PARTNERSHIP AGREEMENT/ PARTNERSHIP DEED

It is a document which is signed by all the partners and which contains all the matters
determining and governing the mutual rights, duties and liabilities of the partners in the conduct
and management of the affairs of the partnership. It may also be referred to as ‘articles of
partnership” containing the name, nature of business, capital, duration of the firm.

Need and Importance of a partnership deed

It has been observed that partners start bickering and quarrelling after the firm has worked for
some time. It is drawn up through a lawyer and is usually valid in the court against any dispute.
When the agreement is in written form, it must be duly signed by the partners, stamped and
registered. Any alteration in partnership deed can be made with the mutual consent of all the
partners.

 It forms the basis of formation of the partnership.

 It defines the mutual rights, duties and liabilities
 It helps in minimizing the areas of disputes among the partners
 It serves as guidepost for the conduct of firms business.

CONTENTS
 Name of the firm
 Nature of the business
 Name of partners
 Place of the business(Location)
 Amount of capital to be contributed by each partner
 Profit sharing ratio between the partners
 Loans and advances from the partners and the rate of interest thereon
 Drawings allowed to the partners
 Amount of salary and commission, if any, payable to the partners
 Duties, power and obligations of partners
 Maintenance of accounts and arrangement for their audit
 Mode of valuation of goodwill in the vent of admission, retirement and death of partner
 The method of revaluation of assets or liabilities on admission, retirement and death of a
partner.
 Procedure to be followed for expulsion of partner
 Arrangements to be followed in case a partner becomes insolvent
 Salary, if any, payable to the partners for managing the firm
 Procedure for the dissolution of the firm and settlement of accounts
  Arbitration in case of disputes among partners
 Operation of bank account

KINDS OF PARTNERSHIPS
There are two main kinds of partnership namely:-

i)Ordinary Partnership
It is one in which all the members have unlimited liability. That is, they are all answerable to all
the debts of the firm up to the extent of selling off their personal property.
ii) Limited Partnerships
It is the one in which the liability of the members is restricted to the amount of capital they
originally put in the busuness.In such a partnership however, there must be at least one partner
whose liability is unlimited. Limited partners do not participate in the management of the firm. It
must also register with the registrar of companies in which case a partnership deed or articles of
partnership must be drawn up
The partners of a firm are broadly divided into three main categories
 General partners
 Special partners
 Other partners
1. General partners
All the partners of a firm are general partners, they are those whose liability is unlimited in the
firm.
They are divided into two:
 Active partner/working partner: It is a partner who takes active part in the day to day
management of the business. They may work in different capacities such as manager,
organizer, adviser, controller of all the affairs of the firm.
 Sleeping Partner
It is a partner who contributes capital, shares profits and losses of the firm but takes no part in the
day to day management of the affairs of the firm.

2. Special Partners
They are those whose liability is limited to the extent of their capital contributed in the firm.
They are only found in a limited partnership. They cannot take part in the management of the
business of the firm.
3. Other partners
a) Secret partner-It is partner who takes part in the affairs of a business but is not known to
the public. He shares profit according to the agreement signed and s liable to the creditors
of the firm to an unlimited extent.
b) Nominal/Quasi partner
It is one who lends his name for the good will and credit worthiness to the firm. He
neither contributes capital nor takes active part in the management of business. He is not
liable for the debts of the firm in most cases. But he gets share from the profits.

c) Minor Partner:

Partnership is a contract and a contract with a minor is void. However, a minor can be
admitted to the benefits of a firm with the consent of other members and that too in a
business which is already operating. His liability remains limited to the extent of share in
the capital. On attaining majority, he has to choose whether he has to continue as a
partner or not.
d) Partner at will
This type of partner will continue so long as the partners have mutual faith, trust and
confidence among them.
e) Partners in profit only
He is entitled to receive certain share of profit and is not held liable for the losses. He is
not allowed to take part in the management of the business.
f) Major Partner
It is one who is over 18 years of age. He is liable for all the debts of the firm
g) Incoming Partner
It is a partner who is admitted as a partner in an existing partnership which is usually
done with the consent of the existing partners.
h) Outgoing/retiring partner
It is a partner who retires from a partnership business with the consent of all other
partners or in accordance with any previous agreement/

Difference between partnership and ownership

Partnership is an association of two or more persons who carry on common business for
earning profit. They share its profits and losses per oral or verbal agreement whereas co
ownership refers to joint ownership in a property by more than one person but businesses
not combined with it.

