Chapter 3

3.
Choosing The Legal Form Of an Ownership
3.1 Forms of Ownership and legal requirement

3.2 Advantage and disadvantage for each types of
ownership
Forms of ownership and legal requirements
• Those forms have been modified over the course of time to keep
pace with business needs and the custom of society.
• Ownership of business is represented by the right of individual
or a group of individuals to acquire legal title to property
(assets) for the purpose of controlling them and to enjoy the
gains of profits from such possession and use.
Con’t
• The most common forms currently in wide use by small business

are:
• Sole proprietorship
• Partnership
• Corporations and
• Cooperatives
• Each form of ownership has a characteristic internal structure,
legal status, size and field to which it is best suited
1) Sole proprietorship
• It is an individual or single ownership

• The sole proprietorship is a form of business organization in
which
 An individual introduces his capital,
 Use of his own skill and intelligence in the
management of its affairs and
 It is solely responsible for the results of its
operation.
• This form is known also as individual or single
proprietorship, sole ownership or individual enterprise.
• Example: Photo studio, bookshop, bakeries, small town
restaurants, retail stores, radio and watch repair shops, and
other elementary forms of business where personal service is
important.
Advantages of Sole proprietorships
a. Ease and low cost of formation and dissolution:-there are no restrictions on
either starting or terminating small business operations.
b. Direct motivation and personal care
c. Freedom and promptness of action
The sole proprietor can take his own decision and there is none to question his
authority. the sole proprietor can take prompt/quick decisions especially
when an emergency arises.
d. Business confidentiality
e. Single Tax:-The proprietorship does not pay tax as a business; the profits
from the business are the personal income of the owner and are declare on
his individual income tax return.
Disadvantages of sole proprietorship
a. Limited resources and size:-the capacity and skill are very limited. Lending
institutions and suppliers may not be willing to cooperate because it is
neither safe nor dependable which results in making the business to remain
limited in size.
b. Limited Managerial Skill:- in complex and difficult condition which requires

different expertise knowledge
c. Unlimited liability:-The sole proprietor will be legally liable for all debts of the
business , a source of courage and real devotion, limit his activities only in
specified areas
d. Uncertain future/Death of the owner terminates the business/
e. Difficulty in hiring and keeping high achievement employees

2. Partnership
• The association of two or more persons to carry as co-owners of a

business where the relationship is based on agreement is called
partnership.
• This form of a business requires the existence of two or more

persons entering into a contractual relationship.
• This contract, which is an agreement between the parties, is known

as a memorandum of association or article of partners’ deed.
Kinds of Partners
1.A general partner
• Assumes unlimited liability and is usually active in managing the
business. Most partners are general partners.
2.A limited or special partner
• Assumes limited liability, risking only his /her investment in the
business. Limited partners may not be active in management, and
their names are not used in the name of the business.
3.A secret partner
• Takes an active role in managing a partnership but whose identities
are unknown to the public. i.e the general public does not know of
this person’s partnership status.
4.A silent partner
• As opposed to a secret partner, a silent partner, his identities and
involvement, is known to the general public, but is inactive in
managing the partnership business
Con’t
5.Senior partners
• Assume major roles in management because of the long tenure
(possession), amount of investment in the partnership, or age.
They normally receive large shares of the partnership’s profits.
6.Junior partners
• Are generally younger partners in tenure, have only small
investment in the firm, and are not expected to make major
decision. They assume limited role in the partnership’s
management and receive a smaller share of the partnership’s
profits.
Advantages of partnership
1. Ease of starting
2. Increased source of capital:-Partnership can offer creditors less risk than
a sole proprietorship; it is often an attractive investment.
3. Combined managerial skill
4. Definite legal status
• Today’s partner can be assured that a competent lawyer can answer
virtually any questions he/she might have about this form of ownership.
i.e lawyers can provide a sound legal advice about partnership issues.
6. Motivation of important employees
7. Reduced risk
Disadvantages of partnership
1.Unlimited liability
2. Risk of implied authority
• The fault and miss judgment made by a single partner binds the
firm and the remaining partners. Thus, they are liable for the debts
made by the partner.
3. Lack of harmony…agrmnt or synchronizatn
4. Lack of continuity/instability/
• If any one of the general partners dies, withdraws because of
mentally or physically incapable (injured), the partnership ends.
5. Investment withdrawals difficulty /frozen-investment/
3. Corporation
• A corporation is an artificial person authorized and recognized by

