Types of Business Ownership: Advantages and Disadvantages

admin

By: Site Engineer, Staff

full bio

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 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 ownership 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, the means by which 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, 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 Sole Proprietorship (One-Man Business)

The one-man business is the most popular and widespread form of business ownership in Africa. Under this form of ownership, a business is owned by one person known in law as 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 own name.

Advantages of Sole Proprietorship

  • Secrecy: It keeping confidential information secret is a stringent factor in the success of the business; the sole-proprietor will most likely succeed in preventing business secrets from leaking to the outside.
  • Ease of Dissolution: It is relatively easy to dissolve a sole-proprietorship as it is to form it, provided that the owner has no debts to pay up.
  • Ownership of all Profits: Because the owner provides all the capital, he alone shares the fruits of successful and skillful management – in this case profit.
  • Ease and Low Cost of Organization: Sole-proprietorships are relatively easy to organize. As long as the business activity is legal, anyone with a little capital can set up a business for himself.
  • Personal Incentive and Satisfaction: The sole proprietor has a strong motivation to succeed, and success often results in a great sense of personal achievement.
  • Freedom and Promptness of Action: The sole proprietor can make decisions and take action on issues as soon as they arise, he is own boss.

Disadvantages of Sole-Proprietorship

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.

  • Lack of Opportunity for Employees: The sole proprietorship often has, on the average, one level of hierarchy. Therefore, the opportunities for advancement, both in terms of career and ownership interests, are often strictly limited.
  • Lack of Continuity: In many cases, the sole proprietorship ceases to continue or dwindles because of the death or poor health of the owner of the business.
  • Unlimited Liability: The sole proprietor bears all the risks of the business alone. Therefore, in the event of failure, he shoulders all the losses, and both his business and non-business assets may well be claimed by creditors.
  • Limitation on Size: The amount of financial resources that the sole proprietor can raise both from individual sources and by borrowing often determines the size of the business, and thus the scale of activities.
  • Difficulties of Management: Every type of business requires sound management. Yet, the sole proprietor may not be able to provide all the managerial expertise needed in such functional areas as accounting, purchasing, financing, marketing etc. Again, where the sole proprietor is undedicated, there will be difficulties with planning ahead, and very often, no distinction is made between the profits of the business and the income of the owner. Since the sole proprietor often closely supervises subordinate employees, problems arise when the sole proprietor is away from the business. This is a serious problem in those sole proprietorships where the owner alone possesses the specialist knowledge needed for operating the business.

Partnership

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.

What Constitutes a Partnership?

From the definition of partnership Act, the following points must be noted:

  1. It must be carried on with a view to making profit. The objective of the business must be profit making and nothing else. Therefore, an association of persons, like most voluntary organizations, is not a partnership.
  2. There must be a business. Business in this instance means any profession, trade or occupation, provided that the law allows the formation of partnerships in such area.
  3. It must be carried on in common. The business must be undertaken by some or all of them, for the benefit of all.

Kinds of Partners

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.

  1. Dormant (or Sleeping) Partner: This is a partner who is fully liable, but who takes no active part in the management of the business. Usually, the law provides that the names of sleeping partners be shown on the firm’s letter-head papers, show-cards, catalogues and memo pads.
  2. Limited Partner: A limited partner is a dormant partner with liability restricted to the amount of money or capital he has invested in the business.
  3. General Partner: A general partner participates in the business, and is also liable to the full extent of his estate for debts incurred by the partnership. In other words, his liability is unlimited.
  4. Active Partner: An active partner is one who is fully and actively involved in the management of the partnership, and represents the business to the general public.

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.

