Firms and Industry II: Business Organization – SS1 Economics Lesson Note (Second Term)

What is a business organisation?

A business organisation is an enterprise set up by an individual or group of individuals, the government or its agencies for the main purpose of making a profit and providing goods and services for the satisfaction of human wants.

Behavioural objectives

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

• define a business organisation and name its main types;
• state the characteristics of public enterprises;
• describe a sole proprietorship, a partnership and a co-operative society;
• list the sources of capital, advantages and disadvantages of each;
• distinguish between the types of partnership and the types of partner;
• name the types of co-operative society.

What are the types of business organisation?

Private enterprises

Private enterprises are owned and managed by private individuals. The major forms of private organisation are:

1. Sole proprietorship
2. Partnership
3. Private and public limited liability companies
4. Co-operative societies

Examples of private companies include Nestle Nigeria Plc. and Cadbury Nigeria Plc.

Public enterprises

Public enterprises are government or state-owned business organisations. They are usually set up by acts of legislation, with the main aim of maximising public welfare. Examples in Nigeria include the Federal Radio Corporation of Nigeria (FRCN) and the Nigerian Ports Authority (NPA).

What are the characteristics of public enterprises?

• They are owned by the government and usually set up by an Act of Legislation or an Act of Parliament.
• The government provides the capital for setting up the business.
• The objective is to provide social services.
• The business is controlled by a board of directors appointed by the government.
• A public enterprise is a legal entity or a corporate body.

What is a sole proprietorship?

A sole proprietorship is a business organisation established, owned, financed and controlled by one person to make a profit. It is also popularly called a one-man business. It is the oldest and the most common type of business organisation.

Characteristics of a sole proprietorship

• Ownership: The business enterprise is owned by one person.
• Unlimited liability: The owner of the business is personally liable for the debt incurred by the firm. If the business fails, his personal properties can be sold to settle the debt.
• Not a legal entity: Under the law, the owner and the business are the same. It cannot sue or be sued on its own.
• Owner provides all the capital: The capital to finance the business is provided by the owner alone.
• No sharing of profit: In a one-man business, the profit or loss goes to the owner alone.
• Bears risks alone: The owner bears the risk of production alone.
• Makes decisions alone.

Sources of capital of a sole proprietorship

1. Personal savings
2. Loans from friends
3. Loans and overdrafts from banks
4. Grants or loans from the government
5. Trade credit

Advantages of a sole proprietorship

1. It involves small capital.
2. It is easy to establish.
3. Decision-taking is quick.
4. It is easy to manage.
5. All profits belong to the owner.
6. It can fit any environment.
7. There is privacy in conducting business affairs.
8. The one-man business is easy to set up and organise.
9. It is suitable where there is a need for special products and a small market for goods and services.
10. It maintains close personal contact with customers.

Disadvantages of a sole proprietorship

1. There is limited capital to finance the business.
2. The sole proprietor has unlimited liability.
3. The business is not a separate legal entity.
4. The continuity of the business is uncertain.
5. The sole proprietor lacks the advantages of specialisation.
6. The sole proprietor bears all risks alone.

What is a partnership?

A partnership is a type of business organisation in which two to twenty persons agree legally to set up and manage a business outfit with the sole aim of making a profit.

Features of a partnership

• The number of partners in Nigeria ranges from two to twenty for most businesses, but two to ten for a banking business.
• The active partners usually make the major decisions together.
• The partners contribute capital or skill or both according to the agreement reached. In return, each of them receives a proportion of the profits as agreed.
• The partners bear the risks of the enterprise jointly. Except for the limited partner, the partners have unlimited liability.
• The business is not a separate legal entity and cannot therefore sue or be sued in its name.
• The control and management of the business is in the hands of the active partners.
• The motive for setting up the business is to maximise profit.

Types of partnership

1. Limited partnership: This is a partnership formed and registered under the Limited Partnership Act. There must be one general partner with unlimited liability or responsibility for the debts of the firm. The others are limited partners whose liability is limited to the amount invested. The partners cannot take an equal part in the management and administration of the business.
2. General or ordinary partnership: In a general partnership, partners have equal responsibility and power, and each may participate in the management of the business. They are equally responsible for the liability of the partnership, which is unlimited. All of them take part in the day-to-day running of the business and are liable or responsible for the debts of the firm.

