TOPIC THREE: BUSINESS UNITS

Definition

Is an organization or firm that deals in the production or distribution of

commodities usually for the purpose of making profit. It may be set up by an
individual or group of individuals and its size depends on the amount of capital
invested.

FORMS OF BUSINESS UNIT

(i) Public sector

(ii) Private sector

PUBLIC SECTOR

The public sectors comprise of business organization owned by the government. The
sector consist of the following;

 Public cooperation

 Public companies

 Local government authorities

 Parastatals

PRIVATE SECTOR

The private sectors comprise of business organization owned by private individuals.

The sector consist of the following;

 Sole proprietorship

 Partnership

 Private companies

 Cooperative society

SOLE TRADER

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Is a person who owns a business singly. He is the only owner of the business, he
provides all the necessary capital, employs all the necessary labour and bears all
the risk of the business.

Characteristics of a sole trader

 Owned by one person.

 Provides capital himself.
 Earns profit and bears loss.
 The main final authority on all affairs of the business versus liabilities or
assets of the business is limited.

UN LIMITED LIABILITIES

It occurs when the business and the owner are not separated.

ESTABLISHING OF A SOLE TRADER BUSINESS

-Presence of the accepted location.

-Place should be recognized by the government policy.

Finding capital

-Money being invested to start the business.

-Submission of provision income for tax assessment (TRA) calculate according to

income quarrying.

Obtain trading license

Is a document which gives power to start the business.

Starting operation

Soon after trade license has been issued the aim commencing the business.

A sole trader business is very flexible

Change the nature of the business any time without offending any body.

ADVANTAGES OF SOLE TRADER

1.Organization is very simple

He takes all the decisions no necessity to call a meeting.

2. He takes all the profit and bears the loss.

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3. Contact with costumers

He is able to establish a direct contact both with his employees and any problem
can be solved easily.

4. Business is very flexible

He can change the nature of the business at any time without asking for
permission.

5. He enjoys top secret

He is the only person who knows the business secrets.

6. Need for small capital

The business can be established with any amount of money.

DISADVANTAGES

 Unlimited liabilities

When he enters into serious loss his personal resource is taken as security to cover
bad debts.

 Capital resource is limited

Resources are small hence no expansion.

 Limitation of talent

Every person has limitation, nobody is well in every aspect that's why there is
division of labour and specialization.

 He bears the loss alone

Sole trader is the only person who owns the business therefore he suffers all loses
which occur.

 Lack of continuity

Performance of sole proprietorship is always uncertain and difficult to maintain.

The success of sole proprietorship depends on the personal efforts and abilities of
the owner. In case the owner dies, the business is adversely affected. The business
may even collapse.

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PARTNERSHIP
A partnership is a business organisation formed and owned by two or more people
known as partners to carry out business with an aim of making profit.
OR

Is the association of two to twenty peoples carrying on a business in common with a

view of making profit.

FEATURES OF PARTNERSHIP

i. They are formed by a minimum of two and a maximum of twenty in the case of
ordinary partnerships and a maximum of fifty in the case of partnerships formed by
professionals such as doctors, lawyers and accountants.

ii. The partners provide capital jointly in the proportions agreed either from
personal savings or loans from banks and other financial institutions.

iii. The action of one partner is binding to all other partners. For instance, any debt
incurred by one partner on behalf of the business is binding to all partners. The
liability is spread among all partners in proportion of their contribution to
partnership capital.
iv.Partners usually share duties and responsibilities in the management and
operation of business as spelt out in the partnership deed.

v. Legally, there is no distinction between the partnership business and its owners,
That is the business is not a legal entity. If the business fails to pay its debts, the
partners will be required to contribute from personal sources to pay up the debts.

vi. Each partner acts as an agent of the business. Partners can therefore sell and
buy on behalf of the partnership.

vii. The profit made by the business belongs to the partners jointly. This profit is
divided in the proportions agreed upon in the partnership deed.
viii. In case the business makes a loss, the loss is shared by partners in the
proportions agreed in the partnership deed.

ix. All business decisions are made jointly by the partners through constitutions,
discussions, consensus and through majority vote.

FORMS OF PARTNERSHIP

1. Temporary partnership

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This is formed for a specific period or for a specific purpose.

2. Permanent partnership

Is the partnership which is formed for a long time the end is not known

TYPES OF PARTNERS
1. According to the rule played by them

 Active partner

An active partner is also known as working partner. He or she manages the day to
day affairs of the business on behalf of the other partners on top of the profit share,
he or she is entitled to a salary

 Dormant partner

He is also known as sleeping partner or financing partner. Such partner does not
participate in the management of the partnership business. He invests capital in
the business but his share of profits will generally be lower than of the other
partners.