3. LIMITED COMPANIES/A JOINT STOCK COMPANY

It is voluntary association of different persons created by law as a separate body for

specific purposes. It’s legal entity separate and distinct from its members. It possess a
common capital contributed by the members, these capital is divided into transferable
shares.
 A company is a voluntary association of persons binded together for some particular
object, usually to carry on a business with a view of making profit. A company is an
artificial ‘person’ created by law with capital divided into transferable shares or stocks
and with limited or unlimited liability possessing a common seal and perpetual
succession. It can sue and be sued in its own name.
A limited Company is formed under the Companies act prevailing in Kenya. In Kenya, it
is formed and registered under the companies Act Cap 486.Due to it been its on entity
meaning it can enter into contracts, own properties and other assets, incur liabilities and
also enter into legal proceeding.

Ways of Forming a Company

 Charter
 Legislation
 Registration under the Company Act.
Characteristics of the joint Stock company.
 Legal Personality
It is an artificial person created by law hence does not enjoy all the personal rights of a human
being. A person can do anything legal but accompany can only carry on activities according to
the aims and objectives for which it was formed. Also, it does not suffer all the personal
liabilities of a natural person. For example a company cannot marry or cannot be committed for
imprisonment for imprisonment. It has an entity separate from that of its members. The persons
contributing capital are known as shareholders.
 Capital divided into transferable shares
The capital of a company is divided into a number of shares which is transferable. That
means a shareholder can sell his interest in the company to another person without getting
the consent of other shareholders. There are certain restrictions in the transfer of shares in
the case of a private company.
 Common seal
Since the company is a separate entity it will be necessary for it to sign papers and document.
Such signature is embodied in the common seal of the company and kept under the safe custody
of some responsible official so as to avoid its misuse.
 Long life/perpetual succession
It enjoys continued existence. The death and retirement of a member cannot affect the running
life of the company.

 Members cannot bind a company by their Acts

Members of a company are not entitled to bind it by their acts. Third parties are expected to
know the powers granted to each shareholder.
 Centralized Management
Individual members of a company are not entitled to take part in the management of the
business. It is managed by representative body known as the Board of Directors who are elected
by the members of the company
 Limited Liability
Each shareholder is liable only to the amount of capital contributed by him and to the unpaid
value of the shares he holds. Private assets of the members are not liable to debts incurred and
other business obligations of the company.

 Number of members
In the case of public Company, minimum number of members is seven and there is no
restrictions for the maximum number of members. In a Private Company, minimum number of
member’s is two and maximum is fifty.
 Transferability of shares
The Shares of a Public Company is transferable. This type of shares may easily be purchased or
sold in the stock exchange market.
 Object
The basic object of the formation of the company is to earn profit. Whole profit is not distributed
among the shareholders but some portion of profit is transferred to Reserve Fund to be used in
case of an emergency.
 Management
Its management is conducted by the Board of Directors. The actual owners of the
company are not allowed to participate directly in the management. So there is separation
of ownership from control.

 Large Business
As there is no limit to the maximum number of shareholders in case of a public company, capital
may be increased and large business may be commenced.
 Trade Agreement
It enjoys separate existence so it can join the trade agreement with other firms in its own name.

 Changing nature of business

 It cannot be changed except by the sanction of the court according to the Memorandum
of Association.

 Duration
A company enjoys continuous existence and is not affected by death, Transfer or insolvency of
the members and only can end by dissolved by a process of law.
 Double Taxation
The company is s subject to double taxation .e the tax is levied on the profits of the
company and the shareholders pay taxes on the dividends received.

