Any economic activity organized and directed towards producing goods and services with the intention of profit-making is commonly referred to as a business. This thesis, therefore, seeks to examine the different forms of businesses formed to produce goods and services for profit-making profit purposes. The thesis shall look into the composition of the different business units by examining their formation management; sources of capital, the liability of the owners, and the advantages and disadvantages that arise from their composition. It shall thereafter conclude by identifying the best approach that would best suit a florist business and a computer-based developer.
Classification of Businesses
A sole proprietorship business is one that is formed and managed by one person. The formation of this type of business undergoes two procedures: the registration of the business name with the registrar and the acquisition of a license from the government in order to protect the business name from misuse and the latter securing the protection of the public through streamlining what should be provided by the particular business (Salaman, 2000). With regard to the management, the decision-making of a sole proprietorship emanates from the proprietor him/herself. On the other hand, the running of the business is undertaken by either employees or family members (McCahenry, 2004). The source of capital mainly emanates from the proprietor’s own contributions or savings and/or may at times be raised through donations by family friends, relatives, or financial institutions. It is however noteworthy that this business is not without fault as the liability of a sole proprietor is normally unlimited. Its implications being that proprietor’s liability is not restricted to only capital contributions but extend to the proprietors’ personal property (McCahery, 2004).
A partnership business on the other hand is a joint business of two or more persons carrying out an activity for a common purpose and benefit. Normally a partnership consists of a minimum of two persons and a maximum of twenty people. Where such partnership offers professional services; it may extend to fifty people. (Partnership Act, 88.36). The formation is through written agreement, which stipulates the particulars of the parties, the terms and conditions of engagement, and is executed upon signing of the parties. This is followed by the registration of the business name.
The management of a partnership is such that every partner takes part in the management of the business, therefore, this facilitates the sharing of duties and responsibilities with regard to skill, knowledge, and experience (NRS; 88.315). Partners are expected to contribute the capital of the business as specified in the partnership deed. Their contribution forms the main source of capital and other sources may be from loans of financial institutions; hire-purchase firms and government institutions (NRS; 88-330).
In reference to liability, partners can either be general partners or limited partners. With regard to the general partnership, the partner’s liability to the company is unlimited in that the general partners are expected to contribute capital over and above the amount invested in the business in order to pay off such debts. On the other hand, in a limited partnership, the liability of partners is limited to the amount of capital they contribute to the business.
A company is a business incorporated under the requirements of the companies act. Incorporation creates an organization that is separate and distinct from the individuals who constitute it. It is thus a legal entity that has the status of an artificial person; it can enter into contracts; hire and fire employees sue and be sued et cetera (Companies Act; Section 2). Private limited companies have a minimum of two persons and a maximum of fifty people.
A company is formed upon the registration of such a company with the registrar of companies pursuant to provisions of the Companies Act. For registration to be effected the memorandum and articles of association should be filed with the registrar with annexure of lists of persons to be directors, statement of share capital, and declaration of compliance with the companies. (Companies Act; Sec.3)With regard to management, a company is managed by a board of directors who are elected or appointed by the shareholder who is responsible for formulating policies and overseeing their implementation. In examining the sources of capital, private companies raise their capital through the sale of shares; through loans from financial institutions and/or government institutions.
From the foregoing it the following conclusions can be identified.
- Those with regard to formation, the sole proprietorship and partnership units require few legal formalities which entail registration and acquisition of licenses while the companies require an elongated legal process due to the elaborate documents involved in its formation.
- With regard to management, it has been examined that while the sole proprietorship is managed by one person that of the partnership and company require a minimum of two persons thus decision making is also elaborate. It has been established also that while this process is advantageous as better decisions are formulated, it is however time-consuming as the process also involves consultations unlike in sole proprietorship.
- With regard to sources of capital, a similarity exists in all forms as the key capital formation is from the entrepreneur’s own contribution seconded by outside financial assistance either from family members or financial institutions. It has however been established that the partnership and limited liability companies are most likely to raise a higher amount of capital and easily as compared to the sole proprietorship.
- The liability of the entrepreneurs in the various forms of organizations is such that while a sole proprietor’s liabilities are unlimited the liability of partners within the partnership and companies is determined by the contracts the parties have established, thus their liability can either be limited or unlimited.
It can therefore be concluded that the sole proprietorship business would be the appropriate one for a florist business as it involves a primary level of production and sale to the customers who are either persons or florist companies. It does not also require a large amount of capital and specialized skills thus assistance from family members would do. On the other hand, a partnership would come in handy for a computer-based business as it comprises of similar characteristics like the companies though it is advantageous in quick decision making thus efficient management.
McCahery Anderson. (Et al) The Governance of Close Corporations and partnerships: US and European perspectives, (2000).Oxford University press.
Salaman George, Understanding Business Organizations, (2000) Taylor & Francis Group.
Uniform Limited Partnership Act (Chap 88).