Types of partner

1. Active partner: This partner takes an active part in the formation, financing and management of the business.
2. Sleeping or dormant partner: This partner only contributes part of the capital used in the formation and running of the business but does not take part in the management and organisation of the business.
3. Nominal or passive partner: This partner exists only in name. He contributes nothing but his name to the formation of the business. He is a person whose high standing or reputation in society can increase the goodwill of the firm and bring certain benefits to the organisation.

Advantages of a partnership

1. Capital is more easily obtained.
2. The business has greater continuity than the sole proprietorship.
3. There is privacy in conducting business affairs.
4. Decision-making is joint.
5. There is greater possibility of expansion.

Disadvantages of a partnership

1. Limited capital: The maximum number of partners in the partnership is twenty.
2. Unlimited liability for the active partners: If the business fails, the private assets of the active partner may have to be sold to meet the business debts.
3. No perpetual existence: The death or withdrawal of an active partner may lead to the end of the partnership.
4. Not a separate legal entity: A partnership cannot sue or be sued in its own name.
5. Slow decision and policy making: All members have to be consulted before any major decision is taken.
6. Disagreement may end the business.

Sources of capital for a partnership

1. Personal contributions from partners
2. Loans and overdrafts
3. Trade credit
4. Undistributed profit
5. Admission of new partners

What is a co-operative society?

A co-operative society is a voluntary business organisation in which a group of individuals with common interests pool their resources together to promote the economic welfare of their members in the production, distribution and consumption of goods and services.

Types of co-operative society

1. Consumers’ co-operative society: This is an association of consumers. They buy goods in bulk at wholesale prices from manufacturers and sell them at retail prices to both members and non-members of the co-operative. They bypass the middlemen to get these goods at cheaper rates and then distribute them to their members.
2. Producers’ co-operative society: This is an association of producers of similar products who have come together to promote the production and sale of their products. Members, such as farmers and other producers, contribute money to buy or hire equipment, machinery and raw materials at reduced rates to promote their productive activities, for example an agricultural co-operative society.
3. Credit and thrift co-operative society: This is one of the commonest co-operative societies found in our present-day society. Members are encouraged to save their money together, and all or part of it may be lent to any member in need.

Features of a co-operative society

• There is usually no limit to the size of its membership.
• It is usually open to persons with identical interests who wish to join.
• Profit or dividends are shared according to the purchase from or sales to the society within a given trading year.
• All the members bear the risks of the business jointly.
• The aim of setting up a co-operative society is to maximise the welfare of the members who have pooled their resources.
• Management and control are democratic.
• Co-operative societies are owned by two persons to any number.
• Co-operative societies are owned by people with common interests.
• They are not necessarily formed to make a profit but to promote the economic activities and welfare of their members.
• Capital is raised through voluntary contributions from the members.
• The liability of members is limited to the amount contributed to the society.
• A co-operative society is similar to a limited liability company, as it can exist in perpetuity.

Advantages of a co-operative society

1. Encouragement of saving: Co-operative societies encourage saving habits among their members.
2. Provision of loan facilities to members: Members find it easy to obtain loans from the society, which would have been difficult to get from financial institutions.
3. Improved standard of living: They improve the standard of living of their members by providing goods that members cannot buy on their own, for example land and electronics.
4. Joint marketing of products: They organise joint marketing, transportation and distribution of their products.
5. Pooling of resources for investment: They pool resources together to invest in different areas of investment opportunity.
6. Perpetual existence: A co-operative society can exist for a long period.

Disadvantages of a co-operative society

1. Insufficient capital: The capital available for investment is very low. Most of the members are low-income earners.
2. Embezzlement: Some leaders in co-operative societies embezzle or misuse funds belonging to the societies.
3. Problem of loan recovery: The society may not be able to recover loans given to members. This may destabilise the society.
4. High level of illiteracy: There is widespread illiteracy among members, which makes their education and training very difficult.
5. Shortage of experienced managers: A major problem for a co-operative society is the difficulty of finding experienced people to manage the business.

Evaluation

1. Define a business organisation.
2. State five characteristics of a sole proprietorship.
3. Distinguish between a limited partnership and a general partnership.
4. Name the three types of partner and describe one of them.
5. List the three types of co-operative society.

Assignment

1. Explain six reasons for government participation in business enterprises.
2. Explain any five differences between public limited companies and public corporations.
3. How are public corporations financed?
4. Explain how the government participates in economic activities.