TOPIC 6.

STARTING A SMALL BUSINESS

Forms of business ownership

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 incase 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.
1. 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
i. Capital is contributed by the partners themselves
ii. Partnership has limited life that is it may end anytime because of the death, bankruptcy or
withdrawal of partners.
iii. Each partner acts as an agent of the firm with authority to enter into contracts.
iv. Partners are co-owners of a business, having an interest or claim in the business.
v. Responsibility, profit and losses are shared on an agreed basis.
vi. 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 incase 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;
i) Temporary partnership-These are partnerships that are formed to carry out a specific task for
a specific time after which the business automatically dissolves.
ii) Permanent partnerships- These are partnerships formed to operate indefinitely. They are
also called a partnership at will.
c) According to their Activity- Under this mode of classification, partnerships can either be:
i) Trading partnerships
This is a partnership whose main activity is processing, manufacturing, construction or purchase
and sale of goods.
ii) Non – trading partnerships
This is a partnership whose main activity is to offer services such as legal, medical or accounting
services to members of the public.
Types of partners
Partners may be classified according to;
i) Role played by the partners
a) Active partner: He is also known as acting partner as he plays an active part in the day-to-
day running of the business.
b) Sleeping/dormant partner: He does not participate in the management of the partnership
business. Although he invests his capital in the partnership, his profit is lower as he is not active.
He is also referred to as passive or silent partner.
ii) Liabilities of the partners for the business debts:
a) General partner: He/she has unlimited liabilities.
b) Limited partner: He/she has limited liabilities
iii) Ages of partners
a) Major partner: This is a partner who is 18 years and above. He is responsible for all debts of
the business.
b) Minor partner: This is a partner who has not attained the age of 18 years but has been
admitted with the consent of other partners. Once he reaches 18 years, he then decides if he
wants to be a partner or not. Before he attains the age of 18, he takes part in the sharing of profits
but does not take part in the management of the business.
iv) Capital contribution
a) Nominal/Quasi partner: He does not contribute capital but allows the business to use his/ her
name as a partner; for the purpose of influencing customers or for prestige.
-He/she can also be a person who was once a partner and has retired in form of a loan. This loan
carries interest at an agreed rate.
-The quasi partner shares the profit of the business as a reward for using his/her name.
b) Real partner: He/she is one who contributes capital to the business.
-Other types of partners include secret partners, retiring partners and incoming partners
i) A secret partner: is one who actively participates in the management of the firm but is not
disclosed to the public. In most cases secret partners are also limited partners.
ii) A retiring partner: Also known as outgoing partner is one who is leaving a partnership
-He may retire with the consent of all the other partners or according to a previous agreement.
iii) Incoming partner: Is one who is admitted to an existing partnership.
Formation -People who want to form a partnership must come together and agree on how the
proposed business will be run to avoid future misunderstanding.
-The agreement can either be oral (by use of mouth) or within down. A written agreement is
called a partnership deed.
-The contents of the partnership deed vary from one partnership to another depending on the
nature of the business, but generally it contains:
a) Name, location and address of the business
b) Name, address and occupation of the partners
c) The purpose of the business
d) Capital to be contributed by cash partner
e) Rate of interest on capital
f) Drawings by partners and rate of interest on drawings
g) Salaries and commissions to partners
h) Rate of interests on loans from partners to the business
i) Procedures of dissolving the partnership
j) Profit and loss sharing ratio
k) How to admit a new partner
l) What to do when a partner retires dies or is expelled
m) The rights to inspect books of accounts
n) Who has the authority to act on behalf of other partners?
Once the partnership deed is ready, the business may be registered with the registrar of firms on
payment of a registration fee.
In case a partnership deed is not drawn, the provisions of partnership act of 1963 (Kenya)
applies. The act contains the following rights and duties of a partner:
i) All partners are entitled to equal contribution of capital
ii) No salary is to be allowed to any partner
iii) No interest is to be allowed on capital
iv) No interest is to be charged on drawings
v) All profits and losses are to be shared equally
vi) Every partner has the right to inspect the books of accounts
vii) Every partner has the right to take part in decision making
viii) Interest is to paid on any loans borrowed by partners (The % rate varies from one country to
another)
ix) During dissolution the debts from outside people are paid first then loans from partners and
lastly partners’ capital.
x) No partner should carry out a competing business
xi) Any change in business such as admission of new partners must be through the agreement of
all existing partners.
xii) Compensation must be given to a partner who incurs any loss when executing the duties of
the business.
Sources of capital
i) Partners contribution
ii) Loans from banks and other financial institutions
iii) Getting items on hire purchase
iv) Trade credit
v) Ploughing back profit
vi) Leasing and renting.
Advantages of partnership
i) Unlike sole proprietorship, partnership can raise more capital.
ii) Work is distributed among the partners. This reduces the workload for each partner
iii) Varied professional/skilled labour; various partners are professionals in various different
areas leading to specialization
iv) They can undertake any form of business agreed upon by all the partners
v) There are few legal requirements in the formation of a partnership compared to a limited
liability company.
vi) Losses and liabilities are shared among partners
vii) Continuity of business is not affected by death or absence of a partner as would be in the
case of a sole proprietorship
viii) Members of partnership enjoy more free days and are flexible than owners of a company
ix) A Partnership just like sole proprietorship is exempted from payment of certain taxes paid by
large business organizations.
Disadvantages of partnership
i) A mistake made by one of the partners may result in losses which are shared by all the partners
ii) Continued disagreement among the partners can lead to termination of the partnership
iii) Decision-making is slow since all the partners must agree
iv) A partnership that relies heavily on one partner may be adversely affected on retirement or
death of the partner
v) A hard working partner may not be rewarded in proportion to his/her effort because the profits
are shared among all the partners
vi) There is sharing of profits by the partners hence less is received by each partner
vii) Few sources of capital, due to uncertainty in the continuity of the business few financial
institutions will be willing to give long-term loans to the firm.
Dissolution of partnership
A partnership may be dissolved under any of the following circumstances:
i) A mutual agreement by all the partners to dissolve the business
ii) Death insanity or bankrupting of a partner
iii) A temporary partnership on completion of the intended purpose or at the end of the agreed
time.
iv) A court order to dissolve the partnership
v) Written request for dissolution by a partner
vi) If the business engages in unlawful practices
vii) Retirement or admission of a new partner may lead to a permanent or temporary dissolution
viii) Continued disagreements among the partners
3. CO-OPERATIVES
-A co-operative society is a form of business organization that is owned by and run for the
economic welfare of its members
-It is a body of persons who have joined together to do collectively what they were previously
doing individually for mutual benefit.
Example
In Kenya the co-operative movement was started by white settlers in 1908 to market their
agricultural produce. In this case, they knew that they could sell their produce better if they were
as a group and not alone
Principles of co-operatives
i) Open and voluntary membership
Membership is open and voluntary to any person who has attained the age of 18 years. No one
should be denied membership due to social, political, tribal or religious differences. A member is
also free to leave the society at will
ii) Democratic Administration
The principle is one man one vote. Each member of the co-operative has only one vote
irrespective of the number of shares held by him or how much he buys or sells to the society
iii) Dividend or repayment
-Any profit/surplus made at the end of every financial year should be distributed to the members
in relations to their contribution.
-Part of the profit may be retained/reserved/put in to strengthen the financial position of the
society.
iv) Limited interest on share capital
-A little or no interest is paid on share capital contributed (co-operatives do not encourage
financial investment habits but to enhance production, to encourage savings and serve the
members)
v) Promotion of Education
Co-operative societies should endeavor to educate their members and staff on the ideas of the
society in order to enhance/improve quality of decisions made by the concerned parties.
Education is conducted through seminars, study tours, open days
vi) Co-operation with other co-operatives
C-operatives must learn from each other’s experience since they have a lot in common.
-Their co-operation should be extended to local national and international.
Features of co-operatives
 Membership is open to all persons so long as they have a common interest. Members are
also free to discontinue their membership when they desire so
  Co-operative societies have a perpetual existence; death, bankruptcy or retirement
of a member does not affect its operations
 They are managed in a democratic manner. Every member has one vote when
electing the managerial committee irrespective of the number of shares held.
 The main aim is to serve the interest of the members where profit is not the
overriding factor.
 Co-operative societies have limited liabilities
 There must be a minimum of 10 people with no maximum membership.
 Co-operatives have a separate legal entity from the members who formed it i.e
they can own property sue and be sued
 Any profit made by the society is distributed to the members on the basis of the
services rendered by each member but not according to the capital contributed.
Formation
-Co-operative societies can be formed by people who are over eighteen years regardless of their
economic, political or social background.
-There must be a minimum of 10 persons and no maximum no.
-The members draft rules and regulations to govern the operations of the proposed society i.e.
by-laws, which are then submitted to the commissioner of co-operatives for approval
-The registrar then approves the by-laws and issues a certificate of registration
-If the members are unable to draw up their own by-laws, the co-operative societies Act of 1966
can be adopted in part or whole
Management
-A co-operatives society is composed/run by a committee usually of nine members elected by the
members in a general meeting
-The management committee elects the chairman, secretary and treasurer as the executive
committee members, who act on behalf of all the members and can enter into contracts borrow
money institute and depend suits and other legal proceedings for the society
-The committee members can be voted out in an A.G.M if they don’t perform as expected.
TYPES OF CO-OPERATIVES SOCIETIES IN KENYA
May be grouped according to;
i) Nature of their activities
a) Producer co-operatives
b) Consumer co-operatives
c) Savings and credit co-operatives
ii) Level of operations
a) Primary co-operatives
b) Secondary co-operatives
a) Producer co-operatives
This is an association of producers who have come together to improve the production and
marketing of their products.
Functions
 Obtaining better prices for their members products
 Providing better storage facilities for their products
 Providing better and reliable transport means for moving the products from the
sources to the market and building feeder roads
 Providing loans to members
 Providing services of grading, packing and processing to the members
 Providing farm inputs e.g. fertilizers, seeds, insecticides e.t.c on credit to
members
 Educating and advising members on better methods of farming through seminars,
field trips, films and demonstration