2. Classified according to liabilities for firm debts or unlimited

-General partner

A person who liability towards the firm is limited.

-Unlimited partner

A person whose liability of the firm debt is limited usually the capital contributed by
him.

LIMITED LIABILITIES

Occur when business and the owner are separately entity i.e. not close relationship
between the owner of asset towards firm debt.

3. Classified according to age

-Major partner

Is a partner who is over 18 years of age. He is liable for all the debts of business.

-Minor partner

Under 18 age he contributes capital, share profit but he is not ready or able for the
firm debt but his capital contribution.

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4. According to capital contribution

-Real partner

Person who contributes capital share profit and loss.

-Quasi partner

Who don’t contribute any capital, take part in business but allows the firm to use
his name as partner. He is not liable for the firm debts in the most of the cases, but
he gets share from the profit.
The agreement is called partnership deed

PARTNERSHIP DEED OR PARTNERSHIP AGREEMENT

This is the written document which governs members in the partnership firm. It
includes the following;

Contents of the partnership deed

Partnership deed would usually state the following

1) Name of address firm

i.e. Baraka business enterprises.

2) Name, address and occupation of each partner, Director, accountant.

3) Type of partner; Active, dormant, and capital to be contributed by each partner.

4) The ratio in which profit and loss would be shared by the partner

5) Right of each partner i.e.

 Drawings
 Salary
 Interest

6) Method of calculating goodwill start at the time of distribution.

7) The duration of the partnership i.e.

 Temporary

OR

 Permanent

8) The procedure to be taken during dissolving partnership.

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9)Purpose of establishing the partnership

RIGHTS AND DUTIES OF A PARTNER

1. Indemnity of a partner for liability

If the partner use excess expect in conduct the business firm business must
indemnity.

2. Displaying utmost good faith

If the partner provide property or funds.

It should be discounted by the firm and the partners should the material facts.

3. No new partner may be included without permission or information.

No new member admitted without the consent of all partners.

4. No partner are personally liable for debts incurred by the firm except quasi
partner.

5. Every partner has a right to act on behalf of the business e.g. Sign and
provide information.

6. If a partner have a private business that competes with the partnership all
profits made by him should be surrendered to the firm.

ADVANTAGES

1. Raise more capital

Partner can use more capital because of capital contribution

2. Work is divided

There is specialization and division of labour

3. Decisions shared

4. Better combination of talents [ skills]

Partners sharing ideas from each other hence leads to added knowledge to the
members

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 5. Losses and liabilities are shared

6. Formation is fair and simple

There is no legal or complicated formality during formation

7. The expansion of the business due to capital accumulated

8. In the event of a difficult partner, partners are likely to come up with a

solution

DISADVANTAGES

 The liabilities of a partner is unlimited

 Profit is shared

When profit is distributed to partners it may reduce the amount

 Temporary

Duration /period of time

 The business is affected by the death of one partner or bankrupt

 Delay in decision

Since all major action must be taken by the consent of all partners they often be
delayed hence cause risk or loss.

DISSOLUTION OF PARTNERSHIP

Definition

The dissolution is wind up to the firm in venture

A partner notifies the other partner in the following are:

1. If the partner is temporary.

2. If partnership notifies the other the other partner right to dissolve.
3. If a partner became insane bankrupt or due to order made the winding of the
partnership.
4. If the partnership became unlawful doing against of the partnership
agreement.

JOINT STOCK EXCHANGE

Definition

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Is a cooperative association of a person formed to a certain specific function

Or

Is cooperative body is created under the law and has an entity of its own quite
separately from the members that comprises.

TYPES OF COMPANIES

1. Statutory company
2. Registered company

STATUTORY COMPANY

Is a company created by act of parliament.

REGISTERED COMPANY

Are those formed and registered under the companies act 1962 cap 486.

TYPES OF REGISTERED COMPANY

Registered companies can be further classified into the following groups

1. According to the member

2. Private company 2-50
3. Public companies

Characteristics of private companies

1. Can have two to fifty members

2. Shares are not transferable or sold
3. Owned by family
4. Can start business soon after owning a trading certificate
5. It is not required to publish its account

PUBLIC COMPANIES

Are companies owned by the public [government]

Characteristics of public companies

1. Can be any number starting from 7 no maximum

2. Owned by the public
3. Shares can be transferred
4. Can start business soon after given certificate incorporate and certificate of
trading.
5. Must publish its accounts

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According to liabilities:

1. limited companies

Is the liability of those members in limited resources do not involve in serious firm
debt