 Winding up
The continuous existence of a company can come to an end only through winding up which is
only possible through legal process.

Types of companies
1. Company by charter

It is a company which is incorporated by the royal order.EG in the United Kingdom, the Queen’s
authority is exercised to incorporate such a company e.g. University. During the colonial period
we had the Imperial British East African Company which was managing Kenya, Uganda and
later Tanzania.
A chartered company’s power, rights and functions are governed by the charter issued at the time
of formation.
2. Statutory (Legislation) Company
This type of Company is formed by the order of the President, Prime Minister or by the special
act of legislature. It is organized for the purpose of carrying on some business of national
importance. The word “limited “may not be used after the name of such a company. In Kenya we
such companies better known as “parastatals”and are usually enacted through act of parliament.
E.g. Kenya Revenue Authority, Kenya Ports Authority, Kenya Power and Lighting Company

3. Registered Company
It is incorporated under the Company Act prevailing in a country. Once formed it becomes a
separate legal entity apart from its members.
It can be divided into the following groups: _
a) Unlimited Company
The shareholders of the company have unlimited liability i.e. they are liable to pay the debts and
other obligations of the business as in ordinary membership.
b) Company Limited buy Guarantee
This is accompany in which each member guarantees (promises) to contribute a fixed amount of
money towards the liabilities of the company as long as he remains a member. In the event of
winding up. Each member will be responsible for the debts of the company to the fixed sum of
the money guaranteed. Such a company is not formed to earn profit but to promote social,
cultural and scientific activities such as sports clubs, welfare, professional and educational
associations, chamber of commerce etc.
c) Company limited by shares
They are the most common in which each shareholder is restricted to the value of the shares held
by him. If he pays the full value of the shares, his liability will be nil. Such companies are either
 Private
 Public
Private Limited Company
This may consist of a minimum of two members but the maximum may not exceed fifty
A private company is not allowed to call upon the public for funds in the form of shares or
debentures.
Any transfer of shares is restricted, it must be approved by the Board of Directors.
It must use “Limited” as the last word of its name.

Public Limited Company

It is one whose membership is not less than seven and there are no restrictions for:-
o Maximum numbers of members
o Transferring of shares
o Expansion through the sale of shares to the public
The owners of the company are the people who hold its shares and are called shareholders
The day to day affairs of the company are managed by people called ‘Directors’ who are elected
by the shareholders amongst themselves.
Formation of a Limited Company
In order to form and register a company, there are certain procedures to follow:-
As a start, there should be people who come up with the idea of forming a company and setting
its pertains. These are the founder members of the company and are known as ‘Prompters’

Steps taken to register a company

I. Search for name
They pay a small fee to the registrar of companies to search and approve the chosen name
by the promoters. The purpose is to find whether another company has already registered
in the same name or not and in the case the m=name is identical to the name of an
existing company the promoters choose another name.