-In this type of co-operative members are paid according to the quantity of the produce a member
has delivered to the society.
Examples,
KCC-Kenya Co-operative Creameries
K.P.C.U-Kenya Planters Co-operatives Union
K.G.G.C.U-Kenya Grain Growers Co-operative Union
b) Consumer Co-operatives
-These are formed by a group of consumers to buy goods on wholesome and sell them to the
members at existing market prices.
-Their aim is to eliminate the wholesalers and retailers and hence obtain goods more cheaply
-The co-operatives allow their members to buy goods on credit or in cash
-Members of the public are also allowed to buy from the society at normal prices thereby
enabling the society to make more profits
-The profits realized is shared among the members in proportion to their purchases i.ethe more a
member buys, the buyer his/her share of profit
Examples;-Nairobi consumer co-operative union, Bee-hive consumer co-operative society and
City-chicken consumer co-operative society
Advantages
 Sell goods of high quality
 Sell goods to members at fair prices
 Sell goods to other people at normal prices thereby making more profit
 Buy goods directly from the producers thereby eliminating middlemen. They are
therefore able to make more profit
 Can give credit facilities to the members
 Can pay interest on capital to the members
 Sell a variety of goods to the members at a place where they can easily get them
Disadvantages
Consumer co-operatives are not popular in Kenya because of the following
i. They face stiff competition from large scale retailers such as supermarkets and multiple shops
who buy goods directly from the producers and sell-them to consumers at low prices
ii. Cannot offer to employ qualified staff
iii. Majority of their members have low income, so raising off capital is a problem
iv. Kenya, being an agricultural country, produces enough subsistence goods for itself. It
therefore does not require consumer co-operatives
v. Reluctance of non-members to buy from the shops lowers the turn-over
vi. Mismanagement of the shops is rampant
Savings and credit co-operatives societies (SACCO’S)
-They are usually formed by employed persons who save part of their monthly salary with their
co-operative society, through check-off system
-Their money earns goods interest and when one has a significant amount saved, he/she become
entitled to borrow money from the society for any personal project e.g. improving their farms,
constructing houses, paying school fees etc.
-The SACCOS charge lower interest on loans given to members than ordinary banks and other
financial institutions.
-The societies have few formalities or requirements to be completed before giving a loan. These
are:
i. Membership
ii. Members salary
iii. Members saving
iv. Guarantee from fellow members
-Profits earned by the SACCO’S may be shared among the members inform of dividends.
-Most SACCO’S have insured their members savings and loans with co-operative insurance
services (CIS).This means if a member dies his/her beneficiaries are not called upon to repay the
loan and the members savings/shares is given to the beneficiaries.
-They are the main institutions that provide loans to most people who do not qualify for loans
from commercial banks because they do not ask for securities such as title deeds required by the
bank.
d) Primary co-operative societies
-These are co-operative societies composed of individuals who are either actual producers,
consumers or people who join up together to save and obtain credit most conveniently
-Consumer co-operative societies and most SACCO’S are primary co-operative societies because
they are composed of individuals.
-Most primary co-operative societies operate at the village level, others at district levels and a
few at national levels.
e) Secondary co-operative societies
-They are usually referred to as unions
-They are generally composed of primary co-operative societies as their members
-They are either found at district levels or at national levels.
Advantages of co-operative societies:
i. Since the properties of co-operatives are owned collectively, they are able to serve the
interest of the members affectively
ii. They have limited liability
iii. Membership is free and voluntary
iv. Members share profits of a co-operative through dividend that are given
v. They have improved the standards of living of their members through increased income
from their produce and through savings from incomes.
vi. Co-operatives benefit their members through giving them credit facilities and financial
loans which they could not have got from local banks
vii. They are run on a democratic basis i.e. all members have an equal chance of being
elected to the management committee.
viii. Many co-operatives are large scale organizations hence able to get the benefits of large
scale organizations e.g low production costs leading to low prices of products
ix. Co-operative enjoy a lot of support from the government and when they are in financial
and managerial problems, the government steps in to assist them
Disadvantages of co-operative societies:
i. Majority of the co-operatives are small in size and therefore cannot benefit from
economies of scale.
ii. Members have a right to withdraw from the society and when they do, co-operatives
refunds the capital back which might create financial problems to the society.
iii. Corruption and embezzlement of funds is a problem for many co-operatives.
iv. Most co-operatives are not able to attract qualified managerial staff hence leading to
mismanagement.
v. Many suffer from political interference. Sometimes; the election of the management
committee is interceded with by some people with personal interest in certain candidates
hence the best person may not be elected to run the affairs of the society. This leads to
poor management and inefficiency.
vi. Members may not take keen interest in the affairs of a co-operative society because their
capital contribution is small.
Dissolution of co-operative societies
i. A co-operative society may be dissolved under any of the following circum-stances.
ii. Order from commissioner of co-operatives
iii. Voluntary dissolution by members
iv. Withdrawal of members from the society leaving less than ten members
v. If the society is declared bankrupt
4. LIMITED LIABILITY COMPANIES (JOINT STOCK COMPANIES)
Definition: A company; is an association of persons registered under the companies’ act who
contribute capital in order to carry out business with a view of making a profit.
The act of registering a company is referred to as incorporation. Incorporation creates an
organization that is separate and distinct from the person forming it.
A company is a legal entity that has the status of an ‘’artificial person”. It therefore has most of
the rights and obligations of a human being. A company can therefore do the following;
i. Own property
ii. Enter into contracts in its own name.
iii. Borrow money.
iv. Hire and fire employees.
v. Sue and be sued on its own right.
vi. Form subordinate agencies, ie, agencies under its authority.
vii. Disseminate or spread information.
viii. The owners (members) of a company are referred to as shareholders
FEATURES OF COMPANIES (LIMITED LIABILITY COMPANIES)
-A company is an artificial person and has the same rights as a natural person. It can therefore
sue and be sued in a court of law, own property and enter into contracts in its own name.
-The members have limited liabilities.
-Companies have perpetual life which is independent of the lives of its owners. Death, insanity
or bankruptcy of a member does not affect the existence of the company. (this is referred to as
perpetual existence or perpetual succession)
- A company is created for a particular purpose or purposes.
Formation
-People who wish to form company are referred to as promoters
-The promoters submit the following documents to the registrar of companies:
i) Memorandum of Association
-This is a document that defines the relationship between the company and the outsiders. It
contains the following:
a) Name of the company/Name clause; -The name of the company must be started and should
end with the word “Limited” (Ltd).This indicates that the liability of the company is limited.
-Some companies end their names with “PLC” which stands for “Public limited company”
which makes the public aware that although it is a limited liability company it is a public not
private.
b) The objects of the company/objective clause;-This set out the activities that the company
should engage in
-The activities listed in this clause serve as a warning to outsiders that the company is authorized
in these activities only.
c) Situation clause;-Every company must have a registered office where official notices and
other communication can be received and sent
d) Capital clause;-It also states that the amount of capital which the business can raise and the
divisions of this capital into units of equal value called shares i.e. authorized share capital also
called registered or nominal share capital.
-It also specifies the types of shares and the value of each share
e) Declaration clause:-This is a declaration signed by the promoters stating that they wish to
form the company and undertake to buy shares in the proposed firm
-The declaration is signed by a minimum of seven promoters for public limited company and a
minimum of two for private company.
-The memorandum of association also contains the names of the promoters
-The promoters signs against the memorandum showing details of their names, addresses,
occupation and shares they intend to buy. Each signatory should agree to take at least one share.
i) Articles of Association
-This is a document that governs the internal operations of the company
-It also contains rules and regulations affecting the shareholders in relation to the company and
in relation to the shareholders themselves.
-It contains the following;
  Rights of each type of shareholder e.g. voting rights
 Methods of calling meeting and procedures
 Rules governing election of officials such as chairman of the company, directors
and auditors
 Rules regarding preparation and auditing of accounts
 Powers, duties and rights of directors
 Methods dealing with any alterations on the capital.
ii) A list of directors with details of their names, addresses, occupations, shares subscribed and
statements of agreement to serve as directors
iii) Declaration that registration requirements as laid down by law (by the companies act) have
been met. The declaration must be signed by the secretary or a director or a lawyer.
iv) A statement signed by the directors stating that they have agreed to act as directors.
v) A statement of share capital- this statement gives the amount of capital that the company
wishes to raise and its subdivision into shares.
-Once the above documents are ready, they are submitted by the promoters to the registrar of
companies. On approval by the Registrar and on payment of a registration fee, a certificate of
incorporation (certificate of registration) is issued
-The certificate of incorporation gives the company a separate legal entity.
Sources of Capital
1. Shares; the main source of capital for any company is the sale of shares.
-A share is a unit of capital in a company e.g. if a company states that its capital is ksh.100,000
divided into equal shares of ksh.10 each.
-Each shareholder is entitled to the company’s profit proportionate to the number of shares
he/she holds in the company.
Types of shares:
a) Ordinary shares
b) Preference shares
a) Ordinary shares;-Ordinary shares have the following rights:
 Have voting rights
 Have no fixed rate of dividends. The dividends on them vary according to the
amounts of profit made
  They have a claim to dividends after the preference shares
 If the company is being liquidated, they are paid last after the preference shares
b) Preference shares;-They have the following characteristics;
 Have a fixed rate of sharing profits (dividends)
 Have a prior claim to dividends over the ordinary shares
 Have no voting rights
 Can be redeemable or irredeemable. Redeemable shares are the ones that can be bought
back by the company at a future date while irredeemable ones are ones that cannot be
bought back
 Can be cumulative or non-cumulative. Cumulative shares are the ones that are entitled to
dividends whether the company makes profit or not. This means if the company makes a
loss or a profit which is not enough for dividends in a certain year, the dividends to
cumulative shares are carried forward to the next year(s) when enough profit are made