Establishing a Partnership

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:

  1. An indication that annual training, profit and loss accounts and a balance sheet be prepared audited by professional accountants and signed by all the partners.
  2. A clause that the audited and signed accounts shall be accepted as final by the partner, and re-opened only if a manifested error is discovered within a stated period.
  3. The basis of valuing goodwill on the death or retirement of a partner.
  4. The method of determining the amount to be paid to a retiring partner, or to the legal representative of a deceased partner, in respect of capital and profits since the date of the last agreed accounts.
  5. The circumstances which shall dissolve the partnership, the notice to be given by a retiring partner, etc.
  6. The right (if any) of one or more partners to introduce a new partner without the consent of all.
  7. An arbitration clause, providing for submission to an arbitrator of any dispute which arises.
  8. The rights and duties of each partner.
  9. The amount of each partner’s initial contribution to the capital of the firm.
  10. The division of profits and losses.
  11. The limits of each partner’s drawings in anticipation of profits.
  12. The salaries (if any) to be paid to the partners.
  13. The rate of interest (if any) to be allowed on capital.
  14. The rate of interest (if any) to be charged on partners’ drawings.
  15. A stipulation that a record of the partnership transactions be entered in books of account to be kept at a specified place and to be open to the inspection of any partner or his approved representative.

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 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 agree to subscribe, is entitled to interest at the rate of 5 per cent per annum from the date of the payment or advance.

(d)       A partner is not entitled, before the ascertainment of profits, to interest on 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 be 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:

  • Business name,
  • All other places at which the business is carried on,
  • The general nature of the business,
  • The principal place of the business,
  • The present name or surname, any other name or surname, the usual residence and other business occupation of each of the individual partners, and
  • The date of the commencement of the business.

In addition to this information, each partner will be required to provide:

  1. Three passport photographs,
  2. Tax clearance certificate for at least three years preceding the date of the commencement of the business.

Advantages of Partnership

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 government. There are, however, other major advantages, namely:

  • Motivational Opportunities for Valuable Employees: Many partnerships grant associate and then full membership status to employees whose contributions are fundamental to the continued success of the firm. In this way, the problem of retaining and rewarding valuable employees is solved and productivity is enhanced.
  • Personal Interest in the Business: The partners view the business as their own and become vitally interested in its success.
  • Larger Amount of Capital: The combination of the financial resources of two or more people in the partnership makes available a large amount of capital for the operation of the business.
  • Credit Standing: The credit standing of the business is also enhanced, since the assets of all the partners are available to guarantee loans and repay debts.
  • Combined Judgment and Managerial Skills: Not only does the old adage, ‘two heads are better than one’ apply, but there is division of labour, which is essential to higher productivity.

Disadvantages of Partnership

The most important of these disadvantages are:

  • Frozen Investment: It is generally very difficult to withdraw funds once invested in a partnership.
  • Limitation on Size: No matter how many people come together in partnership, (provided this does not exceed the limits specified by the law), the size of the partnership is always still small, particularly when compared to the limited liability company.
  • Unlimited Liability of the Partners: Each general partner has unlimited liability and is therefore fully accountable for the debts of the business.
  • Lack of Continuity: The partnership may be dissolved if a general partner withdraws or dies.
  • Managerial Difficulties: Disagreement between the partners can cause serious difficulties for the management of the partnership.

Limited Partnership

Some of the disadvantages of the ordinary partnership can be taken care of by establishing a limited partnership.

A limited partnership is defined as 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 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.

  • The name of the firm.
  • The term, if any, for which the partnership is entered into, and the date of its commencement. If no term is fixed, any other conditions of the existence of the partnership must be given.
  • A statement that the partnership is limited and the description of every limited partner as such.
  • The general nature of the firm’s business.
  • The principal place of business.
  • The full name of each partner, whether general or limited.
  • The sum contributed by each partner, and a statement as to whether it is paid in cash or otherwise.