2. Once the name is approved, they go ahead and prepare certain necessary legal
documents as follows
 Memorandum of Association
 Articles of Association
 Registered office
 List of Directors
 Form of Statutory declaration
Memorandum of Association
It define the company’s objectives, powers and serves as a guideline to the outside public. It is
the constitution of the company.
It states
 The name of the company with the word” Limited ”as the last word in the name e.g.
XYZ stationers Limited(or Ltd in short)
 The city and the country in which the registered office s situated
 A statement that the liability of the members is limited
 The objectives of the Company. It outlines the aims and the purpose for which the
company is being formed. The company cannot act beyond the objectives stated in the
memorandum.
 A statement of the nominal authorized capital with which the company wants to be
registered. The registration fee is calculated according to this capital.
 Declaration: This confirms that the prompters want to form themselves into a limited
company. It is signed by a minimum of seven persons in a public Limited Company
and at least two in a private company.
 Article of Association.
It serves as a guideline to the internal management of the company.it includes regulations
governing the internal management and administration of the company.it is very essential
in a private company but in a public company they may adopt the standard set of articles
known as ‘Table”
It states
 Classes and rights of shareholders
 The issue and transfer of shares
 Methods of dealing with any alterations on the capital
 Procedures of general meetings and voting rights
 Qualifications, duties and powers of directors
 Borrowing, dividends and reserve policies
 Auditing of the books
Registered Office
Notice of the situation of the company’s registered office
List of Directors
List of persons along with their particulars who have agreed to act as directors and are called so
once the company is incorporated and a certificate issued.
Statutory Declaration
It states that all necessary requirements of the companies Act have been duly complied with and
the director’s agree to act as such. This is signed by the company secretary or a director whose
name explicitly name in the articles of association or an advocate of the High court of Kenya.
Then all the documents are taken for stamp duty to the collector of stamp duties at the Ministry
of Lands office. After paying the fees, the documents are stamped. Then the documents are
retrieved from the collector of stamp duties and lodged for incorporation with the registrar of
companies.
3. Certificate of Incorporation
It is issued when the required documents are presented to the registrar of companies and upon
payment of registration fees and after everything is found satisfactory.
It means that:-
 The Company has been registered
 The company has come into existence
 The company has posed a ;legal entity separate from its members

4. Trading License.
This document is issued by the authority in an area to carry out a particular business in specified
area. After acquiring a trading license a private company can begin its operation but a public
company cannot do so until a certain minimum amount of capital has been raised.
Further a public company has to take the following steps
 Issue of prospectus
Having registered the company, the directors of public company must advertise the shares of the
company so as to raise the capital required. The document advertising such shares or inviting the
public to subscribe is what is known as “Prospectus “It is usually printed in newspaper or may be
sent directly to people who are likely interested.
 Allotment of shares
When applications have been received from different persons, the directors will allot the shares
to applicants. An allotment is the acceptance of the offer of the applicant and such, constitutes a
binding contract with the applicant.
 Certificate of Commencement of business
The following documents need to be submitted to the registrar
 Minimum subscription
A statutory declaration on the prescribed form that the shares have been allotted
to an amount not less in the whole than the minimum subscription.
 Payment of shares
Every director of the company has paid for the company’s qualification shares
 Submission of Prospectus
The company has filed a prospectus or statement in lieu of prospectus with the registrar.
 Declaration regarding conditions
A statutory declaration by the secretary or one of the directors on the prescribed form that all the
conditions have been complied with.
After the registrar verifying the above documents, he issues a certificate of commencement. The
company can now operate from the date of obtaining the certificate.

Similarities of a private Limited company and a public Limited Company

 Shareholders have limited liability
 Separate legal personality(Identity)
 Continuity in the event of the need of shareholder
 Greater status than an incorporated business
  Less secrecy as compared to sole proprietorship or partnership, end of year accounts must
be sent to the authorities for inspection and annual publication of detailed reports and
accounts for public limited company.

Differences between private Limited company and a public Limited Company

Private Public Limited Company
Limited
Company
Control Original There is a risk of takeover due to availability of the shares on the Stock Exchange
owner is still
often able to
retain control
Capital Can raise There is access to substantial capital resources due to substantial sources
capital from due to the ability to issue a prospectus to the public and to offer shares for sale
sale of shares
to family,
friends and
employees
Shares There is a There is ease of buying and selling shares for shareholders which encourages
difficulty for investment in public limited company
shareholders
to sell share
Plans Directors can Directors are sometimes influenced by short term objectives of major investors
plan long
term due to
their control
over the
business
affairs
Cost It is less There is the cost of business consultants and financial advisors
costly when
forming one

Privileges o a private company

 For forming a private company, only two members are required
 It is required to have only two directors
 It is not required to file prospectus or a statement in lieu of prospectus with
the Registrar of companies
 It can commence its business immediately after incorporation
 It is also not required to hold a statutory meeting nor iis it required to file a
statutory report
 The directors of a private company are not required to give their consent to act
or to take up their qualifications shares prior to their appointment
  A non-member cannot inspect the copies of the profit and loss Account filed
with the Registrar of Companies
 Limit on payment of maximum managerial remuneration does not apply to a
private company
 Restrictions on appointment and re appointment of managing director does not
apply to such company
 A private company is not required to maintain an index of its membership
Advantages of limited Companies
1. Limited liability
The liability of each shareholder is limited. If the company is declared bankrupt, the shareholder
is not liable to pay the company’s debts from his personal account or property.