-Non- cumulative shares are the ones whose dividends are not carried forward to the following
year(s)
2. Debentures
This refers to loans from the public to a company or an acknowledgement of a debt by a
company
They carry fixed rate of interest which is payable whether profit are made or not.
They are issued to the public in the same way as shares.
They can be redeemable or irredeemable.
Redeemable debentures are usually secured against the company’s assets in which case they
termed as secured debentures or mortgaged debentures.
NB: Where no security is given, the debentures are called unsecured /naked debentures.
3. Loans from bank and other financial institutions;-A company can borrow long term or short
term loans from banks and other money lending institutions such as Industrial and Commercial
Development Corporation [I.C.D.C]
These loans are repayable with interest of the agreed rates.
4. Profits ploughed back;-A company may decide to set aside part of the profit made to be used
for specified or general purposes instead of sharing out all the profit as dividends. This money is
referred to as a reserve.
5. Bank overdraft;-A customer to a bank may make arrangements with the bank to be allowed
to withdraw more money than he/she has in the account.
6. Leasing and renting of property.
7. Goods brought on credit.
8. Acquiring property through hire purchase
TYPES OF COMPANIES
I. PRIVATE LIMITED COMPANY
Private limited company has the following characteristics;
 Can be formed by a minimum of 2 and a maximum of 50 shareholders, excluding
the employees,
 Does not advertise its shares to the public, but sells them privately to specific
people
 Restricts transfer of shares i.e. a shareholder cannot sell his/her shares freely
without the consent of other shareholders.
 Can be managed by one or two directors. A big private company may however,
require a board of directors
 Can start business immediately after receiving the certificate of incorporation
without necessarily having to wait for a certificate of trading.
 It does not have an authorized minimum share capital figure.
 Has a separate legal entity and can own property, enter into contracts, sue or be
sued.
 Has limited liability.
 Has a perpetual existence.

