FORMS OF BUSINESS ORGANIZATIONS

1. INTRODUCTION
2. OBJECTIVES
3. MAIN CONTENT
4. CONCLUSION
5. SUMMARY
6. TUTOR MARKED ASSIGNMENT
7. REFERENCES/FURTHER READING

INTRODUCTION

At this early stage it will be helpful for us to look at the various forms of business organization in order to have a comparative view of other business organization and company. Also important is that we will be able to draw comparative merits of each type of organization and set the criteria to assess them. All business organizations must be assessed from these basic levels. The first is that of money, does it facilitate easy investment in the business? The second question is to determine the risk factor, since there is always no total assurance of success in any business, does the business mitigates or minimize the risk involved in the venture, and thirdly, does the organization have such structure as to reduce friction or the disagreement amongst the investors and managers (see Allen Dignam and John Lowry, 2009, Company Law, Oxford University Press, London).

OBJECTIVES

At the end of this unit the student must understand the basic types of business organization – (1) the sole trader (2) the partnership

MAIN CONTENT

SOLE TRADER

The sole trader is the most elementary type of business organization; the business involves only the individual himself going into business on his own, without the involvement of any outsider. The sole trader may be assisted by members of his family, his wife, and children basically. He may employ assistants and other officers, and in most big one man business (as it may be refereed to) of many expand to a point that he needs professionals like accountant and prevalent craftsmen to assist in the business. it is most suitable and prevalent in crafts work like mechanic, teachers, petting trading and supple manufacturing business.

Sole traders usually provide their own capital with their personal savings and if they are lucky, may utilize bank loan. In most cases they rely on friends and family to raise the initial capital, and are indeed limited in their activities due to limitation of capital. The implements of their trade must be sourced by self-finance. They can only contract on their own with personal guarantee for all their dealings with third parties and their liability is personal. In effect, wherever, the business is indebted to anybody, they must pay not only from the business but also from personal savings, and the creditors are entitled to levying execution not only on the business but also on the personal assets of the sole trader. It is this lack of distinction between the personal assets of the sole trader and his business that makes this type of business organization unattractive. Legally, therefore, there is no distinction between the assets of the sole traders and that of the business.

As the business is just one individual there is absolutely no risk of any disagreement and so there is no need for any serious organizational structure to prevent frictions and disagreement. It is good for the sole trader to keep proper accounts, but where he does not, he is not responsible to anybody to keep proper accounts. However, for the purposes of tax he is taxed as a sole trader and nothing more, though he must obtain a business permit from the Local Government to operate as such within the cities.

The sole trader is therefore adequate for a single person with limited capital but is totally unsuitable for a large scale investment.

Registration

The sole trader, where he desires to adopt a business name for his business must register the business name with the Corporate Affairs Commission under Part B of the Companies and Allied Matters Act (Cap C20, LFN 2004) (CAMA). Section 573 of the Act provided that every individual, firm or corporation having a place of business in Nigeria and carrying on business under a business name shall be registered in the manner provided under the Part B of the Act. Where however, the sole trader merely uses his meal names he does not need to register the business under the Act, but where he adopts another name that is different from his real names then he must register under the Act.

While registering the business, the sole trader must supply the following information to the Registrar.

• he must fill the prescribed
• The business name proposed
• The general nature of the business
• The full postal address of the principal place of business
• Full postal address of any other place of business
• The names of the individual sole trader, nationality, the age, sex, residential address, and business occupation of the individual
• Date of commencement of business
• Passport photograph of the sole trader (see section 574 CAMA).

As soon as the sole trader has complied with the legal requirements the Registrar will issue a certificate of registration to him.

SELF ASSESSMENT TEST

Discuss the legal requirements for registration of sole trader as business under the Companies and Allied Matters Act 2004.

PARTNERSHIP

The sole trader may in order to further expand or raise capital may consider involving investors or partners, who may desire to join in the business by bringing their own money into the business and thereby form partnership business. This may of course facilitate expansion of the business by increasing the capital available for business. Section 1 of the Partnership Act 1890 defines partnership as “the relationship which subsists between persons carrying on business in common with a view to make profit.” The partnership may be formed either by oral agreement or by written agreement or it may be inferred from the conduct of the partners. Where there is a written agreement it will specify the terms and conditions of the partnership. There is therefore no particular formal process of forming a partnership as it may be inferred from the conduct of the parties. The minimum member of person that may form partnership is obviously two, while the maximum number where it is not firm of solicitors or accountants) is twenty. (section 19 CAMA)

The asset of the partnership belongs strictly to the partnership and does not delivery to the individual partners.

Where there is no partnership agreement or where the partnership agreement does not exclude the Partnership Acts/Laws, the law will govern the partnership each partner is entitled to participate in the partnership business. A partner is entitled to equal share in the profits of the business. No partner can be expelled by the others unless there is agreement to the contrary. A partnership will determine on the death of a partner.

In order to avoid frictions and organizational problems, the partnership may modify Partnership Act with a more complex agreement that will govern the partnership. Each is liable for the debt of the partnership, as each partner is jointly and severally liable for the debt of the partnership business.

The partnership business may also be registered under Part B of the CAMA 2004, as a form, and by complying with section 593 of the Act.

SOME PRACTICAL AND LEGAL DIFFERENCE BETWEEN PARTNERSHIPS AND COMPANIES

1. Formation and existence of partnership depends on mutual trust and personal relationship. This is not required in the case of a company
2. Partnership can be formed by oral agreement or from conduct, whereas you need, a lot of formalities to bring a company into being
3. Every partner is entitled to take part in the management of the firms business whereas in a company ownership is separated from management
4. Death or withdrawal may terminate the partnership, while death or withdrawal of a major shareholder does not terminate a company. Joint stock companies have perpetual succession
5. The liability of the partners is unlimited, and they are liable personally for the debts of the partnership jointly and severally. While the liability of the members of the company is limited only to their investment in the company

SELF ASSESSMENT TEST

Discuss the incidents of partnership business.

CONCLUSION

From the foregoing the two forms of business organization discussed above, the sole trader and partnership we discover that both are very popular, because they require little financial investment and they depend on the goodwill of the individuals involved. Most of the big industrial concerns today started from this modest level.

SUMMARY

The sole trader is one man business employing in some cases the family members to assist in the management of the business. It requires little financial involvement and the liability of the trader is unlimited and therefore his personal assets could be attached for the debt of the business. The partnership is formed by two or more persons but not exceeding twenty (except for a firm of solicitors and accountants) associated for profit motive. The partnership may be inferred from the conduct of the parties, or by oral agreement, or written agreement of the parties. Where the partners did not enter into an express agreement their affairs are regulated by the Partnership Act 1890, or the Partnership Laws of the respective states. The form like the sole trader may be registered under Part B of CAMA 2004. The partnership agreement may exclude the provisions of the law or adopt the Partnership Acts. The death of a partner terminates the partnership.

TUTOR MARKED ASSIGNMENT

Discuss the main differences between a sole trader and the partnerships