ACC 103 (Siyanbola 2)

INTRODUCTION TO BUSINESS
(ACC 103)
Topic 2- Forms of Business Ownership and

Management
COMRADE VICTOR
Tejumade O. Siyanbola (PhD, Kent), Department of Mgmt.
8/6/2018 1
& Accounting, OAU, Ile-Ife
Introduction
 In starting a business enterprise, one of the key decisions is making a choice
about the form of ownership;
 Business ownership can take different legal forms, each with its varied privileges,
responsibilities, pros and cons that need to be considered before making such
decisions;
 Other germane issues for consideration when choosing business type are:
 The extent to which you want to be personally liable for both financial and legal risks;
 The person/group that will hold the controlling interest;
 The type of financial structure that the business will have;
 Transferability of ownership;
 Ability and capabili The ease with which the organisation and dissolution are allowed to
occur;ty of the entrepreneur;
 The business’s tax position;

 Government laws and regulations; COMRADE VICTOR
 Continuity of ownership to achieve being a going concern.
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Forms of businesses
 There are three legal structures that can be chosen from:
I. Sole proprietorship (SP);
II. Partnership;
III. Corporations with the following specific options:
• Partnerships;
• Corporation.
IV. Others are cooperative societies and the Not-For-Profit organisations
 Generally, sole proprietorship is the most common business type in nations of the
world, including the USA and Europe; this is particularly connected to the fact that
SMEs are the dominant business types the world over;
 The point is that there is no single perfect form of business organisation;
 Your choice will depend on your short and long term needs, tax policies with a
country, personal preferences, your capabilities and available resources;
 The legal form of ownership should not be confused with business size.
8/6/2018
& Accounting, OAU, Ile-Ife COMRADE VICTOR
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I. Sole proprietorship
 This refers to a business that is owned, operated and managed by a single

individual with the sole aim of making profit;
 The owner:
 Manages, take decisions, take responsibilities and has final authority;
 It is the oldest and the easiest business type to own a start-up;
 Sole Proprietorship (SP) is also known as an unincorporated business form
since no permission is required from government before setting it up;
 Although registration is not compelled by law, it may, however, still be
registered as a business with the Corporate Affairs Commission;
 Apart from tax, the business has no other legal obligation to government;
 Examples of SP in Nigeria are:
 Retail outlets like supermarkets, schools, poultry, training institutes, laboratory
services,
8/6/2018 art and craft works and
Tejumade computer
O. Siyanbola engineering
(PhD, Kent), Department of Mgmt. etc.
4
Characteristics of Sole Proprietorship
The Business is owned and managed by a single individual who
provides the capital to establish and run the business;
 It is self-managed;
 It is rather small in size in comparison with the other business types;
 It is the most common type of business ownership in Africa, West
Africa sub-region and Nigeria;
The business is for-profit maximisation by nature;
The owner has unlimited liability as he/she is personally responsible for
meeting all financial obligations of the firm including debts.
COMRADE VICTOR

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Advantages of Sole Proprietorship
 The owner can be reached easily on matters concerning the business;

 The owner enjoys the benefits, freedom and flexibility to manage the
business personally;
 It is possible to reduce wastage since the business is self-manage by
the owner;
 The owner enjoys business independence;
 Owner’s personal commitment;
 No need for formality to organise and dissolve the business;
 Legal requirements for starting the business is insignificant;

