Forms of Business Units 1

Topic Objectives

By the end of the topic, the learner should be able to:

1. Identify the various forms of business units.
2. Explain the characteristics of each form of business unit.
3. Discuss the formation and management of each form of business unit.
4. Discuss the sources of capital of each form of business unit.
5. Discuss the role of stock exchange as a market for securities.
6. Explain the advantages and disadvantages of each form of business unit.
7. Recognize the circumstances under which each form of business units may be dissolved.
8. Discuss trends in business ownership.

Business Units

A business unit is an organization formed by one or more people with a view of engaging in a profitable activity.

Business units are generally classified into private or public sector business units’ i.e.

Note: Private sector comprises of business organizations owned by private individuals while the public sector comprises business organizations owned by the government.

1.Sole Proprietorship

This is a business enterprise owned by one person who is called a sole trader or a sole proprietor. It is the most common form of business unit and usually found in retail trade e.g. in small shops, kiosks, agriculture e.t.c and for direct services e.g. cobblers saloons e.t.c

Characteristics/Features

• The business is owned by one person

• The capital is contributed by the owner and is usually small.

The main source is from his savings and other sources can be from friends, bank or getting an inheritance

• The owner enjoys all the profits alone and also suffers the losses alone

• The owner is personally responsible for the management of the business and sometimes he is assisted by members of his family or a few employees.

He remains responsible for the success or failure of his/her business.

• The sole proprietor has unlimited liability meaning that in case of failure to meet debts, his creditor can claim his personal property

• There are very few legal requirements to start the business unit.

• Sole proprietorship is flexible; it is very easy to change the location or the nature of business.
Formation

The formation of a sole proprietorship is very simple. Few legal formalities are required i.e. to start a sole proprietorship, one need only to raise the capital required and then apply for a trading license to operate the business small fee
is paid and the trade license issued.

Sources of capital

The amount of capital required to start a sole proprietorship is small compared to other forms of business organizations.

The main source of capital is the

Owners savings.] Additional capital may however be raised from the following;

• Borrowing from friends, banks and other money lending institutions such as industries and commercial Development corporation(ICDC)and Kenya
industrial estates

• Inheritance

• Personal savings

• Getting goods on credit

• Getting goods on hire purchase

• Leasing or renting out one’s properties

• Donations from friends and relatives

• Ploughing back profit.

Management

The management of this kind of a business is under one person.

The owner may however employ other people or get assistance from family members to run the business.

Some sole proprietorship may be big business organizations with several departments and quite a number of employees.

However, the sole proprietor remains solely responsible for the success of failure of the business

Advantages of sole proprietorship

1. The capital required to start the business is small hence anybody who can spare small amounts of money can start one.

2. Few formal/legal procedures are required to set up this business

3. Decision making and implementation is fast because the proprietor does not have to consult anybody

4. The trader has close and personal contact with customers. This helps them in knowing exactly what the customers need and hence satisfying those
needs

5. A sole proprietor is able to assess the credit-worthiness of his or her customers because of close personal relationship.

Extending credit to a few carefully selected customers reduce the probability of bad debts.

6. The trader is accountable to him/herself

7. A sole trader is able to keep the top secrets of the business operations

8. He/she

enjoys all the profit

9. A sole proprietorship is flexible. One can change the nature or even the location of business as need arises.

Disadvantages of sole proprietorship

1. Has unlimited liability. This means that if the assets available in the business are not enough to pay all the business debts the personal property
of the owner such as house will be sold to meet the debts

2. There is insufficient capital for expansion because of scarce resources and lack of access to other sources

3. He/she is overworked and has no time for recreation.

4. There is lack of continuity in the sole proprietorship i.e. the business is affected by sickness or death of the owner.

5. A sole proprietorship may not benefit from advantages realized by large scale enterprises (economies of large scale) such as access to loan facilities and large trade discounts.

6. Lack of specialization in the running of the business may lead to poor performance.

This is because one person cannot manage all aspects of the business effectively. One maybe a good salesman for examples but a poor
accountant.

7. Due to the size of the business, sole proprietorships do not attract and retain highly qualified and trained personnel.

Dissolution of sole proprietorships

Dissolution refers to the termination of the legal life of a business.

The following circumstances may lead to the dissolution of a sole proprietorship:

• Death or insanity of the owner

• Transfer of the business to another person- this transfers the rights and obligations of the business to the new owner.

• Bankruptcy of the owner- this means that the owner lacks the financial capability to run the business.

• The owner voluntarily decides to dissolve the business e.g due to continued loss making.

• Passing of a law which renders the activities of the business illegal.

• The expiry of the period during which the business was meant to operate.

2. Partnership:

This is a relationship between persons who engage in a business with an aim of making profits/ an association of two or more persons who run a business as co-owners. The owners are called Partners.

It is owned by a minimum of 2 and a maximum of 20 except for partnership who provide professional services e.g medicine and law which have a maximum of 50 persons.

Characteristics of partnership

Capital is contributed by the partners themselves

Partnership has limited life that is it may end anytime because of the death,bankruptcy or withdrawal of partners.

Each partner acts as an agent of the firm with authority to enter into contracts.

Partners are co owners of a business, having an interest or claim in the business.

Responsibility, profit and losses are shared on an agreed basis.

All partners have equal right to participate in the management of the business.

This right arises from the interest or claim of the partner as a co owner of the business.

Types of partnership

Partnerships can be classified/ categorized in either of the following ways:

(a)According to the type/liability of partners

(b) According to the period of operation

(c)According to their activities

(a) According to the type or liability of partners

Under this classification, partnerships can either be:

i) General/ordinary partnership Here all members have unlimited liability which means in case a partnership is unable to pay its debts, the
personal properties of the partner will be sold off to pay the debts.

ii) Limited partnerships In limited partnership members have limited liabilities where liability or responsibility is restricted to the capital
contributed.

This means that in case the partnership cannot pay its debts; the partners only lose the amount of capital each has contributed to the business and not their personal property. However, there must be one partner whose liabilities are unlimited.

(b) According to the period/duration of operation

When partnerships are classified according to duration of operation, they can either be;

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