Forms of Business Organization – JSS1 Business Studies Lesson Note (Second Term)

A business organisation is the form in which a business is owned and run. This lesson covers five forms: sole proprietorship, partnership, public corporation, co-operative society and limited liability company. For each form, it explains the meaning, features, advantages and disadvantages.

Behavioural objectives

By the end of the lesson, students should be able to:

• define sole proprietorship, partnership, public corporation, co-operative society and limited liability company;
• state the features and sources of capital of each form of business;
• list the types of partners and the types of co-operative society;
• give the full meanings of common public corporations in Nigeria;
• state the advantages and disadvantages of each form of business.

What is a sole proprietorship?

Sole trade is the oldest form of business organisation. It is a business owned, run and controlled by one person to make a profit. Other names for it are sole proprietorship and one-man business.

A man or woman who engages in sole trade is known as a sole trader. Examples of such businesses are shoe mending, law firms, kiosks, farming and provision stores.

Features of sole trade

• It is established to make a profit.
• It is easy to set up.
• It gives room for quick decision-making.

Sources of capital of a sole trader

• Personal savings (the owner’s contribution)
• Loan from friends and relatives
• Loan from a bank or the government

Advantages of sole trade

• It is easy to run and establish.
• It requires small capital to start.
• There is freedom to run different types of business.
• The owner enjoys the profit alone.
• He or she controls the business alone.
• He or she makes quick decisions.

Disadvantages of sole trade

• The owner bears the risk alone.
• He or she works for long hours.
• The death of the owner may end the business.
• Wrong decision-making can lead to problems for the business.
• The liability of the owner is unlimited.

What is a partnership business?

A partnership is a business organisation formed by two to twenty persons who come together to make a profit.

The minimum number of partners is two and the maximum is twenty. In banking, the maximum is ten.

Sources of capital of a partnership

• Partners’ contributions
• Admission of a new member or partner
• Ploughing back profit into the business
• Loan from commercial banks

Features of a partnership business

• It is not a legal entity.
• The liability of partners is unlimited.
• It is owned by two to twenty people.
• Profit and loss are shared according to the partners’ agreement.

Types of partners

1. Active partner: a partner who takes part in the running and management of the business.
2. General partner: a managing partner who has unlimited liability.
3. Sleeping or dormant partner: a partner who only contributes part of the capital and does not take part in the running of the business.

What is a partnership deed?

A partnership deed is a written agreement between the partners. It contains:

• the name of the company or firm
• the names of the partners
• the amount of capital required
• the nature of the business to be transacted
• how profit or loss will be shared.

What is partnership dissolution?

Partnership dissolution means bringing the life of an existing partnership business to an end.

Advantages of a partnership

• It has more capital than a sole proprietorship.
• The talents of individual partners can be developed.
• The business account is not published.
• Better decisions are taken.
• The partnership business can grow into a bigger organisation.

Disadvantages of a partnership

• Decision-making is delayed because the partners are many.
• Disagreement between partners may bring dissolution.
• The liability of partners is unlimited.
• The death of an active partner may put an end to the business.

What is a public corporation?

A public corporation is a business organisation set up, financed and managed by the government to provide essential services for members of the public. Making a profit is not its main aim.

A public corporation is also known as a state enterprise or statutory corporation.

Features of a public corporation

• It is owned by the government.
• It is financed by taxpayers’ money.
• It is set up to render essential services to the public.
• It does not compete with any organisation.
• It is established by an act of parliament.

Advantages of a public corporation

• It has sufficient capital.
• It ensures fair and equal distribution of the services provided.
• It serves as a means of controlling monopolies.
• It raises the standard of living of the people.
• It is owned by the government.

Disadvantages of a public corporation

• It is very hard to set up.
• It requires a large amount of money.
• Decision-making is delayed.
• Overproduction and wastage are common.
• It lacks privacy.
• Interference from the government affects the efficient management of the corporation.

Full meanings of some public corporations

1. NIPOST: Nigerian Postal Service
2. NPA: Nigerian Ports Authority
3. NRC: Nigerian Railway Corporation
4. NWC: Nigeria Water Corporation (Water Board)
5. NITEL: Nigerian Telecommunications Limited
6. NEPA: National Electric Power Authority (now PHCN)
7. PHCN: Power Holding Company of Nigeria PLC

What is a co-operative society?

