Download Forms of Business Ownership: A Comprehensive Overview and more Thesis Accounting in PDF only on Docsity!
Chapter Two Forms of Business Ownership
2.1 Introduction Business ownership is the right of individuals/groups to possess business assets. It involves: managing and controlling them in the manner he thinks best bearing the gain and losses arising out of such possession and use Business undertakings can be organized as public or private form of ownership.
A) Private ownership is the right of possession, management, control and disposition of property by private individuals or groups. B) Public ownership is the right of possession, management, control and disposition of property by public bodies.
Business (industrial /commercial)
Private sector Public sector
Sole partnership joint stock cooperatives proprietorship company
A person ( an entrepreneur) who wishes to start a new business may choose from any one of these forms or types of business.
2.2 Sole Proprietorship A form of business organization in which an individual: introduces his own capital uses his own skill and intelligence in the management of its affairs solely responsible for the result of its operation.
Examples of Individual /sole proprietorship are: photo studio hotel and restaurant stationery grocery bakery repair shops
Features of Sole Proprietorship
- Single ownership- the business is owned by a single individual who finances, controls and manages the business and consequently enjoys the profits or suffers losses solely and exclusively.
- Owner manager – ownership and management of the business concerns rest in the hands of the sole proprietor who enjoys full control over the business 3 .No separate legal entity- the sole proprietorship firm has no separate legal identity of its own as distinct from its owner. Both are treated as one and the same in the eye of the law.
- Undivided risk – The question of sharing the profits or losses of business by another person other than the sole owner does not arise and the proprietor bears the risks all by him self /herself.
- Unlimited liability – In case of losses the liability of the sole owner is unlimited and his personal property may also be attacked.
Advantages of Sole Proprietorship
- Easy and low cost of formation and dissolution
- Sole claim on profit
- Freedom and promptness in action – in maters of business dealing the sole proprietor can take his own decision and there is no question to his/her authority.i.e there is no need to consult other persons
- Business secrecy-since confidential information is a key to secrecy for a competitive business, it is unlikely that the owner will leak the information
- Social Desirability too much wealth does not concentrate in the hands of the few one way of equitable distribution of wealth unlimited liability is used to put forth their maximum effort that indirectly helps the society to grow and prosper. 6 .Absolute control direct and absolute control of his business affairs his /her control on all business operations is complete and absolute.
- Minimum Government Control -not regulated by any central / state law. -little / no interference / control by government in day to day business affairs.
- Personal touch -customer satisfaction
2. Contractual relationship memorandum of association /article of partnership in deed. term and condition of the partnership right ,duties and obligation of partnership the name ,address, nationality of each partner the firm’s name the head office and branches contribution of each partner the services required from persons contributing skill the share of each partner in the profit and the losses the manager and agents of the firm the period of the time for which the partnership has been established Note As the part of the formation procedure, this type of business is required to be made known to the outside parties or to the public through the process of publicity in the official news paper, such as Addis Zemen. 3. Capital contribution Each partner shall make a contribution, which may be in money, other property or skill. The contribution that is to be made for the business shall be equal unless otherwise agreed. 4. Management Every partner has the right to take an active part in the management of the firm’s affairs. The partnership agreement may provide patterns of managing according to existence and knowledge. 5. Duration The partnership firm legally comes to an end if any of the partner withdraws or dies. However, if the remaining partners agree to work together under the original firm name and style, the firm will not be dissolved and will continue its business after setting the claims of the outgoing partner.
6. Unlimited liability The liability of each partner of the firm is unlimited in respect of the firm’s debts. The liability of partners is both individual and collective. The creditors have a right to recover the firms debts from the private property of one or all partners, where the firm’s assets are insufficient.
7. Agency relationship The firm is responsible for every mistake found committed by a partner in the course of business and considered the agent of the firm. Outside parties which enter into a contact with a partner, are entitled to believe that the firm also agrees to the contract. 8. Utmost good faith and trust There must be the highest standard of honesty among partners. Partnership agreement is based on mutual confidence and trust of the partners. The partners must, therefore, be just and honest to other partners.
9. No separate legal entity The partnership firm has no independent legal existence from the persons who constitute it. In the eyes of the law like that of sole proprietorship, there is no distinction between partners and the firm. 10. Restriction on transfer of interest No partner can assign or transfer his partnership share to any other person so as to make him a partner in the business without the consent of all other partners. 11. Unanimity of consent No change may be made in the nature of business No partner can act out of the specified way Any partner cannot make major and special decision without the consent / agreement of all partners . Types of partnership There are two types of partnerships, namely: a) General partnership, and b) Special partnership The difference between these two types is that general partnership has unlimited liability for its partners, whereas the special partnership has liability of members limited.