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 receive back. Although, the need of partnership will normally regulate the relationship between the partners in the limited partnership, the following rules usually apply:

  • The charge by a limited partner of his share in the business does not entitle the other partners to dissolve the partnership.
  • No consent of existing limited partners is needed when a person is being introduced as a partner.
  • Unlike general partners, a limited partner cannot dissolve the partnership by notice.
  • Differences arising between partners, as to ordinary matters connected with the partnership business, may be decided by the majority of the partners.
  • A limited partner may, with the consent of the general partner, assign his share in the partnership, and the assignee thus becomes a limited partner, with all the rights and obligations of the assignor.

Dissolution of Partnership

A partnership (whether limited or ordinary) may be dissolved in either of two ways:

  • Without recourse to the courts, or
  • Through the intervention of the courts

A number of reasons may lead to the terminations of a partnership. The termination of partnership without count action may be necessitated by the following reasons:

  • The death or bankruptcy of any partner.
  • The charging of any partners’ share on an application at the court by one of his private creditors. In this case, however, it is for the other partners to decide whether or not the firm is to be dissolved.
  • The happening of any event, which makes it unlawful for the business of the firm to be carried on, or makes the partnership unlawful (such as some of the partners being the nationals of an enemy country). In this case, no expression of a contrary intention can save the partnership from dissolution.
  • The expiration of the period of time, if any, fixed by the partnership agreement.
  • The completion of an adventure or undertaking for which the partnership was formed.
  • The giving of notice by any partner, if no period for the dissolution had been fixed earlier.

Partnerships may also be dissolved by the courts upon the application of one of the partners on the following grounds:

  • When a partner, other than the partner suing, is guilty of a conduct which, in the opinion of the court, is calculated to affect prejudicially the operation of the business.
  • When a partner, other than the partner suing, willfully or persistently commits a breach of the partnership agreement, or conducts himself in such a way that the other partners find it reasonably impracticable to carry on the business in partnership with him or her.
  • When the partnership can only be carried on at a loss.
  • When circumstances have arisen which, in the opinion of the court make it just and equitable that the partnership is dissolved.
  • When a partner is suffering from a mental disorder.
  • When a partner, other than the partner suing, becomes permanently incapable of performing his part of the partnership contract.

The Incorporated Company

The third major form of business ownership is the 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.

Nature of the Incorporated Company

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 effect the object for which it was created. Among the most important are immorality, and, if the expression is allowed, individuality; properties, by which a perpetual succession of many persons is considered as 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.

1. Incorporated Company Limited by Shares

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:

  • The name of the company, with ‘limited’ as the last word.
  • The objects of the company
  • That the liability of the members is limited.
  • The amount of share capital with which the company proposes to be registered, and the division thereof into shares of a fixed amount.

2. The Incorporate Company Limited by Guarantee

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:

  • The name of the company, with ‘limited’ as the last word.
  • The objects of the company.
  • That the liability of the members is limited.
  • That each member undertakes to contribute to the assets of the company in the event of its being wound up while he is a member, or within one year afterwards, for payment of the debts and liabilities of the company contracted before he ceases to be a member; and of the costs, charges, and expenses of winding up, and for adjustment of the rights of the contributors among themselves, such amount as may be required, not exceeding a specified amount.

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

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:

  • The name of the company; and
  • The objects of the company.

Where the company has a share capital, the Act provides that:

  • A subscriber of the memorandum may not take less than one share; and
  • Each subscriber shall write, opposite his name in the memorandum, the number of shares he takes.

Classification of Incorporated Companies

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.

The Private Company

Section 28 of the 1968 Companies Act defines a private company as one which by its articles:

  1. Restricts the rights to transfer its shares;
  2. Limits the number of its members to fifty, not including persons who are in the employment of the company, and persons who, having been formerly in the employment of the company were, while in that employment to be, members of the company.
  3. Prohibits any invitation to the public to subscribe for any shares or debentures of the company.

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 for 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:

  • Only two members are necessary to enable the company to carry on the business.
  • The company is not likely to be wound up because it has less than seven members.
  • The company can commence business and enter into binding contracts immediately on incorporation; a public company cannot do either until it has complied with further requirements and obtained a trading certificate; and cannot allot shares (even to a vendor) until other requirements are fulfilled. For these reasons, it is common practice to register an intended public company as a private company, and convert it into a public company after incorporation.

