Part Three: Choosing The Legal Form of

an Ownership
3.1 Forms of Ownership and legal requirement
3.2 Advantage and disadvantage for each types of
ownership

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 What is owner ship
Ownership is the state, act, or right of owning something,
i.e., possessing something. The term may also refer to an
organization or group of owners.
 It is the exclusive and ultimate legal right to a lawful claim or
title.
 If you have ownership, you can possess, enjoy, sell, give away,
destroy, or sell an item of property.
 If you have ownership of something it means that you are the
owner; it belongs to you.
 Ownership does not only refer to people, but also to other
entities.
For example, the government is the owner of a state company.
2 Also, a holding company owns its subsidiary businesses.
 Choice of Suitable form of ownership
 choosing suitable form of ownership for determination of
the:
Division of Profits
Extent of liability
Extent of Risk
Division of Power
Control of Owner
Long term commitment, cannot be altered easily

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 Forms of ownership and legal requirements
Those forms have been modified over the course of time to
keep pace with business needs and the custom of society.
Ownership of business is represented by the right of
individual or a group of individuals to acquire legal title to
property (assets) for the purpose of controlling them and to
enjoy the gains of profits from such possession and use.

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 Forms of ownership
 The most common forms currently in wide use by small
business are:
Sole proprietorship
Partnership
Corporations and
Cooperatives
 Each form of ownership has a characteristic internal structure,
legal status, size and field to which it is best suited

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 Sole proprietorship
 It is an individual or single ownership
 These firms are owned by one person, usually the individual who
has day-to-day responsibility for running the business.
 The sole proprietorship is a form of business organization in which
 An individual introduces his capital,
 Use of his own skill and intelligence in the management of
its affairs and
 It is solely responsible for the results of its operation.
 This form is known also as individual or single proprietorship,
sole ownership or individual enterprise.
 Example: Photo studio, bookshop, bakeries, small town restaurants,
retail stores, radio and watch repair shops.
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 Advantages of Sole proprietorships
a. Ease and low cost of formation and dissolution:-there are
no restrictions on either starting or terminating small business
operations.
b. Direct motivation and personal care
c. Freedom and promptness of action
The sole proprietor can take his own decision and there is
none to question his authority. the sole proprietor can take
prompt/quick decisions especially when an emergency arises.
d. Business confidentiality
e. Single Tax:-The proprietorship does not pay tax as a business;
the profits from the business are the personal income of the
owner and are declare on his individual income tax return.
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 Disadvantages of sole proprietorship
a. Limited resources and size:-the capacity and skill are very
limited. Lending institutions and suppliers may not be willing to
cooperate because it is neither safe nor dependable which results in
making the business to remain limited in size.
b. Limited Managerial Skill:- in complex and difficult condition
which requires different expertise knowledge
c. Unlimited liability:-The sole proprietor will be legally liable
for all debts of the business , a source of courage and real devotion,
limit his activities only in specified areas
d. Uncertain future/Death of the owner terminates the
business
e. Difficulty in hiring and keeping high achievement
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employees
 Partnership
 The association of two or more persons to carry as co-
owners of a business where the relationship is based on
agreement is called partnership.
 This form of a business requires the existence of two or more
persons entering into a contractual relationship.
 This contract, which is an agreement between the parties, is
known as a memorandum of association or article of
partners’ deed.
 The Partners should have a legal agreement that sets how,
decisions will be made,
profits will be shared,
disputes will be resolved.
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 Kinds of Partners
1. A general partner
Assumes unlimited liability and is usually active in managing
the business. Most partners are general partners.
2. A limited or special partner
Assumes limited liability, risking only his /her investment in
the business. Limited partners may not be active in
management, and their names are not used in the name of the
business.
3. A secret partner
Takes an active role in managing a partnership but whose
identities are unknown to the public. i.e. the general public
does not know of this person’s partnership status.

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 Kinds of Partners
4. A silent partner
 As opposed to a secret partner, a silent partner, his identities and
involvement, is known to the general public, but is inactive in
managing the partnership business
5. Senior partners
 Assume major roles in management because of the long tenure
(possession), amount of investment in the partnership, or age. They
normally receive large shares of the partnership’s profits.
6. Junior partners
 Are generally younger partners in tenure, have only small investment
in the firm, and are not expected to make major decision. They assume
limited role in the partnership’s management and receive a smaller
share of the partnership’s profits.
 See others…
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 Advantages of partnership
1. Ease of starting
2. Increased source of capital:-
Partnership can offer creditors less risk than a sole proprietorship;
it is often an attractive investment.
3. Combined managerial skill
4. Definite legal status
Today’s partner can be assured that a competent lawyer can
answer virtually any questions he/she might have about this form
of ownership. i.e. lawyers can provide a sound legal advice about
partnership issues.
6. Motivation of important employees
7. Reduced risk
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 Disadvantages of partnership
1.Unlimited liability
2. Risk of implied authority
 The fault and miss judgment made by a single partner binds
the firm and the remaining partners. Thus, they are liable for
the debts made by the partner.
3. Lack of harmony…agreement or synchronizing
4. Lack of continuity/instability
If any one of the general partners dies, withdraws because of
mentally or physically incapable (injured), the partnership
ends.
5. Investment withdrawals difficulty/frozen-investment