Formation
-It must have a memorandum of association, article of association list of directors, declaration
signed by a director or lawyer and certificate of incorporation.
Advantages of private limited company
i) Formation: The Company can be formed more easily than a public company. The cost of
information is less than that of a public company
ii) Legal personality: A private company is a separate legal entity from its owners. Like a
person, it can own property, sue or be sued and enter into contacts
iii) Limited liability: Shareholders have limited liability meaning that they are not responsible
for the company’s debts beyond the amount due on the shares
iv) Capital: They have access to a large pool of capital than sole proprietorship or a partnership.
They can borrow money more easily from financial institutions because it owns assets which can
be pledge as security
v) Management: A private company has a larger pool of professional managers than a sole
proprietorship or a partnership. These managers bring in professional skills in their own areas
which are of great advantage to a private company
vi) Assured continuity of the business: Death, bankruptcy or withdrawal of a shareholder does
not affect the continuity of the company
vii) Trading: Unlike a public company a private company can commence trading immediately
upon receiving a registration certificate.
Disadvantages of a private company
i) Returns: A private company, unlike sole proprietorship or a partnership, must submit annual
returns on prescribed forms to the registrar of companies immediately after the annual general
meeting
ii) Capital: A private company cannot invite the public to subscribe to its shares like a public
limited company. It therefore limited access to a wide source of capital.
iii) Share transfer: The law restricts the transfer of shares to its members/shareholders are not
free to transfer their shares
II) PUBLIC LIMITED COMPANY; - Public limited companies have the following
characteristics:
i. Can be formed by a minimum of 7 (seven) shareholders and no set maximum.
ii. Cannot start business before it is issued with a certificate of trading. This is issued after
the certificate of incorporation and after the company has raised a minimum amount of
capital
iii. It’s managed by a board of directors
iv. The shares and debentures are freely transferable from one person to another.
v. It advertises its shares to the public/ invites the public to subscribe for/buy its shares and
debentures.
vi. Must publish their end of year accounts and balance sheets
vii. Must have an authorized minimum share capital figure
viii. Has a separate legal entity and can own property, enter into contracts, sue or be sued.
ix. Has limited liability.
x. Has a perpetual existence.
Advantages of public limited company
i) Wide range of sources of capital :It has access to wide range of sources of capital especially
through the sale of shares and debentures
-They can also borrow money from financial institutions in large sums and have good security to
offer to the lenders.
ii) Limited liability: Like private companies, public limited company’s shareholders have
limited liability i.e. the shareholders are not liable for the company’s debts beyond the
shareholders capital contribution.
iii) Specialized management: PLC’S are able to hire qualified and experienced professional
staff.
iv) Wide choice of business opportunities: Due to large amount of capital a public company
may be suitable for any type of investment
v) Share transferability: Shares are freely transferable from one person to another and affects
neither the company’s capital nor its continuity.
vi) Continuity: PLC has a continuous life as it is not affected by the shareholders death,
insanity, bankruptcy or transfer of shares
vii) Economies of scale: Their large size enables them to enjoy economies of scale operations.
This leads to reduced costs of production which raises the levels of profit
viii) Employee’s motivation: They have schemes which enable employees to be part owners of
the company which encourages them to work harder in anticipation of higher dividends and
growth in the value of the company’s shares.
ix) Share of loss: Large membership and the fact that capital is divided into different classes’
means that the risk of loss is shared and spread.
x) Shareholders are safe guarded; Publicity of company accounts safeguard against frauds.
Disadvantages of public limited companies
i) High costs of formation: The process of registering a public company is expensive and
lengthy. Some of the costs of information are legal costs, registration fees and taxes
ii) Legal restrictions: A public company must comply with many legal requirements making its
operations inflexible and rigid
iii) Alienation of owners: Shareholders non-participation in management is a disadvantage to
them
iv) Lack of secrecy: The public limited companies are required by law to submit annual returns
and accounts to the registrar of companies denying the company the benefit of keeping its affairs
secret. They are also required to publish their end of year accounts and balance sheets.
v) Conflicts of interests: Directors may have personal interests that may conflict with those of
the company. This may lead to mismanagement.
vi) Decision making; important decision are made by the directors and shareholders. The
directors and shareholders meet after long periods which make decision making slow/delayed
and expensive.
vii) Diseconomies of scale: The large size and nature of business operations of public limited
companies may result in high running/operation costs and inefficiency
viii) Double taxation: There is double taxation since the company is fixed and dividends
distributed to the shareholders are also taxed