2. Larger capital
Because of their large membership, companies are in a better position to raise huge capital than
sole trades and partnership
3. Assured continuity of business
Since the death, bankruptcy or withdrawal of any one member does not affect the company,
companies have an assured continuity. Unlike in partnership where the death of partner may
dissolve the partnership.
4. More sources of funds
The sale of company shares on the stock exchange stimulates investment even from small savers
and persons of varying incomes. It can also raise money through sale of debentures.
5. Expert management
The directors are experience in different fields therefore can manage the company professionally.
They also employ specialists or hire for the services of people who are qualified in technical and
administrative abilities.
6. Large scale production
Due to large capital available, production can be dome on a bigger scale as compared to other
business organization.
7. Share of loss
Large membership and the fact that capital is divide into different classes of shares means that
the risk of loss is also shared and spreads.
8. Shareholders are safeguarded
Publicity of company accounts safeguards shareholders against fraud
9. Public Confidence
It wins the public confidence and trust since it is created by law and is supervised by legal
authority.
10. Transferability of shares
The shares of the public company may easily be transferred to another person or may be
disposed of in the stock exchange.
11. Higher profit
Due to its huge capital, a limited company can enjoy the benefits of large-scale production,
management and distribution with results in lesser production costs and higher profits.
12. Job opportunities
It provides to job opportunities to millions of people working in various industrial enterprises all
over the country.
13. Wellbeing of individuals
It gives an opportunity to even small scale investor to grow in business and this promotes habit
of saving and investing among the general public
14. Boosting the economy
They pay more taxes due to large production which help the government collect revenue and
increase the economic activities in the country.
15. Welfare of Employees
The employees of accompany can also buy shares. This an encourage them to work harder and
be loyal to the company.

Disadvantages of a limited company

1. Formation of a company is complicated
There are many legal formalities which are to be observed which consume a greater amount of
time, energy and money also.
2. Observation of State law and regulations
They are more subject to state laws and regulations e.g. no company is allowed to undertake any
form of business outside what was agreed upon with the registrar.
3. Delay in decision making
It is so since the business is conducted by a few elected members. The Board of directors must
met before important decision are made.
4. Shareholders Non Participation in management
The shareholders do not have direct control over the running of the day to day business of the
company. The management of the company is separated from its ownership hence the directors
may take undue advantage as they may have their own interest at heart as the shareholders may
be just concerned with the dividends.
5. Difficult to control the company
Due to its large size it’s difficult to control and management becomes more complex and there
are few trained managers to run such a business successfully.
6. Poor workers relationship
Where there are no personnel officers to keep in touch with the employees, personal relations
between the workers and the employer are weak.
7. Operational expenses
It is a costly organization. Certain fees and other charges are paid to the government. Many
professional people are employed in various departments and huge salaries are paid to them.
8. No personal relation
Is ownership belongs to thousands of people who do not know each other. Secondly the business
activities are in the hands of few people who may not take interest to create direct relationship
with the public.
9. Heavy taxes
They pay higher rate of tax on their incomes. The management of the company pay heavy taxes
on the whole dividend and the shareholders pay taxes on individual incomes.
10. Favoritism and tribalism
Directors generally employ their friends and relatives for key jobs in the company who are
usually incompetent and inexperienced to conduct and follow the affairs of the business.
11. Conflict of interests
There are various groups in a company who have different interests at heart. They have different
voting rights, powers and share in the dividend. This can bring conflict between the management
and shareholders which result in misunderstanding and exploitation of shareholders.

