business ownership, there are others that are less popular. One such example is the mutual company which may be established by people who are also the user of its services. Mutual companies are usually operated in two business areas-life insurance and savings. Any individual who purchases life insurance from a mutual company or deposits money in a mutual savings bank automatically becomes a member of the mutual company.
Mutual companies often have the same advantages as limited liability companies, and besides, enjoy tax concessions.
Another form of business ownership that is not very well-known is the savings and loans association. Such association functions like the thrift and savings societies often found in rural areas in Africa. The major difference is that in thrift societies all depositors of funds are members of the society, but this may not necessarily be the case in the savings and loan associations.
Borrowers and savers will be members-only where, as in the thrift society, the association is mutually owned. The savings and loan association elects a Board of directors to manage its affairs.
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