ix) Inflexibility: Public limited companies cannot easily change its nature of business in response
to the changing circumstances in the market. All shareholders must be consulted and agree.

DISSOLUTION OF A COMPANY
The following are the circumstances that may lead to the dissolution of a company:
 Failure to commence business within one year- If a company does not commence
business within one year from the date of registration, it may be wound up by a court
order on application of a member of the company.
 Insolvency – when a company is not able to pay its debts, it can be declared insolvent and
wound up.
 Ultra- vires – this means a company is acting contrary to what is in its objective clause. In
such a case, it may be wound up by a court order.
 Amalgamation – two or more companies may join up to form one large company
completely different from the original ones.
  Court order – the court of law can order a company to wind up especially following
complaints from creditors.
 Decision by shareholders – the shareholders may decide to dissolve a company in a
general meeting.
 Accomplishment of purpose or expiry of period of operation – a company may be
dissolved on accomplishment of its objects, or on expiry of period fixed for its existence.

THE ROLE OF STOCK EXCHANGE AS A MARKET FOR SECURITIES

DEFINATIONS
(1) Stock: a group of shares in a public limited company
-Stocks are formed when all the authorized shares in a particular category have been issued and
fully paid for.
(2) Stock exchange market: is a market where stocks from Quoted companies are bought and
sold
-Stock exchange markets enable shareholders in public companies to sell their shares to other
people, usually members of the public interested in buying them.
(3) A Quoted Company: is a company that has been registered (listed) as a member of the stock
exchange market.
-Companies that are not quoted cannot have their shares traded in the stock exchange market.
(4) Securities: this could either refer shares or documents used in support of share ownership.
(5) Initial Public Offer (I. P. O): refers to situations in which a company has floated new shares
for public subscription ( Has advertised new shares and has invited members of the public to buy
them.
(6) Secondary market: The market that deals in second hand shares i.e. the transfer of shares
from one person or organization to another.
There is only one stock exchange market in Kenya i.e. The Nairobi Stock Exchange.
A person wishing to acquire shares will do so either at an IPO or in the secondary market.
However, an investor cannot buy or sell stocks directly in the stock exchange market. They can
only do so through stock brokers.
ROLES OF THE STOCK EXCHANGE MARKET
(a) Facilitates buying of shares- it provides a conducive environment to investors who want to
buy shares in different companies.
(b) Facilitates selling of shares- it creates a market for those who wish to sell their shares.
(c) Safeguarding investors’ interests- it monitors the performance of the already quoted
companies and those found not meeting expectations are struck off. Companies who want to be
quoted must also attain a certain standard of performance.
(d) Provides useful information- it provides timely, accurate and reliable information to
investors which enable them to make decisions on the investments to make. The information is
passed on through mass media and stock brokers.
(e) Assist companies to raise capital- it assists companies to raise capital by creating an
environment through which companies issue new shares to members of the public in an IPO.
(f) Creation of employment- it creates employment for those who facilitate the buying and
selling of shares eg stock brokers, stock agents etc.
(g) Raising revenue for the government- the government earns revenue by collecting fees and
other levies/ dues from activities carried out in the stock exchange market.
(h) Availing a variety of securities- it avails a variety of securities from which an investor can
choose from. The market therefore satisfies needs of various investors eg investors who wish to
buy from different companies can do so in the market.
(i) Fixing of prices- the stock exchange market is in a position to determine the true market
value of the securities through the forces of demand and supply. This is of great importance to
both the buyer and the seller.
(j) Measures a country’s economic progress- the performance of securities in the stock
exchange market may be an indicator of a country’s economic progress e.g a constant rise in
prices and volumes of securities traded within a given period of time would indicate that the
country’s economy is positively growing.
(k) Promotes the culture of saving- it provides investors with opportunities to channel their
excess funds. Such people act as role models to other members of the society who may emulate
them thereby promoting a saving culture.
5. PUBLIC CORPORATIONS (STATE CORPORATIONS)
These are organizations formed by and/or controlled by the government (the government has a
controlling interest). This means that the government owns more than 50% shares in the corporation.
Where the government has full ownership, the organization is known as a parastatal