12. Lack of freedom

There is a lot of interference during the operations of a limited company from the various
government authorities.E.g KRA, Ministry of Health, city or town Council etc.
13. Fraud there is deception of innocent public to invest in the company from unscrupulous
promoters of the company who present a very bright and rosy picture in the prospectus to attract
capital from the public.

14. No Secrecy
As it is compulsory by law for public company to publish its accounts and submit various reports
to the registrar and the general public, the secrecy cannot be maintained forever. Employees can
also leak out confidential information of the company’s financial position which can be used by
their competitors.
15. Management mischiefs
Sometimes the Managers and directors misuse the company resources for their personal benefits
which brings losses to the company.
16. Lack of personal interest
The employees who are not the owners sometimes may not have personal interest and
commitment in the future of the company which may result in inefficiency and in turn losses.
17. Stock Exchange speculation
The joint stock company facilitates speculation in shares at stock exchange and the reckless
speculation is harmful to the interest of the shareholders and for sound investment.
18. Grouping for power
The management of the company remains in the hands of group which acquires controlling
shares. Their remain tussle of grouping or power between different groups.
19. Bogus Report
Only the directors know the internal affairs of the company, but they do not present the true
picture before the shareholders in their respective meetings. Therefore the interested parties may
not know the actual performance of their company.
20. Corruption
Some big businessmen can encourage corruption by bribing the authorities to secure her favors.

21. Growth of monopoly

It can create monopoly against the public imterst.If it tries to have monopolistic control over the
market, it can create problems for the general public and small firms because it will have
complete control over the supply and pricing of the products.
Terminologies
Shares: It is the capital of a company which is divided into small units
Stock: It is a block of shares which is traded in the Stock Exchange Market
Debentures: Long term finance raised by a company through public borrowing
Dividends: They are profits of a trading company distributed amongst members at the end of the
financial year in proportion to their shares.
Ploughing back profits/self-financing/internal financing: It is a portion of the profit retained
which serves as a source of finance for the company.
Equities: It is synonym for ordinary shares and common stock of companies
Liquid Assets: Assets which are themselves money or can be converted into money with
minimum delay and risk of loss.
Listing: It is a company has a listing on the Stock Exchange, it can offer its shares for sale.
Securities: Stocks ad shares in a company
Portfolio: The list of holding securities owned by an investor
Share premium: The amount payable for shares in a company and issued by company itself in
excess of their nominal value.
Share index: An official and public list of share prices.

Difference of forms of business Organization

Sole Proprietorship Partnership Joint stock company
Formation Formed with the Formed by written Formed by fulfilling
greatest ease and agreement by the conditions of
minimal cost minimum2 and promotion,
maximum 20 incorporation and
commencement as
laid down under the
companies
ordinances.

Finance Mostly financed from Partners contribute Raises specified

savings, friends, capital in varying amount of capital by
relatives and banks proportions, banks issuing of ordinary
 and other financial paid up shares
institutions
Members liability The liability of the The liability of each The liability of the
sole proprietor is partner(unless limited shareholder is limited
unlimited. by agreement)is only to the value of
unlimited the shares held by
him.
Control Sole proprietor is his The control is shared Shareholders who are
own boss and has full and all major the owners usually
control of the decisions are taken exercise indirect
business. with unanimous control over the
consent affairs of the
company.
Management The sole trader relies The managerial Shareholders elect the
upon his own skill functions are shared Board of Directors
and judgment in according to partner’s and entrust the
managing the skills, talents and management of the
business ability. company of them
who in turn hire
experts and make
them in charge of
marketing,
production, finance
etc.

Taxation Sole proprietor is Each partner is It is subject to double

taxed as an individual assessed for income taxation
unit tax separately
Dissolution The sole proprietor It may dissolve in It can be dissolved by
may decide to end the case of mistrust, court order, approval
business of it is not death, retire of by owners of
making profits partner or it becomes majority shares,
insolvent expiration of the
corporate charter, by
misuse and non-use
of power.