Public Companies

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:

  • Is limited by shares but is not a private company.
  • Is entitled to invite the general public to subscribe for its shares and
  • Has a minimum of seven members, without any limit on the maximum number it may have.

Government-Owned Companies

These are companies which 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.

Establishing a Company

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:

  • Memorandum of Association
  • Articles of Association
  • Statement of Nominal Capital
  • List of persons who have consented to act as directors in the case of a public company, and
  • Statutory Declaration of Compliance with the requirements of the Act.

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.

Articles of Association

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 which are unlimited or limited by guarantee are required to register Articles of Association with the memorandum, but companies which are limited by shares may either register their own articles or adopt Table A of the First Schedule as set out in the 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.

Advantages of the Incorporated Limited Liability Company

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:

  • Limited Liability of Shareholders: Investors in these companies enjoy limited liability, which means that they risk only the amount they paid or promise to pay for their share of stock. Creditors cannot look beyond corporate assets for the payment of debts owed to them.
  • Larger Size: By issuing many shares, corporations can attract millions of Naira from shareholders. In the case of public companies, there may be thousands of such shareholders.
  • Transfer of Ownership: In almost all instances shareholders can sell their shares to anyone willing to buy them. In the case of death, the shares of deceased shareholders can be transferred to their heirs.
  • Length of Life: Corporate charters can be perpetual so that a business can live forever. Several companies in Nigeria can boast that they have been in existence for 50 or more years.
  • The efficiency of Management: The shareholder’s delegate authority to a board of directors who, in turn, hire the company’s managers. If the managers are unsatisfactory, they can be sacked. Efficiency may also result, in that specialists, such as purchasing agents, can be employed.
  • Ease of Expansion: If the company wishes to expand, it can sell more stocks, provided that current or new investors are willing to buy additional shares. Furthermore, large companies find it much easier to borrow funds because the amounts they need are substantial enough to interest the appropriate financial agencies to market these securities.
  • Legal Entity: A company can sue and be sued in its own name, make contracts, and hold title to land and buildings. By contrast, a sole proprietorship or partnership must use individual names even though the business has a firm name.

Disadvantages of the Incorporated Company

  • Governmental Restrictions and Reports: Companies within a state cannot do business without proper registration. Also, the state and the federal government require reports that can be costly and burdensome to prepare.
  • Lack of Personal Interest: All persons who work for a company are its employees. Unless these employees are also principal shareholders, they do not have much interest in the success of the business, unlike what obtains in the case of sole proprietors and partners.
  • Lack of Secrecy: Companies must make annual reports to their stockholders. When these stockholders number in the hundreds or thousands, financial details become available to companies, as well as to the general public.
  • Charter Restrictions: At the time of securing a charter, a corporation states its intended business. It may not be able to diversify its activities into other areas, later on, unless it files an amendment.
  • Taxation: In addition to paying annual franchise taxes, a company may pay annual levies to other states in which it does business. Also, most corporate income is taxed by states and by the federal government. Furthermore, certain types of corporations may be subjected to special taxes.
  • Incorporation Expenses: Incorporation fees vary with the number of shares or stocks authorized, but a charge of more than a thousand dollars would be common. Share certificate and record books must be purchased, and lawyers’ fees are incurred.

Comparison of Sole Proprietorship, Partnership, and Incorporated Company

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.

A Comparison of the Characteristics of Legal Forms of Business Ownership

1. Ease and Cost of Formation

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.

2. Ownership and Profit

Sole Proprietorship – Undivided

General Partnership – Divided among two or more partners

Incorporated Company – Belong to the corporation, but may be distributed to stockholders.

3. Personal Incentive of Owners

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.

4. Liability of 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.

5. Size

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.

6. Taxation

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.