 Public corporations are formed to perform certain/specific functions on behalf of the

government.
 They are formed to provide essential services that are generally in the public interest, and
that may require heavy initial capital investment which few private investors can afford
 They are formed by the act of parliament.
Examples
 Kenya Railways corporation- provides railway transport
 Telkom Kenya-provides telecommunication services
 Postal corporation of Kenya
 Industrial and commercial Development corporation (ICDC)- financial and management
services
 Mumias and Chemelil sugar companies.
 Kenya air ways- provide air transport services. etc

Characteristics/features of public corporations

i. They are formed by the government under the existing laws i.e formed by an act of
parliament eg education act
ii. Initial capital is provided by the government
iii. They are jointly owned by the government and members of public/private investors
iv. They are set up to perform certain specific functions on behalf of the government
v. They are managed by a board of directors appointed by the government or appointed by
the government and the joint owners
vi. They have an entity of their own and can own property, enter contracts, sue and be sued
vii. They have limited liability
viii. Some operate without a profit motive while others have a profit motive
Formation
-Some are formed by an act of parliament while others are formed under the existing laws.
-When formed by an act of parliament, the Act defines its status obligations and areas of
operation. The Act outlines the following;
 Proposed name of the corporation
 Aims and objectives
  Goods or services to be produced and provided
 Location(Area of operation)
 The appointment of top executives
 The powers of the Board of directors
 The ministry under which it will operate
Management
-The public corporations are managed by a board of directors appointed by the president or the
relevant minister
-The chairman and the board of directors are responsible for the implementation of the aims and
objectives of the corporations.
-The chairman of the board of directors reports to the government (president) through the
relevant minister.
-The managing director who is usually the secretary of the board of directors in the chief
executive officer of the corporation
Sources of capital
-The initial capital is usually provided by the government as a vote of expenditure for the
ministry concerned
-Those corporations jointly owned by the government and the public raise capital through the
sale of shares
-financial institutions in form of loans
-Retained profits/profits ploughed back.
-Hire purchase

Advantages of public corporations

i. Initial capital is readily available because it is provided by the government
ii. Can afford to provide goods and services at low prices which would otherwise be
expensive if they were left to the private sector.
iii. Most of them produce goods and services in large quantities thereby reaping the
benefits of large scale production
iv. Some are monopolies. They hence enjoy the benefits of being a monopoly e.g.
they do not have to incur costs advertising since there is no competition
 v. They can be bailed out/assisted by the government when in financial problems
vi. They have limited liability
vii. Money for research and development can be made readily available by the
government
viii. Through corporations the government is able to remove foreign domination in the
country
ix. They can afford to hire qualified personnel.
Disadvantages of public corporations
i. They are managed by political appointees who may not have the necessary
managerial know how.
ii. When they make losses, they are assisted by the government and this could lead
to higher taxation of individuals
iii. Lack of competition due to monopoly leads to inefficiency and insensitivity to
customers feelings.
iv. Political interference may hamper efficiency in the achievement of set goals and
objectives.
v. Decision-making is slow and difficult because the organizations are large.
vi. They may lack close supervision because of their large sizes.
vii. There is embezzlement of large sums of money leading to loss of public funds
viii. The government is forced to provide goods and services to its citizens in all parts
of the country where at times its uneconomical to provide them because the costs
of providing them may surpass the returns
ix. Public funds are wasted by keeping poorly managed public corporations.
x. Diseconomies of scale apply in these business units because they are usually very
large scale organizations e.g. decision making may take long.
Dissolution of public corporations
They can only be dissolved by the government due to:
1. Persistent loss making
2. Bankruptcy- where the corporation cannot pay its debts
3. Change in the act of parliament that formed the corporation
4. Privatization
5. Mismanagement, resulting in poor management of the corporation
Factors to be considered when starting a small enterprise
Capital. Entrepreneurs have to invest in a certain amount of personal money for the start of their
business. He should know the sources of capital.

Business opportunity. An entrepreneur should not start a business similar to existing ones
without determining whether the market can accommodate all of them.
Entrepreneurial skills and knowledge. An entrepreneur should know his competencies,
attitudes and skills that will benefit his business.
Competitors. A person wishing to start a small business should know his or her competitors and
the quality of products, so that he or she can make his products even better.
Legal requirements. It’s important for an entrepreneur to know the legal requirements of
starting a business because the legal requirements may prohibit or restrict consumption of certain
commodities.
Business premises. The location of a business is a key factor to consider. The following factors
should be put in mind
 Transport facilities
 Availability of energy power
 Nearness to raw materials
 Expansion ability in future
 Availability of auxiliary services like banking
Procedures of Starting a small Business
 Identification of a business idea
 Development of a business plan
 Location of a business demand evaluation
 Registration of the business
 Choice of the business organization
 Business name
 Trading licenses / permit
 Start-up and management of the business.
 All entrepreneurs are business people – though not all business people are entrepreneurs.
 Entrepreneurs tend to be more innovative than ordinary business people and end up
developing a business plans.
Business life cycle
Business life cycles refers to the phases that a business passes from the time the idea is formed in
the entrepreneurs mind to the time business' rolls and expands of even declines Many businesses
go through six stages in their life. Others may go through five stages:

I. Idea Generation stage

This is the preliminary stage for the business. Here, the entrepreneur does a lot of ground work to
access the viability of the venture he is about to get into. At this stage, the to come up with the
business idea. Several needs may require to be fulfilled but the entrepreneur may not meet all of
them; it becomes necessary at this stage to select the most viable business idea from the many
available. This stage may involve creativity and assessment of various ideas. It is at this stage
that an entrepreneur decides on the business mission, scope and direction. This mean, an
entrepreneur gives the prospective business a purpose. Some purposes may include provision
services and to make profit He will carry out due diligence to ensure he has taken all important
factors into Recount setting off the business. He will incur expenses to execute some of these
important activities. He may for instance require the services of a legal representative to acquire
land. He may also hire the services of a surveyor if he wants to build his own premise, if he will
hire personnel to assist in running the business, he should ensure that he has sufficient funds
need to get a loan to do this.
II. Start - up stage

Activities at the start up stage may involve preparation of a formal business plan, registration of
the business, sourcing capital, recruiting staff and designing also launch the product and sign up
with distributors or dealers. At this stage, the entrepreneur has already set the business up. The
business is operational despite the setbacks that befall all businesses that he may need to make
adjustments in order to survive. He may see the need to insure the property in case he hadn't He
may also realize that he does not need an extra staff hence he may cut down on that, sales may be
slow in picking up, so he may decide to come up with new marketing strategies, He may see the
need to have proper records for tax purposes.
III. Growth stage

At the growth stage of business common experiences may include:

 Increased sales and profits
 Wider market coverage in terms of geographical regions.
 A growing number of employees
 Variety of products/services
 Increased competition
 Need for additional expenditure
During this phase, the business will experience rapid growth as customers’ needs become the
main focus for the entrepreneur. It is at this stage that he will realize there is need to gain a
competitive edge in order to make more sales. The entrepreneur at this stage may think seriously
about automating his operations, hiring professionals like accountants, perhaps even expanding
the business. The signs that these requirements are necessary will be felt by the growing need to
meet the increasing and dynamic needs of the customer
IV. Stabilization Stage
At this stage, the business sales and profits stagnate. The business may also experience;
 Intensified competition.
 There is also market saturation by similar (“look like”) products
 Consumers’ indifference to the-product
 Sales may decline and consequently profit may decline.

This is the phase that determines whether the business has managed to meet its long term
objectives and a period to assess how successful the short term objectives have been met. At this
stage, the entrepreneur is more concerned about corporate governance, issues and how this
impacts on customer needs. He will also be concerned with the management of the business in
various departments such as finance, sales and marketing. The entrepreneur will have his sights
on a higher level of competition with other, firms that belong to a higher circle, hence he see the
need of turning the business into a public limited company in order to compete as such levels.
This model can be applied to the growth or otherwise of a firm. The entrepreneur thus needs to
ensure that the business opportunity he has before him has a road map charted in advance and
based on due diligence. This does not mean that every firm will follow the above model. The
entrepreneur needs to be aware of the possible outcomes.
V. Innovation Stage

Organizations that fail to innovate at stabilization stage are likely to decline. To ensure the firm
comes back to growth, the entrepreneur is required to re- look at the ways business has been
conducted. The aim is to undertake activities differently and rescue the firm from decline. It is
expected that innovative strategies would ensure accelerated growth.
Among innovative attempts include:
 Change of management the aim is to bring new-and better ideas that will ensure the
firm is back to the growth path.
 Re- package the product/ service .This would ensure the market gets the impression of
a new product that is modified and. better than the former. It is also a strategy of winning
customers back from competitors.
 Change the technology. The aim of new technology is to ensure efficiency in production
and enhance customer service. It is important that the entrepreneur chooses a technology
that matches the type of business he is doing
 New distribution methods. The firm may also design new distribution methods.
Changing the distribution strategy would ensure customers access their products at the
convenient places especially providing personalized distributions to customers or even
ensuring 24 hour service to customers
 Advertise and promote differently. The firm may decide go to different regions and
promote its product or services.
VI). Decline Stage
This stage is not in the normal plan of business. The entrepreneur does not foresee business
declining at the start- up stage. Some of the experiences at this stage include:-
 Drastic fall in sales and profits this is as a result of customers moving to competitors
and in large numbers. It is also a result of consistent expenditure against limited income.
 Consumer indifference to the product/ service this means consumers no longer prefer
the product to competing brands. The entrepreneur may experience huge stocks of unsold
product.
 Inability to meet bills/ debts as they fall due this arises from persistent low income or
losses against increased expenditure.
 Key management staffs leave the organizations. This may result-from the
organizations inability to remunerate top managers or provide them ' with adequate
facilities for their performance of various tasks.

Challenges faced when starting a small business

 Poor infrastructure facilities including power is a challenge.
 Deficiency in managerial and technical skills needed for the operation of the business.
 Financial challenges/shortages because it’s difficult or are limited to access external
sources of funds.
 In a male dominated society, women entrepreneurs find it difficult to cope up with
pressure and tensions of managing an enterprise.
 Lack of planning -an entrepreneur should have a well-developed plan with clear
objectives prior to starting any venture.
 Government limitations-the government tends to back the larger business enterprise
making the small enterprise less attractive especially when it comes to bank lending.
 Environmental changes-the economic, political, social and technical environment all are a
challenge to the entrepreneur.
 Legal requirements like licenses is also a challenge to operate certain businesses
 Lack of necessary entrepreneurial skills, knowledge and traits.
  High level of competition
Resources for a business
A resource refers to anything that can be used to achieve an objective. These resources include;
a. Human resource-Human resource (personnel) refers to the employees working in an
organization. Employees will only be useful if they have the necessary knowledge and skills to
successfully carry out the assigned tasks. It is therefore necessary for the management to match
the correct people with the correct Job activities; this will ensure success for the business.
b. Financial resource-Money is required in order to start and operate a business. A business
with adequate finances that are property allocated to various activities and also monitored is
likely to do better than the one lacking such aspects.
c. Physical resources-These include tangible facilities which belong to the business such as
buildings, machinery, furniture and stock. Availability of such facilities enables the business to
operate.
d. Technology-This refers to skills and methods used in production. Use of modern technology
enhances production of goods and services.