CO-OPERATIVE SOCIETIES AND PUBLIC ORGANISATIONS

They are business enterprises that are owned jointly by members, who may be private
individuals or other business organizations.
It’s an undertaking of an association of individuals who make efforts to achieve any common
objective for the common interest of its members. It differs from other major forms of
organizations as it set up not for earning profit as its main motive but with the basic object of
organizing to render services to its members. The main rule of co-operative society is “One for
all and all for one “It is established by a certain number of persons with a spirit of service in
order to achieve self-help and render services to its members which is managed in a democratic
manner. It can act as a protective deice for people with limited means. The foundation of
cooperative organization is based on equality of persons for the promotion of economic interest
of themselves.
Co-operative organization is an association of persons, usually of limited means, who have
voluntarily joined together to achieve common economic end through the formation of a
democratically controlled business organization, making equitable contributions to capital
required and accepting a fair share of risks and benefits of the undertaking.
“It is a voluntary organization of those who are economically weak to ‘stand on their own feet
‘They come together not to earn profit but improve their common economic interests through
business propositions. The co-operative form of organization is based on the philosophy of self-
help and mutual help.

Features of co-operatives
 All members can contribute to the running of the business, sharing the work load,
responsibilities and decision making, although in large co-operatives some delegation to
professional managers takes place
 All members have one vote at important meetings
 Profits are shared equally amongst members.
Advantages of such business units
 Buying in bulk
 Working together to solve problems and take decisions
 Good motivation for all members to work hard as they will benefit from shared profits.
Potential drawbacks
 Poor management skills unless professional managers are employed
 Capital shortages because no sale of shares to the non-member general public is allowed
 Slow decision making if all members are to be consulted on important issues.
If the co-operatives have surplus funds, they can invest In other areas to generate more
income for their members such as buying commercial property and letting it out.
 Public Organizations/Public sector
These consists of business organizations where the government is responsible for the profit
and loss in any business undertaking. They are mainly large organizations that are either
expensive to run and need a considerable amount of capital investment, or are essential
services considered too important to be left to private enterprise. It involves all those
business, trade and industrial activities which are carried on under the ownership and
management of the government. It is regarded most essential to promote the welfare and
economic activities of a country. The main state enterprises are the nationalized industries
like railways, electricity, waterways, airlines, telecommunication, energy, postal services,
broadcasting etc.
The state enterprises are conducted by government or semi government organizations and
public or statutory corporations.

Public Sector enterprises-public Corporations

They are those enterprise that are owned by the state-usually central or local government.
They do not have profit as a major objective e.g. TV channels, airlines etc.
1. Public corporations
They are commercial organization owned by the state with a legal entity. It is similar to a
joint stock company in that:-
 It is a legal entity
 It is self-governed
 It is self-financing and operates on commercial lines

Difference between a public corporation and joint stock company

 A corporation is usually state owned and has no shareholders
 Most corporations have monopolies
 They operate solely for profits but in public items by representatives of the public
 They are paid from Government finances and consumer expenditures.
2. Local Bodies
They consist of city councils, Municipal Councils, county councils etc. These are established in
urban areas. They are responsible to supply water, health services, primary education etc. in their
respective towns e.g. Nairobi city council, Nakuru Municipal Council