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Disadvantages of Sole Proprietorship
 Limited financial resources due to fundraising difficulty;
 The business is prone to failure due to owner’s inexperience and
incompetence;
 Continuity challenges as the business life span is linked to the ability
and/or life span of the owner;
 Limited opportunity for expansion;
 Unlimited liability (the potential for a business owner to lose more than
the owner invested in a business;
 Lack of opportunities for employees in terms of job enlargement,
ambition and career development;
 The owner usually put in long hours and may sometimes sacrifice own
gains for the business;
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II. Partnership
 This is a voluntary association between two or more people who come
together to co-own a business for profit by pulling their resources together;
 Partnership is one of the two options opened to people who want to go
into business together, the other form is a corporation;
 Though not recommended, it is possible to go into partnership without a
formally written document;
 But, in the absence of a written agreement, the business operates in line
with the state’s regulation governing partnership business;
 In Nigeria, a partnership is registered under Companies and Allied
Matters Act of 1990 and has to comply with the relevant provisions;
 Partnership is limited to 2-10 people for banking and consultancy and
2-20 for other business types.
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Partnership
 Unlike the sole proprietorship, partners are expected to bring complementary
skills to the business and jointly source for resources to sustain the business;
 Partnership is of two broad types:
 General/ordinary partnership:
• This is the more common type and describes a business structure in which all the owners
have equal share of both the management and risk of the business;
• It means that each active partner may take part in managing the business and equally
liable for the potential debts;
 Limited partnership:
 This describes the sort of partnership in which at least one of the partners will have limited liability;
 It therefore means that at least one of the partners is responsible for all debts of the partnership and
therefore has greater powers, rights and responsibilities than the limited partners;
 The limited partner (s) do not take part in the management of the business, and their liability is also
limited to the amount of capital they have invested.

8/6/2018
& Accounting, OAU, Ile-Ife COMRADE VICTOR9
Sub-division of partnership types
i. General/active partner
• This partner contributes money to the business and takes active part in operating and managing the business;
• Has unlimited liability and may act as business manager, supervisor or director in the firm;
• The active partner is usually paid a salary if the deed of the business provides for such;
• But, where provision for payment is not made, then no payment is made as all active partners are presumed to take
active part.
ii. Limited/special partner
• This indicates that the partner has limited liability and that his/her responsibilities are limited to the investment alone;
• The partner takes no active part in the management and running of the business.
iii. Sleeping/dormant partner
• The partner does not take active part in managing the business and his/her partnership is unknown to the public;
• The partner merely contributes capital to the business.
iv. Nominal/passive partner
• This partner does not contribute any money to the business but only consents to his/her names being used as one of the
partners without any real interest in the business.
v. Secret partner
• This is a partner that participates adequately in the running of the day-to-day business of the firm but his/her
membership is hidden from the public;
vi. Silent partner
• This partner is known to the public as an important partner but takes little active part in managing and running the
business. Tejumade O. Siyanbola (PhD, Kent), Department of Mgmt.
8/6/2018 10
Advantages of partnership
 Availability and access to financial resources;
 Privacy – Annual statements of account are not open to public scrutiny;
 Easy to form the company;
 Control in the hands of the owners;
 Greater potential for continuity compared to sole proprietorship;
 Shared managerial talent and pooled knowledge;
 Sharing of gains, risks and losses;
 Division of labour;

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Disadvantages of partnership
 Unlimited liability;
 Delay in decision making;
 Challenges to continuity if anything happens to one of
the key partners;
 Slow expansion potential;
 Difficulty in ownership transfer;
 Potentials for friction and disagreement;
 Limited degree of freedom for partners.
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III. The Corporation/Limited Liability Company/Joint Stock
Company
 This is the most complicated business structure;

 It is an autonomous entity consisting of an association of individuals or
corporations that are created under the authority of existing law;
 In this form, the powers and liabilities are separated from the owners;
 It has the ability to sue and be sued, own properties and engage in
business transactions;
 The corporation must act in accordance with the charter and the state
laws in which the business is set up;
 Each of the owners’ liability is limited to the tune of their individual
investment.
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Characteristics of a corporation
 Itis an entity that is totally separated from its owners;
 Owners liability is limited to their investment;
 The owners may have little to do with managing the
business;
 The corporation can exist perpetually because it is
created by law;
 Because it is a separate legal entity, the corporation is
taxed separately from its owners.

