Firms And Industry II – Business Organization SS1 Economics Lesson Note

BUSINESS ORGANISATION

A business organization can be defined as 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.

TYPES OF BUSINESS ORGANISATIONS

1. PRIVATE ENTERPRISES: Private enterprises are enterprises owned and managed by private individuals. The major forms of private organizations are listed; 

i. Sole proprietorship 

ii. Partnership 

iii. Private and public limited liability companies and cooperative societies 

iv. Co-operative societies.  Examples include Nestle Nigeria Plc., Cadbury Nigeria Plc.

2. PUBLIC ENTERPRISES: These are government or state-owned business organizations which are usually set up by acts of legislation, with the main aim of maximizing public welfare. Examples in Nigeria include the Federal Radio Corporation of Nigeria (F R C N), the Nigeria Ports Authority (N P A) etc.

CHARACTERISTICS/FEATURES OF PUBLIC ENTERPRISES

a) They are owned by the government and usually set up by an Act of Legislation or an Act of Parliament.

b) The government provides the capital for setting up the business

c) The Objective is to provide social services

d) The business is controlled by a board of directors appointed by the government.

e) A public enterprise is a legal entity or a corporate body. 

SOLE – PROPRIETORSHIP

A sole proprietorship may be defined as a business organization established, owned, financed and controlled by one person to make a profit. The sole – proprietorship, also popularly referred to as one–man business is the oldest and the most common type of business organization.

CHARACTERISTICS OF 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 solely provided by the owner.

– 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.

– He makes decisions alone.

SOURCE OF CAPITAL OF A SOLE PROPRIETORSHIP

i. Personal saving

ii. Loan from friends

iii. Loan and overdraft from banks

iv. Grants/loan from Government

v. Trade credit

ADVANTAGES OF SOLE PROPRIETORSHIP

i. It involves small capital

ii. It is easy to establish

iii.  Decision-taking is quick

iv. It is easy to manage

v. All profits belong to the owner

vi. It can fit any environment

vii. There is privacy in conducting business affairs

viii. The one-man business is easy to set up and organize

ix. The sole proprietorship is suitable where there is a need for special products and a small market for goods and services.

x. It maintains close personal contact with customers.

DISADVANTAGE OF SOLE PROPRIETORSHIP

i. There is limited capital to finance the business

ii. The sole proprietor has unlimited liability

iii. The business is not a separate legal entity.

iv. The business has uncertainty of continuity

v. The sole proprietor lacks the advantages of specialization

vi. The sole proprietor bears all risks alone.

THE PARTNERSHIP

A partnership may be defined as a type of business organization 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/CHARACTERISTICS OF 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 of setting up a business is to maximize profit.

TYPES OF PARTNERSHIP

1. LIMITED PARTNERSHIP: A limited partnership is a type of partnership which is formed and registered under the Limited Partnership Act. In a limited partnership, 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 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 is the partner who 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 organization of the business.
3. NOMINAL OR PASSIVE PARTNER: This partner exists only in name or word because; 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 to ensure certain benefits to the organization.

ADVANTAGES OF PARTNERSHIP

i. Capital is more easily obtained

ii. The business has greater continuity than the sole proprietorship.

iii. There is privacy in conducting business affairs

iv. Join decision-making

v. Greater possibility of expansion.

DISADVANTAGES OF PARTNERSHIP

i. The partnership has limited capital: The maximum number of partners in the partnership is twenty.

ii. There is 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.

iii. The business may not have perpetual existence: The death or withdrawal of an active partner may lead to the end of the partnership.

iv. The business is not a separate legal entity: A partnership cannot sue or be sued in its owner’s right.

v. Slow in decision and policy making: All members have to be consulted before any major decision is taken

vi. Disagreement may end the business.

SOURCES OF CAPITAL FOR PARTNERSHIP

i. Personal contributions from partners

ii. Loans and overdraft

iii. Trade credit

iv. Undistributed profit

v. Admission of new partners.

CO-OPERATIVE SOCIETIES

A cooperative society is defined as a voluntary business organization 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 SOCIETIES

1. Consumers Co-operative Society: A consumers’ co-operative society 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 cooperative. 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 the association of producers of similar products who have come together to promote the production and sale of their products. Members of this society like farmers and other producers contribute money to buy or hire equipment, machinery and raw materials at reduced rates meant for the promotion of their productive activities e.g. agricultural co-operatives society.
3. Credit and Thrift Co-operative Society: This is one of the commonest co-operative societies found in our present-day society. In this society, members are encouraged to save their money together, of which, all or part of it may be lent to any member that is in need.

FEATURES OF 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 cooperative society is to maximize the welfare of the members who have pooled their resources.

– Management and control is 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 cooperative society is similar to a limited liability company, as it can exist in perpetuity.                                          

ADVANTAGES OF CO-OPERATIVE SOCIETY

i. Encouragement of society: Cooperative societies encourage saving habits among their members.

ii. Provision of loan facilities to members: Members find it very easy to obtain loans from the society, which would have been difficult to get from financial institutions.

iii. Improve members’ standard of living: They improve the standard of living of their members by providing goods that they cannot buy on their own. e g. land, electronic, etc.

iv. Encourage Joint Marketing of Products: They organize joint marketing, transportation and distribution of their products.

v. Pooling of resources for investments: They pool resources together to invest in different areas of investment opportunity.

vi. Perpetual existence: A cooperative society can exist for a long period.

DISADVANTAGES OF CO-OPERATIVE SOCIETY

i. Insufficient capital: The capital available for investment is very low. Most of the members are low-income earners.

ii. High rate of embezzlement: Most of the leaders in cooperative societies are highly corrupt, some often embark on embezzlement and misuse of funds belonging to the societies.

iii. Problem of loan recovery: The society may not be able to recover loans given to members. This may destabilize society.

iv. High level of illiteracy: There is widespread illiteracy among members which makes their education and training very difficult

v. A major problem for a cooperative society is the difficulty of finding experienced people to manage the business.

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.