A co-operative society is a business organisation formed by people who have a common interest in owning and running a business for the benefit of their members.

Types of co-operative society

• Producer co-operative society
• Consumer co-operative society
• Multi-purpose co-operative society
• Credit and thrift co-operative society

Producer co-operative society: This is normally formed by a group of farmers who produce agricultural products of the same kind, for example cocoa, rice and beans. The farmers want to take advantage of cheap seeds and grains supplied by government marketing boards.

Consumer co-operative society: This is formed by a group of customers who contribute their money to buy goods in bulk for the benefit of their members.

Multi-purpose co-operative society: This combines the activities of the producer and consumer co-operative societies in carrying out its operations.

Credit and thrift co-operative society: In this type, the members contribute money regularly to the purse of the society.

Features of a co-operative society

• It is a union of persons rather than of capital.
• It provides services for the benefit of its members.
• It is easy to form.
• Every member is involved in running the business.

Sources of finance of a co-operative society

• Voluntary contributions from the members
• Fines and other special fees
• Ploughing back profit into the business
• Loans from the government and banks

Advantages of a co-operative society

• It encourages members to form a saving habit.
• It gives loans to its members.
• It purchases goods on behalf of the members.
• It can be used to reduce exploitation.

Disadvantages of a co-operative society

• Capital for the business is insufficient.
• Misunderstanding among members may affect the smooth running of the business.
• Unfaithfulness of the management may put the business to an end.
• Most managers are not financially experienced.
• Most members are illiterate.

What is a limited liability company?

A limited liability company is a business organisation that has been incorporated. It is an association of individuals who agree to put their resources together to run a business that is distinct from its owners.

It is a legal entity created through state approval and is separate from its owners. There are two types:

• Public limited liability company
• Private limited liability company

What is a public limited liability company?

A public limited liability company has a minimum of seven members and no maximum. It is owned by members of the public. Examples are UAC PLC, First Bank PLC, Nestle PLC and Academy Press PLC.

The members are known as shareholders. They share the profit, called dividend, yearly.

Features of a public limited liability company

• Its shares can be traded and transferred on the stock exchange market.
• It is required to publish its account at the end of the trading period.
• Workers can become shareholders.
• Its name ends with PLC (Public Limited Company).

Sources of finance of a public limited liability company

• Contributions from members
• Loan and overdraft from a bank
• Loan from a private individual
• Credit facilities from suppliers

Advantages of a public limited liability company

• It can sell shares to members of the public.
• It can also borrow from members of the public.
• It engages in different lines of business.
• Its shares can be listed and quoted on the stock exchange market.

Disadvantages of a public limited liability company

• It is expensive to set up.
• It requires large capital.
• Decision-making is slow.
• Its account must be published.

What is a private limited liability company?

A private limited liability company is owned by private individuals. It is formed by a minimum of two and a maximum of fifty members, for example Oyelade Nigeria.

Features of a private limited liability company

• It is owned by private individuals.
• It enjoys privacy.
• Its shares cannot be traded on the stock exchange market.
• Its name must end with Limited (Ltd), for example Marvic and Associate Nig. Ltd.

Sources of finance of a private limited liability company

• Contributions from members
• Loans from private individuals
• Credit facilities from suppliers
• Loan from a bank and overdraft

Advantages of a private limited liability company

• It enjoys privacy.
• Its management structure is simple.
• Management and control are very easy.
• The annual report need not be published, except for the company’s own use.

Disadvantages of a private limited liability company

• Shares cannot be issued to members of the public.
• Borrowing from the public is not allowed.
• It cannot be listed on the stock exchange market.

Evaluation

1. Define sole proprietorship and state two of its advantages.
2. State the minimum and maximum number of persons in a partnership business.
3. Name the three types of partners given in this lesson.
4. State three features of a public corporation.
5. State two differences between a public limited liability company and a private limited liability company.

Assignment

1. What is a limited liability company?
2. Who is a sole proprietor?
3. Give five examples of public corporations.
4. Write short notes on:
   • Consumer co-operative society
   • Multi-purpose co-operative society