Comprehensive Study Guide on Types of Business Organisations: Sole Proprietorships and Partnerships
Overview of Business Organisations
The three basic forms of business organizations are:
Sole proprietorships.
Partnerships.
Corporations (also referred to as limited liability companies).
Sole Proprietorship
Definition: A proprietorship is an organization in which a single person owns the business, holds title to all the assets, and is personally responsible for all liabilities.
Virtues and Shortcomings:
Main Virtues: It can be easily established and is subject to minimum government regulation and supervision.
Shortcomings: These include the owner’s unlimited liability for all business debts, limitations in raising capital, and the difficulty in transferring ownership.
Taxation: The proprietorship pays no separate income taxes. Instead, the income or losses from the proprietorship are included on the owner’s personal tax return.
Advantages of Sole Proprietorship:
Accounts do not have to be audited.
It caters for personal attention of customers.
Finance is limited to sources such as:
Personal saving.
Loans from relatives and friends.
Short-term loans from banks.
Trade credit from suppliers.
Less legal formalities to form.
Highly flexible and adaptable.
Highly flexible decision-making process.
Profits motivate owners.
High supervision of employees.
Low bureaucracy, resulting in less time wasted.
Disadvantages of Sole Proprietorship:
Limited sources of finance.
Limited accounts knowledge.
Most sole traders do not employ professional advice, which implies less growth and stagnation.
Unlimited liability.
Short economic life, which does not attract long-term finance, leading to limited expansion and growth.
Partnership
Definition: A partnership is defined as "the relationship, which exists between persons carrying on a business in common with a view of profit." It is similar to a proprietorship except that it is owned by two or more persons.
Taxation: The profit of the partnership is taxed on the individual partners after sharing.
Capital and Liability:
A potential advantage compared to a proprietorship is that a greater amount of capital can be raised.
General Partnership: Each partner is personally responsible for the obligations of the business.
Limited Partnership: Limited partners contribute capital and their liability is confined to that amount of capital. There must be at least one general partner who manages the firm and has unlimited liability.
Formation of a Partnership: Allowed by the Partnership Act through:
Orally.
Actions of the person concerned.
Agreement in writing.
By a deed (an agreement under seal).
Registration Requirements: If the partners run the business under a name that does not disclose the true surnames of all partners, the firm must be registered under the Registration of Business Names Act.
Information for the Registrar of Business Names: Partners must furnish the following:
The business name.
The general nature of the business.
The principle place or location of the business.
The present Christian and surnames of the partners along with their usual residential address.
The nationality of each partner.
Any other occupation of the partners.
The date of commencement of their business.
Types of Partners
General Partners: These partners have unlimited liability and participate actively in partnership activities.
Limited Partners: These partners have limited liability and do not participate in the management of the partnership.
Sleeping Partners: These partners have no active role but contribute to the capital and share in the profits, though usually at a lower proportion.
Nominal Partner: This person is not one of the owners or actual partners but allows their name to be identified with the business for a fee. They do not contribute capital or take part in management.
Quasi Partner: One who is presented to the public as a partner although they contribute no capital and do not participate in management. They may share profits and liabilities.
Minor Partner: A person serving as a partner while under the statutory majority age of years. Their liability is limited to their capital, but upon reaching the statutory age, they rank as an active partner with unlimited liability.
The Partnership Deed
Definition: A legal contract among the partners. The articles of partnerships must contain the following clauses:
Nature of business.
Profit/loss sharing ratio.
Capital contribution.
Rates of interest on both capital and drawings.
Provision for proper accounts and their audit.
Duties and rights of each partner.
Grounds of dissolution.
Determination of Goodwill (the method of determining the value of goodwill on retirement or drafting in of a new partner).
Determination of amount payable to outgoing partners.
Admission, withdrawal, and expulsion procedures.
The arbitration clause.
Provisions in the Absence of a Partnership Deed
In the event of an ambiguity or the absence of a deed, the Partnership Act provides the following:
Capital must be contributed equally, and profits shared equally.
No interest should be credited on capital.
No interest should be charged on drawings.
Each partner should take an active part in management, and no salaries are payable to them.
All decisions should be made based on majority opinions.
Major changes, such as change of purpose or introduction of new partners, require the agreement of all partners.
Books of accounts must be kept at the principal place of business.
All partners have the right to inspect the books of accounts.
Partners cannot carry out any competing business.
Loan advances by partners will be made at an interest rate stipulated in the Partnership Act.
Order of Settlement on Dissolution:
Loan repayment.
Capital repayment.
Surplus repaid on an equal profit-sharing basis.
Dissolution and Illegality of Partnerships
Circumstances for Dissolution:
Expiry of a specified period or completion of the purpose (for temporary partnerships).
A partner notifies others in writing of the intention to dissolve.
A partner suffers mental ailments, is declared bankrupt, or dies.
The business becomes unlawful (e.g., changes in law banning the activity).
The partnership cannot run at a profit.
Court-Ordered Dissolution: A court may dissolve a partnership upon application if:
A partner acts contrary to the deed and damages the firm's interests.
Prevailing circumstances make it fair and just.
Circumstances Rendering a Partnership Illegal:
Formed for an illegal purpose (e.g., theft).
The partnership does not meet minimum qualifications (e.g., for auditing).
The partnership contains more than members.
The business uses a name that does not disclose true names and has not been registered under the Registration of Business Names Act.