law, with distinctive name, a common seal, comprising of
transferable shares of fixed values, carrying limited liability and
having a perpetual or continued or uninterrupted succession
Characteristics of Corporation
1. Separate legal entity
• It can sue or be sued.
• It has the right to manage its own affairs.
• Shareholders cannot be liable for the acts of the corporation
2. Limited liability
• Since the corporation has separate legal entity its debts are its own.
The assets and liabilities, rights and obligations incidental to the
company’s activities are assets and liabilities, rights and obligations
respectively of the company and not of its members.
3.Transferiablity of shares
• It is easy to transfer ownership in a corporation. A stockholder may
sell stock to another person and transfer the membership and
Con’t
4.Perpitual existence
• Death, insanity, retirement and withdrawal of shareholders will not
affect the company.
5.Common seal
• A corporation has a common seal with the name of the company
engraved on it, which is used as a substitute for its signature through
it acts through its agents.
6.Separation of ownership from management
7.Supervision
8.Written Constitution
• On the creation of a company, the promoters must file certain
documents with the Registrar of Companies. These include the
Article of Association and the Memorandum of Association.
Advantages of a corporation
1. Financial strength
2. Limited liability
3.Scope of expansion
 Corporations have greater potential than sole
proprietorship or partnerships
4. Managerial efficiency
– Corporations enjoy the advantage of efficient management
by hiring specialist’s skilled persons to become members
of the board of directors to mange the corporation
5. Ease in transferring ownership
6. Legal entity status
A corporation can purchase property, make contracts, sue and
be sued in the corporate name.
Disadvantages of a corporation
1. Difficulty of formation
• It is time consuming and cumbersome/not managable to
establish corporations unlike the other forms of businesses.
2. Lack of owner’s/manager’s personal interest
• These forms of organizations are managed by directors, hired
officials, and employees who may not be expected to have
such an interest in the success of the business as the
individual owner or partner would have in his own business.
3. Delay in decision-making…it needs official meeting of
managers or board
4.Lack of secrecy….openness…lack of privacy
5.Double taxation
4.Coperatives
• It is an organization owned by members/customers who pay
an annual membership fee and share in any profits (if it is
profit making organization).
It has to adopt the following principles:
• Members have an equal vote in decisions
• Membership is open to every one who fulfills specified
conditions (e.g. Number of hour worked)
• Assets controlled and usually owned jointly by members
• Profit shared equally between members with limited interest
payment on loans made by members;
• Members benefit from participation, not investment
5.Other forms of business
Franchises
• A franchise is a business in which the owner of the name or method of

doing business (called the franchisor) allows a local operator (called the
franchisee) to set up a business under that name.
Management buy-outs and buy-ins
• In recent years the traditional separation of shareholders and management

has been eroded by the growing popularity of management buy-outs’. This
is where a group of members pool their resources to buy the business they
have been running, usually from as larger, parent company. A management
buy-in is where a group of managers buys into an existing firm, usually
replacing those who have been running it.

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3.

Choosing The Legal Form Of an Ownership

3.1 Forms of Ownership and legal requirement

• The most common forms currently in wide use by small business

• It is an individual or single ownership

b. Direct motivation and personal care

c. Freedom and promptness of action

b. Limited Managerial Skill:- in complex and difficult condition which requires

d. Uncertain future/Death of the owner terminates the business/

e. Difficulty in hiring and keeping high achievement employees

• The association of two or more persons to carry as co-owners of a

• This form of a business requires the existence of two or more

• This contract, which is an agreement between the parties, is known

• A corporation is an artificial person authorized and recognized by

• A franchise is a business in which the owner of the name or method of

Management buy-outs and buy-ins

• In recent years the traditional separation of shareholders and management

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