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 3. Corporation
 A corporation, is an artificial person authorized and recognized
by law, with distinctive name, a common seal, comprising of
transferable shares of fixed values, carrying limited liability and
having a perpetual or continued or uninterrupted succession
life.
 A corporation is company controlled by a group of people who own
shares in the company’s ownership.
 The shareholders dictate who runs the company and how it
conducts business, then receive profits based on the shares of stock
that they own.
 Corporations can raise funds more easily and readily than
partnerships and sole proprietorships and often have access to more
starting capital to boot.
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 Types of Corporations
C-corporation: The most common type of corporation.
 It protects the entrepreneur from being personally sued for
the actions and debts of the corporation.
 S-corporation: A corporation that is taxed like a sole
proprietorship or partnership with each shareholder paying tax
on the amount of their proportionate shares.
 S-Corporation offers shareholders protection against the
business's liabilities.
The term "S-Corporation" doesn't mean "small corporation."
S-Corporations: are a subset of a corporation. First, a
corporation must be formed, then the S-Corp status may be
elected.
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 Cont…
Nonprofit corporation: Legal entities that make money for
reasons other than the owner’s profit.
Examples:
Churches
Charities
education foundations
trade associations
 Limited Liability Company (LLC): A new type of business
ownership that provides limited liability and tax advantages.
Examples
Law firms
Medical firms
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 Characteristics of Corporation
1. Separate legal entity
It can sue or be sued.
It has the right to manage its own affairs.
Shareholders cannot be liable for the acts of the
corporation
2. Limited liability
Since the corporation has separate legal entity its debts are
its own. The assets and liabilities, rights and obligations
incidental to the company’s activities are assets and
liabilities, rights and obligations respectively of the
company and not of its members.

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 Characteristics of Corporation
3.Transferiablity of shares
 It is easy to transfer ownership in a corporation. A
stockholder may sell stock to another person and transfer the
membership and membership interest freely without
consulting other stockholders.
4.Perpitual existence
 Death, insanity, retirement and withdrawal of shareholders
will not affect the company.

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 Characteristics of Corporation
5.Common seal
 A corporation has a common seal with the name of the
company engraved on it, which is used as a substitute for its
signature through it acts through its agents.
6.Separation of ownership from management
7.Supervision
8.Written Constitution
 On the creation of a company, the promoters must file
certain documents with the Registrar of Companies. These
include the Article of Association and the Memorandum of
Association.
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 Advantages of a corporation
1. Financial strength
2. Limited liability
3.Scope of expansion
 Corporations have greater potential than sole proprietorship or
partnerships
4. Managerial efficiency
 Corporations enjoy the advantage of efficient management by hiring
specialist’s skilled persons to become members of the board of
directors to mange the corporation
5. Ease in transferring ownership
6. Legal entity status
A corporation can purchase property, make contracts, sue and be
sued in the corporate name.
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 Disadvantages of a corporation
1. Difficulty of formation
 It is time consuming and cumbersome/not manageable to
establish corporations unlike the other forms of businesses.
2. Lack of owner’s/manager’s personal interest
 These forms of organizations are managed by directors, hired
officials, and employees who may not be expected to have such
an interest in the success of the business as the individual owner
or partner would have in his own business.
3. Delay in decision-making…it needs official meeting of
managers or board
4.Lack of secrecy….openness…lack of privacy
5.Double taxation
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 4. Corporative
It is an organization owned by members/customers who pay
an annual membership fee and share in any profits (if it is
profit making organization).
 Cooperatives are people centered enterprises owned,
controlled and run by and for their members to realize their
common economic, social, and cultural needs and
aspirations.
 Cooperatives bring people together in a democratic and
equal way.
Whether the members are the customers, employees,
users or residents, cooperatives are democratically
managed by the 'one member, one vote' rule.
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 Cont…
Members share equal voting rights regardless of the amount of
capital they put into the enterprise.
Corporative has to adopt the following principles:
Members have an equal vote in decisions
Membership is open to every one who fulfills specified
conditions (e.g. Number of hour worked)
Assets controlled and usually owned jointly by members
Profit shared equally between members with limited
interest payment on loans made by members;
Members benefit from participation, not investment

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 5. Other forms of business
1. Franchises
 is right to use the franchisor’s established name and branding,
as well as their already-tested business model.
 The right to resell (or distribute) a franchisor’s product and
right to use someone else’s business system.
 A franchise is a business in which the owner of the name or
method of doing business (called the franchisor) allows a local
operator (called the franchisee) to set up a business under that
name.

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 cont…
Franchise: A legal agreement that gives an individual the
right to market a company’s products or services in a
particular area.
Franchisee: A person who purchases a franchise agreement.
Franchisor: The person or company who sells a franchise.
 Initial franchise fee: The fee the franchise owner pays
in return for the right to run the business.
2. Management buy-outs and buy-ins
A management buy-out is the purchase of a business by
its existing management team.
 Cont…
 By contrast a management buy-in is the purchase of a
business by an incoming management team.
 The dynamic of each type of deal is different.
 In recent years the traditional separation of shareholders and
management has been eroded by the growing popularity of
management buy-outs’.
 This is where a group of members pool their resources to
buy the business they have been running, usually from as
larger, parent company.
 A management buy-in is where a group of managers buys
into an existing firm, usually replacing those who have been
running it.
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