3. Parastatal bodies
It is an organization that is distinct from the government departments and local authorities, but in
which the government is a sole owner, or has a controlling interest. They are established by the
government to perform some specific functions. Their management is also in the hands of Board
of Directors who are appointed by the government. They do not have share capital and are
financed by the government.eg they are formed to market agriculture produce by establishing
marketing boards or provide quality educational materials through the establishment of
educational and publishing institutes.
Causes of state undertakings
Promote general welfare of the public
Some activities are undertaken by the state to promote the health, safety or general welfare of the
public especially health and safety such as water, power and drugs. It is managed with social
objectives rather than solely with profit motives.
To encourage private investment in activities which required heavy capital but take long to
bring returns
There are activities such as research, mining, education and the like which require heavy capital
expenditure but yield no revenue for a long time hence the government must take lead to
encourage private investment.
Avoid wastage and inefficiency
Some establishments are nationalized to avoid duplication, waste and inefficiency.
Source of Revenue
The state may also operate some enterprises to raise revenue for itself and create more jobs for
its people.
To control prices
The aim may be to control prices by producing those commodities or services produced by
private firms.
To take up business proving costly to private firms
The cost of management may force the private sector out of business or discourage them to
invest in some industries.
Advantages of public corporations
 They are suitable for activities such as public utilities where competing firms would
involve waste, inefficiency.
 They can accept responsibility which is beyond the normal aims of private enterprise e.g.
sewerage and garbage collection although these are now being privatized.
 Since the interest of the public is the main consideration, services are provided at fair
prices.
  They are financially sound and can obtain loans easily on a large scale at fair rates of
interest than privately operated business units.
 There is democratic control through the state and local authority and profits are not to a
limited number of shareholders.
Disadvantages of public undertakings
 Tendency towards inefficiency due to lack of strict profit targets
 As finance Is mainly raised from the government, it can also encourage inefficiency
 The absence of competition may lead to poor services and low quality goods
 Wastes are encouraged since losses are borne by the tax payers and since capital can be
easily obtained.
 Political interference may lead to bad business decisions e.g. investing in a business
project in a certain area to gain popularity.
 The fear of political repercussions may lead to avoidance of risky and have important
projects
 Where rival private undertaking exists, they are sometimes subject to unfair terms and
conditions.

Privatization
It is selling state owned and controlled business organizations to investors in the private
sector. Its main aspect is the transfer of ownership of nationalized (state owned)
industries into the private sector by creating public limited companies.

FACTORS TO CONSIDER IN SELCETION OF AN APPROPRIATE FORM OF

OWNERSHIP STRUCTURE

NATURE OF BUSINESS
The selection of an appropriate form of business ownership depends upon, to a great
extent, the nature of the proposed business itself. E.g. the business that requires personal
attention and skill for their success are usually organized as proprietor concerns.

AREA OF OPERATIONS
If the operation of a business is confined to an area or locality only, the appropriate form
of ownership will be a proprietorship.

EASE OF FORMATION
The form of organization should be established without much difficulty. According to the
view point of entrepreneur, if an organization involve minimum expenses, minimum
legal formalities, is less time consuming and makes available a number of suitable
associates for running the business, it is then an ideal form of organization.

EASE OF RAISING CAPITAL

If an organization has the facility to attract required capital from the public by assuring
  Safety of investment
 Fair return on investment
 Transferability of investment, the entrepreneur will not hesitate in choosing that
form of organization.
DEGREE OF CONTROL
In case, direct control over business operation is required, the suitable form of ownership may be
proprietorship or partnership. Incase direct control is not required, the best form of business
ownership will be a company.
CAPITAL REQUIREMENTS
If business requires a small amount of capital, the best form of ownership may be either
proprietorship or partnership. In case of huge capital requirements, the company form of
ownership will be the best.
EXTENT OF RISK AND LIABILITY
If an entrepreneur is ready and capable to bear risk involved in business, he can organize his
business on proprietorship or partnership. But if the entrepreneur is hesitant to bear the risk
involved in businesses/he can go for accompany where individual risk is limited.

DURATION OF BUSINESS
If business is proposed for a definite duration and on ad hoc basis, proprietorship or partnership
are better forms of business ownership. The reason is that they are easy to form and dissolve. In
case the business is to be run on permanent basis, it can be organized as company because it
enjoys perpetual succession.

GOVERNMENT REGULATIONS
If an entrepreneur does not like much government involvement in his/her businesses/he can
select proprietorship or partnership as the form of his business ownership instead of a company
where the government rules and regulations apply more.