ACC 103 (Siyanbola 2)

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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.
Tejumade O. Siyanbola (PhD, Kent), Department of Mgmt.
8/6/2018 2
& Accounting, OAU, Ile-Ife
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.
Tejumade O. Siyanbola (PhD, Kent), Department of Mgmt.
8/6/2018
& Accounting, OAU, Ile-Ife COMRADE VICTOR
3
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
& Accounting, OAU, Ile-Ife
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

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


8/6/2018 5
& Accounting, OAU, Ile-Ife
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;

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


8/6/2018
& Accounting, OAU, Ile-Ife COMRADE VICTOR
6
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;
Tejumade O. Siyanbola (PhD, Kent), Department of Mgmt.
8/6/2018
& Accounting, OAU, Ile-Ife COMRADE VICTOR
7
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.
Tejumade O. Siyanbola (PhD, Kent), Department of Mgmt.
8/6/2018
& Accounting, OAU, Ile-Ife COMRADE VICTOR
8
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.

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


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
& Accounting, OAU, Ile-Ife
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;

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


8/6/2018
& Accounting, OAU, Ile-Ife COMRADE VICTOR
11
 
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.
Tejumade O. Siyanbola (PhD, Kent), Department of Mgmt.
8/6/2018
& Accounting, OAU, Ile-Ife COMRADE VICTOR
12
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.
Tejumade O. Siyanbola (PhD, Kent), Department of Mgmt.
8/6/2018
& Accounting, OAU, Ile-Ife COMRADE VICTOR
13
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.

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


8/6/2018
& Accounting, OAU, Ile-Ife COMRADE VICTOR
14
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.

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


8/6/2018
& Accounting, OAU, Ile-Ife COMRADE VICTOR
15
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
& Accounting, OAU, Ile-Ife COMRADE VICTOR
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.
8/6/2018
Tejumade O. Siyanbola (PhD, Kent), Department of Mgmt.
& Accounting, OAU, Ile-Ife COMRADE VICTOR
17
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.
8/6/2018
Tejumade O. Siyanbola (PhD, Kent), Department of Mgmt.
COMRADE VICTOR 18
& Accounting, OAU, Ile-Ife
Types of cooperative societies

 Consumer cooperative societies;


 Cooperative credit societies;
 Farmers’ multi-purpose cooperative societies;
 Produce/producer marketing cooperative
societies;
 Housing and building societies.
Tejumade O. Siyanbola (PhD, Kent), Department of Mgmt.
8/6/2018
& Accounting, OAU, Ile-Ife COMRADE VICTOR
19
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.
Tejumade O. Siyanbola (PhD, Kent), Department of Mgmt.
8/6/2018
& Accounting, OAU, Ile-Ife COMRADE VICTOR
20
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.
8/6/2018
Tejumade O. Siyanbola (PhD, Kent), Department of Mgmt.
COMRADE VICTOR 21
& Accounting, OAU, Ile-Ife
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.
Tejumade O. Siyanbola (PhD, Kent), Department of Mgmt.
8/6/2018 22
& Accounting, OAU, Ile-Ife

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