7. Opportunity for Employees

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.

8. Managerial efficiency

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.

9. Freedom and Promptness of Action

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.

10. Ease of Dissolution

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 Board of Directors and legal steps with the state.

11. Continuity

Sole Proprietorship – Based on 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 Cooperative Society or Movement

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.

The characteristics of Cooperative Society

  • Each cooperative unit is owned by the user-members of the group.
  • Each member has only one vote, regardless of the number of shares of stock owned.
  • There is a limitation on the number of stocks that each member may own.
  • The capital for the enterprise is subscribed only the members.
  • Interest is paid on the investment of each member stockholder.
  • Dividends are paid on a patronage basis, in the proportion to the number of goods that each member has bought or sold through the cooperative. These are referred to as patronage dividends.

Types of Cooperative Society

  1. Consumer Cooperatives: These are established to provide consumer goods such as food items, clothing, and other household goods to members at reasonable prices.
  2. Service Cooperative: These help to satisfy needs in the services area-services such as transport, health, and medical facilities, credit facilities, etc.
  3. Housing Cooperatives: These building dwellings or grant loans to members to build or buy their own homes. Additionally, houses may be built for rent.
  4. Artisanal and Industrial Cooperatives: These are established by craftsmen or small traders to market some tangible product(s).
  5. Agricultural or Producers’ Cooperatives: These are cooperatives with a typically rural base, formed for the sole purpose of promoting agricultural development. To this type of cooperative belong service cooperatives for the common hiring and use of farming equipment; for buying fertilizers, seeds, fodder, machinery, and equipment.

Of all the various types of cooperatives, the agricultural cooperative is the most common.

Establishing a Cooperative

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.

  • Financing the cooperative by the issuance and purchase of shares and the payment of entrance fees.
  • Purchase of books and records.
  • Appointment of full-time staff was necessary to run the business.
  • Educational work by officers of the government cooperative societies division of the appropriate ministry.
  • Trial operations by the young cooperative to get things to take shape. Although not compulsory, this step often proves valuable in the overall establishment of the business.
  • Affiliations, where necessary, to secondary and apex cooperative bodies; and
  • Registration of the cooperative to give it legal status.
  • The decision is taken to form a cooperative society of one type or the other. This decision formally concretizes the idea to form a cooperative society, which can emanate from several sources. Usually, those who originate the idea are called sponsors of the cooperative society.
  • The sponsors of the cooperative society initiate a meeting of interested parties at which plans for working out more contacts are usually made.
  • A general meeting is held by all interested parties and a planning group is elected. Ideally, the general meeting should consist of, at least, ten people.
  • The planning group conducts an economic survey of the project the cooperative is interested in and draws up a plan of action. This includes the setting up of bye-laws for the organization.
  • A general meeting of all interested persons is held to adopt the programme of action of the planning group.
  • Election of officers to run the cooperative.

Registration is granted when the Chief Registrar is satisfied that:

  • The business operation has been moving on progressively and members are honest;
  • The necessary books and records have been provided and are being properly kept;
  • The necessary affiliations have been made;
  • In all indications, the society will continue to do well in the future and to help in the promotion of the cooperative philosophy and principles;
  • The necessary articles of associations, bye-laws in this case, meet the stipulation of the Ministry of Trade, Industry, and Cooperatives;
  • That membership is not less than ten and that each of the members is not less than eighteen years old;
  • That the object of the society is the promotion of the economic interest of its members in accordance with cooperative principles;
  • The society has actually taken off;
  • The society is alive to its obligations and the necessary financial obligations of the members to the society are being met.

Advantages and Limitations of Cooperative Societies

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 programmes, 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.

Mutual Companies

Apart from these major forms of business ownership, there are others which 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 like limited liability companies, and besides, enjoy tax concessions.

Savings and Loans Association

Another form of business ownership which 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 loans 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.

 

Don’t forget to share this post!

share:
Whatsapp Share Icon