2. Unlimited liability

Is the one of the liability of those members is limited

Or

Private person resource are involved in serious from debt

Liabilities quaintest

Is the company which do not issue share or own because its debt with business e.g.
Simba sports limited

PUBLIC LIMITED COMPANIES

Is the company which is owned by the government where by the liability of the
members is limited to a stated amount

IMPORTANCE /FEATURES OF PUBLIC LIMITED COMPANIES

-Owned by public

-Legal personality

-They have an entity of them own quite separately from members that constitute
them

-Limited liabilities

-The liabilities of share holder is limited should be published to the a/c in

government media

-Capital is divided into transferable share

-The capital of the company is divided into a number of shares each share is
transferable

-Perpetual succession

-The company exist identity fill its dissolved does not affect by death or insanity

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-They have minimum of seven members to the maximum

-Common seal/law

-Since the companies are separate entity it will be necessary for it to sign papers
and documents

-The owners have no direct contact with the employees or customers

FORMATION OF COMPANIES

The person who want to establish company he is required to fill the following
documents to the legislator of the companies

 Memorandum of association
 Article of association
 List of directors
 A statement signed by director stating that they agree to act on behalf of the
company
 A declaration that the necessary requirements
 Certificate of trading /start business
 Certificate of incorporation

MEMORANDUM OF ASSOCIATION

Is the document to be prepared when forming a company which define the power
and limitation of the company with outsiders.

CONTENTS OF THE MEMORANDUM OF ASSOCIATION

Name clause

This clause states the name of the company the last word of the name should be
limited to serve as a reminder to the people dealing with the company that the
liability of its members is limited.

Situation clause

State the location of a place where the company has been allocated OR Every
company must have a registered office, where its office is situated and notice can be
put.

Objective clause

This clause states the purpose of establishment of the company

Capital clause

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This clause states the share capital which the company wishes to have

Liability clause

This clause states that the liabilities of the members shall be limited

Declaration clause

This is the last clause which states the desire for members to engage themselves
into a public limited company.

ARTICLE OF ASSOCIATION

Is the document which lays down the rules and the requirements of the company
internal organization of the company.

CONTENTS OF ARTICLES OF ASSOCIATION

 The rights and powers of each type of shareholder.

 The powers of directors.

 The methods of conducting meetings.

 The issue and transfer of shares.

CERTIFICATE OF TRADING

Is the document issued by the register who allows the company to commence its
operation.

CERTIFICATE OF INCORPORATION

This documents are presented to the registrar of companies and everything found
satisfactory, a certificate of incorporation may be issued. This brings the company
into the existence as a separate legal entity.

SHARES

A share is a unit of capital of Joint Stock Company.

Types of shares

 Ordinary shares
 Preference shares

ORDINARY SHARES

Is the kind of share which do not occurs or carry a fixed rate of returns

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PREFERENCE SHARES

Is the kind of share which carry fixed rate of return preference share holder have a
first right dividend

DIVIDEND

Is the profit distributed to share holders in the limited company [only for those who
joint /share the capital]

Types of reference shares

1. Accumulative preference shares

Those shares are entitled to a fixed rate dividend till they are paid.

2. Non accumulative preference shares

These are entitled to a fixed rate of dividend but only for the year for which a
dividend is declared.

3. Redeemable preference shares

Are shares which are brought back by the company after a stated period

Irredeemable preference shares

Shares can’t be brought back by the company

DEBENTURES

Is a unit of loan of a limited company

Types of debentures

Classification according to the security pledged against them

1. Naked debentures

Are debentures which do not have security pledge against them

Classification according to the redemption

Redeemable debenture

Are never refunded the money borrowed against them remains outstanding of the
full company is liquidated

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Debentures differ from shares in the following aspects;

1. Share is a unit of capital while debenture is a unit of loan

2. Share is paid a dividend while debenture is paid interest
3. Most share holders have the right to vote or favours the company while
debenture holders they don't have the right to vote.
4. Return on share is not restricted while debenture rules is restricted to a
certain percentage

ADVANTAGES OF PUBLIC COMPANIES

1. The liabilities of the members is limited

2. Raise capital

-Company is better placed to raise amount of capital through high profit

3. Large scale production

-Large sum of money enable large production hence high profit

4. High dividend cause share increase

-It is value share in the market

5. Shares are freely transferable

-Members can sell shares to another person

6. Employees may be allowed to buy shares hence become share holder

7. Management is controlled by directors who expect to lead efficient
cooperation
8. Perpetual succession

The company has a continuous existence and are not affected by

 Death
 Bankrupt
 Insanity

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