a) General partnership General partnership is further classified as follows: i) Partnership - at will- a partnership is called a partnership at-will when: the partnership is not for a fixed period of time no provision is made as to when and how the partnership will come to an end a partner can pull out of the firm giving a certain number of days notice to the firm with drawing from the partnership as terminating the deed of agreement ii) Particular partnership – formed for a fixed period or for the completion of a definite venture and automatically comes to an and with the expiry of the period or the venture iii) Ordinary joint venture – temporary partnership arrangement between two or more persons to carry out a particular business venture – after accomplishing the tasks, the joint venture comes to an end. Examples: construction projects promotion of new enterprises
b) Special partnership Here also we can classify special partnership as follows: i) limited partnership at least one partner whose liability is unlimited one or more partners whose liability is limited to the extent of capital contribution the limited partner is not entitled to take an active part in the management of the business
risk of implied authority – a dishonest or incompetent partner may make the firm in difficulties because his acts would bind the firm and the remaining partners. lack of harmony – As everyone ties to promote his personal interest, internal frictions and misunderstandings may be created. uncertainty of duration-the business can come to an end due to death, retirement or withdrawal of a partner for any reason like dissatisfaction, bankruptcy or disagreement among partners. non transferability of interest-no partner can transfer his interest or get back his investment in business by selling off to outsiders whenever he wants without the consent of other partners. lack of public confidence- in the absence of public disclosure of its affairs, public can have little confidence in the soundness of the firm.
2.4. Joint Stock Company (Corporation) A joint stock company is essentially a group of persons coming together voluntarily to carry on certain business by organizing themselves into a single legal entity with a view to function as an artificial person in the eyes of the law. A corporation is an artificial person (being an association of natural persons) recognized by law with distinctive name, a common seal comprising of transferable shares of fixed values, carrying limited liability and having a perpetual or continuous or uninterrupted secession.
Characteristics of Corporation 1. Separate legal entity The corporation becomes a legal entity and is granted the right to manage its own affairs, the right to sue and be sued and the right to own and dispose property.
2. Limited liability Since the company has a separate legal entity, its debts are its own. Personal assets will not be required to cover debts and other obligations in case the business fails to settle.
- Transferability of shares The shareholder of the business can transfer his/her share to other without consent of other shareholders. The owners can sell their share or give freely as they wish for any one without the consent of other shareholders. 4. Perpetual existence The corporation can be dissolved in only three ways: a) By court order b) By the approval of the majority of the shareholders c) By expiration of the corporate charter (charter is an instrument granting the corporation the right to operate and defining the restrictions and procedures under which it may do so). Corporation is not affected or interrupted by the death, insolvency or retirement of any shareholder or director. 5. Common deal A company is an artificial person and therefore has no physical existence. It acts through a body of natural persons, called the board of directors. The law requires that a company
must have a common seal with its name engraved on it. Any document bearing the common seal of the company and signed by two directors, legally binds the company.
Corporate structu re There are three groups that comprise the corporate structure: stockholders /shareholders, the board of directors and the officers of the corporation.
1. Stockholders /shareholders These are owners of the corporation who bought shares of stock that show proof of the ownership. A corporate charter is the written law of the company and usually contains: Name and address of the corporation Name and address of the directors The purpose for which the corporation is formed. Amount and kind of stock Privilege and voting powers of each stock Duration of the corporation. Because stockholders are the owners of the company, they have certain vested rights (group and individual rights) that cannot be voted away.
Group rights to elect directors to vote and amend the laws to change the charter to vote on the disposal of the corporate assets to dissolve the corporation Individual rights To buy ,sell and transfer his /her stock To receive dividends in proportion to the number of share owned To inspect and receive the company’s records To vote at stockholders meeting To receive evidence of ownership To sue officers and directors for fraud To share the distribution of assets in the event of dissolution.
2. Board of Directors (BODs) The board of directors is the chief and the highest governing body of the corporation. Because they hold a position of great trust, directors may be held liable to stockholders for gross negligence, fraud or misuse of corporation assets. However, they cannot be liable for normal mistake /mistake in the business judgment.
It can expand as long as investors are willing to purchase additional shares of stock.