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Advantages of corporations
 The limited liability available to owners;
 Ability to raise large amount of financial resources;
 Distribution of wealth;
 Advantages of scale of the business;
 Specialised managerial capabilities, skills and
knowledge of several people;
 Legal entity separating it from owners;
 Continuity of operations and company.

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Disadvantages of corporations
 The challenges of complying with the requirements of
the state’s corporate code;
The challenges of double taxation;
 Loss of control every time you sell part of your stock;
 Lack of secrecy that is available under smaller
business types;
 Difficulty in terminating the business once established;
 Delayed decision making;
 Reduced personal interest due to separation of
ownership; Tejumade O. Siyanbola (PhD, Kent), Department of Mgmt.
8/6/2018
16
IV. The cooperative societies
 Corporative societies came to existence during the industrial revolution

in the 19th century with the key aim of alleviating the economic distress
suffered by members;
 The first cooperative society in contemporary society was established
in Britain in 1844 with the opening of a cooperative store in Lancashire
near Manchester;
 However, modern day associations consist of a group of people who
pool their resources to make profit mainly for the benefit of members;
 Members participate freely in business activities and are entitled to
interest on investment and patronage dividends;
 The share of the profit is normally based on the level of each member’s
participation.
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The basic features of cooperative societies
 Open membership;
 Democratic control (one person, one vote);
 Limited interest on capital invested and money
borrowed;
 Membership is not transferrable;
 There must be religious and political neutrality;
 Cooperative not required by law to publish its
accounts;
 Free entrance and free exit.
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COMRADE VICTOR 18
Types of cooperative societies
 Consumer cooperative societies;

 Cooperative credit societies;
 Farmers’ multi-purpose cooperative societies;
 Produce/producer marketing cooperative
societies;
 Housing and building societies.
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Advantages of cooperative societies
 Fundraising is fairly easy;
 Profit of the group is not subject to tax;
 Members have equal rights;
 Loans are available to members at cheaper rate;
 Members are able to enjoy benefits that are not
available to the general public;
 They help member to cultivate saving habit;
 Members are allowed to withdraw their capital at short
notice.
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Disadvantages of cooperative societies
 Low capital base;

 Qualifications and experience of members of the committee are
not guaranteed;
 Mismanagement, particularly of funds;
 Members base the success of the society on the amount of
dividends shared, and where this is unsatisfactory, eye brows will
be raised;
 Because members can withdraw their capital any time, there is
always some form of instability;
 Coop societies sometimes spend their money in funding
political parties.
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COMRADE VICTOR 21
The Not-For-Profit organisations
 This form is a tax-exempt organisation formed by religious,

educational, charitable, literary groups etc.;
 They exist for purposes other than profit making;
 NFP depend heavily on grants from private and public
donations to meet the day-to-day expenses;
 When individuals contribute to NFP organisations, they are
entitled to deduct the contribution from their own taxes;
 In case a NFP organisation winds down, it assets must be
donated to another NFP.
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ACC 103 (Siyanbola 2)

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INTRODUCTION TO BUSINESS

Topic 2- Forms of Business Ownership and

 The business’s tax position;

 This refers to a business that is owned, operated and managed by a single

Tejumade O. Siyanbola (PhD, Kent), Department of Mgmt.

 The owner can be reached easily on matters concerning the business;

Tejumade O. Siyanbola (PhD, Kent), Department of Mgmt.

Tejumade O. Siyanbola (PhD, Kent), Department of Mgmt.

Tejumade O. Siyanbola (PhD, Kent), Department of Mgmt.

 This is the most complicated business structure;

Tejumade O. Siyanbola (PhD, Kent), Department of Mgmt.

Tejumade O. Siyanbola (PhD, Kent), Department of Mgmt.

 Corporative societies came to existence during the industrial revolution

 Consumer cooperative societies;

 Low capital base;

 This form is a tax-exempt organisation formed by religious,

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