Sources of finance for a business

Businesses can acquire finances from various sources. These include;
Owner's Capital
This is often the only source of capital available for the sole trader starting in business. The same
often applies with partnerships, but in this case there are more people involved, so there should
be more capital available. This type of capital though, when invested is often quickly turned into
long term, fixed assets, which cannot be readily converted into cash. If there is a shortfall on a
Cash Flow Forecast, the business owners could invest more money in the business. For many
small businesses the owner may already have all his or her capital invested, or may not be
willing to risk further investment, so this may not be the most likely source of funding for cash
flow problems.
Ploughed back profits
Firms make profit by selling a product for more than it costs to produce. This is the most basic
source of funds for any company and hopefully the method that brings in the most money.
Borrowings
Like individuals, companies can borrow money. This can be done privately through bank loans,
or it can be done publicly through a debt issue. The drawback of borrowing money is the interest
that must be paid to the lender.
Issue of Shares
A company can generate money by selling part of itself in the form of shares to investors, which
is known as equity funding. The benefit of this is that investors do not require interest payments
like bondholders do. The drawback is that further profits are divided among all the shareholders
Overdraft
This is a form of loan from a bank. A business becomes overdrawn when it withdraws more
money out of its account than there is in it. This leaves a negative balance on the account. This is
often a cheap way of borrowing money as once an overdraft has been agreed with the bank the
business can use as much as it needs at any time, up to the agreed overdraft limit. But, the bank
will of course, charge interest on the amount overdrawn, and will only allow an overdraft if they
believe the business is credit worthy i.e. is very likely to pay the money back. A bank can
demand the repayment of an overdraft at any time. Many businesses have been forced to cease
trading because of the withdrawal of overdraft facilities by a bank. Even so for short term
borrowing, an overdraft is often the ideal solution, and many businesses often have a rolling (on
going) overdraft agreement with the bank. This then is often the ideal solution for overcoming
short term cash flow problems, e.g. funding purchase of raw materials, whilst waiting payment
on goods produced.
Bank Loan
This is lending by a bank to a business. A fixed amount is lent e.g. Kshs.10,000 for a fixed
period of time, e.g. 3 years. The bank will charge interest on this, and the interest plus part of the
capital, (the amount borrowed), will have to be paid back each month. Again the bank will only
lend if the business is credit worthy, and it may require security. If security is required, this
means the loan is secured against an asset of the borrower, e.g. his house if a Sole Trader, or an
assesst of the business. If the loan is not repaid, then the bank can take possession of the asset
and sell the asset to get its money back. Loans are normally made for capital investment, so they
are unlikely to be used to solve short-term cash flow problems. But if a loan is obtained, then this
frees up other capital held by the business, which can then be used for other purposes.
 Leasing
With leasing a business has the use of an asset, but pays a monthly fee for its use and will never
own it. Think, of, someone setting up business as a Parcel Delivery Service, he could lease the
van he needs from a leasing company. He will have to pay a monthly leasing fee, say Kshs.50,
000, which is very useful if he does not wish to spend Ksh.800,000 on buying a van. This will
free up capital, which can now be used for other purposes. A business looking to purchase
equipment may decide to lease if it wishes to improve its immediate cash flow. In the example
above, if the van had been purchased, the flow of cash out of the business would have been Ksh
800,000, but by leasing the flow out of the business over the first year would be Ksh 600,000,
leaving a possible Ksh 200,000 for other assets and investment in the business. Leasing also
allows equipment to be updated on a regular basis, but it does cost more than outright purchase
in the long run
In an ideal world, a company would bring in all of its cash simply by selling goods and services
for a profit. At some point the company may need to invest in big investment that will yield
returns in the near future. For this reason, a time will eventually come when the company will
need to acquire funds from any of the above mentioned

Business support services available for small businesses.

In order to increase chances of survival small businesses need to identify firms that offer support
services where they can get help with the running of the business. Some of the support services
for small enterprises include:

1. Training services
This is necessary to improve capital in entrepreneurial, management and technical skills

2. Marketing services
To determine market demand and provide market linkages

3. Business counselling
This will help improve management. Capacity of small business owners in effective planning,
implementation and control of business operations

4. Banking services
This enables businesses to build credibility, reduce risks of handling cash and save funds for future use.
 5. Insurance services
Insurance firms are important for small business as it enables them reduce risks associated with
operating businesses.

6. Postal services
To facilitate effective and affordable communication

7. Book keeping
To ensure business records are accurate and up to date and that the organization is tax compliant.

8. Business incubators
To provide a nurturing environment for small businesses through the provision of a wide range of
business support services such as training, marketing assistance, networking, tax preparation.

9. Technology provision
Enables small businesses to embrace appropriate and affordable technologies e.g. Agriculture
Technology Development Centers, Kenya Industrial Research and Development Institute
( KIRDI)

Causes of Business failure

i) Inappropriate business management and technical skills (adaptable to changing customer

needs).
ii) Inadequate financing
- Start-up
- Operating
- Expansion capital
- Personal expenses
iii) Lack of proper record keeping
- Use of records for sound decision making
- Little understanding of accounting records
iv) Improper costing and pricing
- Retail
- Manufacturing
- Service business
- Direct costs
- Indirect cost
v) Incompetent employees
- Lack of motivation
- Poor pay
- Unskillful
- Job not marching skill
- Employment of relatives
- Inaccurate recruitment procedures
- Training and development
- Clear job description
vi) Neglecting customers
- Customer cantered organization
- Exceed customer expectations
- Survey customer satisfaction
- Provide avenue for resolving customer issues
- Prompt service and resolution to customer
- Customer friendly terms
vii) Ignoring competition
- Know your competitors
- Know your position in regard to your competitor
- Know the competitors strategies
- Note direct, indirect and future competitors
- Coping strategies
viii) Neglecting suppliers
- Make prompt payments
- Develop good relationship with suppliers
- Adequate time to supply
 Activities
i) Identify the legal forms of business ownership within the locality.

ii) Find out the business support services available in your locality.

Self-assessment questions
i) Explain the importance of following the right procedure in starting a business
ii) Explain ways of identifying a suitable location for your business
iii) Outline ways of identifying a suitable location for your business