Describe the types of business organizations.

Describe the types of business organizations.

1.SOLE PROPRIETORSHIP
Characteristics
1. Accounts do not have to be audited
2. It caters for personal attention of customers
3. Limited to such finances as:
a. Personal saving
b. Loans from relatives & friends
c. Short-term loans from banks.
d. Trade credit from suppliers.
4. Less legal formalities to form.
5. Highly flexible (and adaptable)
6. Highly flexible decision-making process.
Other Advantages
1. Sole trade usually skilled in the business (good for competition)
2. Profits motivates owners
3. High supervision of employees
4. Low bureaucracy (less time wasted)
Disadvantages
1. Short economic life therefore does not attract long-term finance, therefore, limited expansion and growth.
2. Unlimited liability
3. Success depends on ability or judgement of owner
Note
• Most sole traders do not employ professional advice which implies less growth and stagnation.
• Limited sources of finance.
• Limited accounts knowledge.

2.PARTNERSHIPS
Definitions
“The relationship, which exists between persons carrying on a business in common with a view of profit.”
Formation of a partnership
1. Orally
2. Actions of the person concerned
3. Agreement in writing.
4. By a deed i.e. an agreement under seal.
Note
In case the partners want to run their business under a name which does not disclose true surname of all partners, such a firm must be registered under the registration of Business Names Act.
Types of Partners
1. General Partners – Unlimited liability and active in participation in partnership activities.
2. Limited partners – Limited liability and does not participate in the management of partnerships.
3. Sleeping partners – has no active role, nevertheless, such a partner will have contributed to the capital of the partnership business and will thus share in the profits although at a lower proportion in most cases.
A partnership deed constitutes a legal contract among the partners. The articles of partnerships must contain eleven clauses.
1. Nature of business.
2. Profit sharing ratio
3. Capital contribution
4. Rates of interest on both capital and drawings
5. The provision for proper accounts and their audit.
6. Powers of each partner.
7. Grounds of dissolution.
8. Determination of Goodwill
9. Determination of amount payable to outgoing partners.
10. Expulsion procedures.
11. The arbitration clause.

3.JOINT STOCK COMPANIES
Initiators contribute to the capital base of such companies through the purchase of shares of such companies. These companies are governed by the Companies Act (Cap. 486) of 1948.
Such must be registered with the Registrar of Companies after which it is issued with a certificate of incorporation which indicates the Birth of the company.
Advantages
• Limited liability.
• Perpetual existence (or going concern) which allows the company to make strategic plans to raise finance in Capital Markets more easily.
• The company can own assets and incur liabilities on its own accord.
• Title to share is freely transferable which makes these shares more of an investment.
• Exception – Private limited companies whose transfer of shares needs the consent of its members.
• Shares may be used as securities.
• Large sources of finance.
Disadvantages
• Loss of secrecy – poor competition
• Many formalities in forming the company
• Heavy initial capital outlay.
• Difficult to reconstruct the capital
• Bureaucracies especially in decision making processes.
• Inflexibility and thus low adaptability.

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Kavungya answered the question on March 11, 2019 at 13:05

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