2. Limited liability Shareholders are responsible for the debts of the company only to the extent of face value of their share in the company. They are not liable to pay any thing more to cover business debts in the event of failure of the company. This encouragers: investors to invest their money in companies companies to collect large amounts of capital to start and expand business Note : It is the factor of limited liability that has greatly contributed to the growth of giant companies throughout the world. 3. Ease of transfer of ownership It permits members to easily transfer their share and get out of the venture as and when they choose liberty to dispose off their shareholdings whenever market conditions are favorable or they are in need of money. 4. Uninterrupted business life A company is perhaps the only form of ownership which enjoys perpetual existence and stability. Unlike sole proprietorship and partnership, a company does not come to close with death ,retirement, insolvency, change in management, owners and directors ,and dispute. 5. Diffused risk The risk is spread over several members of the corporation and is reduced for each member which helps the business in attracting more investors and to venture on new opportunities. 6. Efficient Management The company organization represents a situation in which ownership is distinct from its management. The divorce between ownership and management provides an opportunity to employ the most efficient persons as directors and if found unsatisfactory they can be fired. Since the persons who manage the company have relatively smaller financial stake, they have an adventurous spirit and can undertake risks, which are needed in starting and bringing success to the business. 7. Public confidence A company organization greatly enjoys the confidence and trust of general public because it cannot keep its affairs secret. 8. Positive social benefit Democratization Source of government revenues
Disadvantages of Corporation
Difficult and expensive formation and operation of business Delay in decision making and implementation High cost of administration
Conflict of interest Tax liability Lack of owner’s personal interest Malpractices
2.5. Cooperatives Cooperative society is a voluntary association of independent economic units to form a business organized, capitalized and managed by of and for its members so as to improve the members’ economic positions within the existing system. Features of Cooperatives
1. Voluntary /open membership A person who has a common interest and is prepared to abide by the rules of the society has the right to join the society as and when he/she wishes to do so, continues in it as long as he/she likes and leaves it at his/her will. On leaving the society, shares are not transferable to other persons although he/she can with draw from the society or automatically transmit to heirs on the death of the member. None will be denied the right and the opportunity to become its member and the cooperative society will not compel anybody to become a member. 2 .Equality of voting right Each of the members has just one vote no matter what proportion the capital he/she has contributed. “one man one vote” 3. Democratic control Cooperation is democracy in action. This is self administration of the society based on equality of all members. The influence on decision making is not related to capital invested but to the participation of the person. 4. Distribution of surplus a) Reserve Fund- the amount allocated as a reserve fund is used for Covering any contingencies expansion of the business improving the quality of the life of the community to build and improve education, health ,water, electricity, transport, communication, recreation, and other common purpose facilities b) The actual distribution of income to members takes two forms i) Return paid on the capital invested by members is considered as forms of interest rather than dividends ii) Patronage refunds or rebates method distribution in relation to the members’ contribution to the society Members get funds in proportion to the amounts of goods that each members has bought or sold through the cooperative society 5. Services motive A cooperative society is formed primarily with the objective of providing useful service to its members in a certain field. The objective of a cooperative society should not maximize profits at the cost of the members, as is usually the case with other types of business enterprises. It does not mean that a cooperative society will never work for profit. It is quite usual to such societies to make profits by extending services to non- members at higher prices
2. Industrial (or Producers’) Cooperatives An industrial cooperative is a voluntary association of craftsmen, industrial labor or small industries for undertaking collective production or providing production facilities and services. In such cooperatives membership is limited to producers of specific commodities and control in the hands of producers alone Members supply labor and capital The resulting products are sold (in general) to the members, but also to non members Organized with two main objectives: a) Economic objectives- are to provide employment opportunities, increases production, develop competitive capacity of the members b) Social objectives- are to safeguard the interests of the poorest industrialists against the exploitation of the better placed entrepreneurs. 3. Marketing cooperatives A marketing co-operative is a voluntary association of independent producers organized to arrange the sale of their output and perform essential marketing functions like grading, warehousing, packaging and transportation. 4. Housing cooperatives Association of persons who are interested in securing the ownership of a house or obtaining accommodation at fair and reasonable rents. Such societies are formed mostly in urban areas. 5. Credit cooperatives A voluntary association of people with limited financial resource formed with the objective of extending short term financial help to them and developing the habit of saving among them. 6. Farming cooperative An association of small farmers organized to secure the benefits of large scale farming
Advantages of Cooperatives Democratic management Limited liability Stability and continuity Easy formation No elaborate legal formulation are involved in forming a cooperative society Only ten adult persons are required to form cooperative The society can start functioning soon after registration General reserve 25% of its profit is held as a reserve as a useful source of internal financing.
Special Exemptions and privileges Because of its laudable social welfare objectives, a cooperative society enjoys many exemptions and privileges in matters of: taxes
registration fee financial assistance in the form of loans and grants by government All these exemptions and concessions are available to a cooperative society only and not to other profit organs. Social Advantage Promotes harmony and cooperation Brotherhood and spirit of service Imparts moral and ethical values besides self governance Encourages saving habit and fellow feeling Self employment opportunities Serves as a means of community development Disadvantages of Cooperatives Limited capital Lack of unity and cohesion Lack of motivation Delay in decision making and implementation Lack of secrecy Excessive government interference Limitation of size Lack of public confidence – due to inefficient management and internal power struggle of a cooperative society, people generally do not have any confidence in such organizations. 2.6. Public Enterprises Public enterprises are autonomous or semiautonomous corporations and companies established, owned and controlled by the state and engaged in industrial and commercial activities. Characteristics
- It is owned (at least 51% share capital) by central government or regional government or by autonomous bodies.
- Controlled and managed by the state
- Primarily service motto Public corporation works primarily for service and profit is only a secondary consideration with it. Prices are set lower and it is providing community service
- Government financed
- Collective ownership- public enterprises are the property of the society or the community as the case may be.
- Public accountability- accountable to the parliament or regional parliament or minister officer.
