Business Organization II: Sole Trader, Partnership & Limited Liability Companies – SS3 Book Keeping Lesson Note (First Term)

A business organisation is the form in which a business is owned and run, and this note covers the sole trader, the partnership and the limited liability company.

• Sole trader: a business owned and run by one person.
• Partnership: an association of two to twenty persons who come together to make profit.
• Limited liability company: an association of individuals who pool money and share profit or loss.

Behavioural objectives

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

1. define a sole trader, a partnership and a limited liability company;
2. state the features of a sole trader and of a partnership;
3. list the advantages and disadvantages of each form of business organisation;
4. distinguish between a private company and a public company.

Who is a sole trader?

A sole trader (or sole proprietor) is a person who owns and runs a business by himself and for himself.

• Examples: a petty trader, a tailor, a hairdresser or a provision shop owner.

What are the features of a sole trader?

• Ownership: the business is owned by one person.
• Objective: the main aim is to make a profit.
• Source of capital: the proprietor provides the capital to set up and run the business.
• Liability: the owner has unlimited liability, so his personal property can pay business debts.
• Legal entity: it is not a legal entity, because the owner is not separated from the business.
• Management: the sole proprietor controls and manages the business himself.
• Life span: it depends on the owner, and the business can fold up at any time.

What are the advantages of sole proprietorship?

• Small capital: the owner can start with his own savings.
• Easy to establish: there are few legal formalities.
• Quick decisions: the owner does not consult anyone.
• Easy to manage: one person can run a small business.
• Small operation: it needs little space and few workers.
• All profits to the owner: he shares them with nobody.
• Fits any environment: it can thrive in towns and villages alike.
• Privacy: business affairs are known only to the owner.
• Close link with employees: the owner knows his workers personally.
• Close link with customers: the owner knows what his customers want.

What are the disadvantages of sole proprietorship?

• Problem of continuity: illness, death or retirement of the owner can end the business.
• Inadequate capital: funds are limited to the owner’s savings and loans.
• All risks borne alone: the owner takes every loss himself.
• Unlimited liability: personal property can be sold to pay business debts.
• No separate legal entity: the owner and the business are one in law.
• Lack of specialisation: one person does many different jobs.
• Limited expansion: small capital and one manager restrict growth.

What is a partnership?

A partnership is an association of two to twenty persons (two to ten in banking business) who come together to run a business and make profit.

• Partnership deed: the written agreement that sets out the terms of the partnership.
• Examples: a law firm, a medical clinic or a small trading firm run by friends.

What are the features of a partnership?

• Contract: a partnership agreement between the partners is the basis of the business.
• Objective: the main aim is to make a profit.
• Source of capital: the partners provide the capital according to a legal agreement.
• Liability: the partners have unlimited liability.
• Life span: it depends on the agreement signed by the partners.
• Legal entity: it is not a legal entity, because the partners are not separated from the business.
• Management: the partners control and manage the business.

What are the advantages of a partnership?

• More capital: the partners pool their resources.
• Possible expansion: larger resources allow the business to grow.
• Specialisation: work is divided among partners according to their skills.
• Better credit standing: creditors trust a partnership more than one individual.
• New ideas: each partner gives his best and contributes ideas.
• Shared strain: the workload is divided among the partners.
• Shared losses: no partner carries the whole loss alone.
• Better chance of success: pooled skills and money help the business last.
• Privacy: the partners’ accounts are not open to the public.

What are the disadvantages of a partnership?

• Unlimited liability: personal property can be used to pay the firm’s debts.
• Difficult withdrawal of funds: a partner cannot easily take out his investment.
• Disagreements: partners may quarrel over who is the boss or over the meaning of the deed.
• Dissolution: death, resignation, retirement or bankruptcy of a partner can end the partnership.
• Difficulty admitting new partners: all existing partners must agree.
• Difficult management: shared control means decisions follow collective judgment.
• Limited size: the number of partners and their funds restrict growth.

What is a limited liability company?

A limited liability company is an association of individuals who contribute money or money’s worth to a common stock, employ it in some trade or business, and share the profit or loss arising from it.

• Limited liability: a shareholder loses only the amount he invested, and his personal property is safe.
• Legal entity: the company is separate from its owners and can own property and sue or be sued in its own name.
• Shares: the units into which the company’s capital is divided and sold to members.
• Shareholder: a person who owns shares in a company.

What are the types of companies?

There are two types of limited liability company: the private company and the public company.

What is a private company?

A private company is a limited liability company that cannot sell its shares to the general public.

• Membership: it needs at least two members and not more than fifty, excluding past and present employees.
• Transfer of shares: a shareholder cannot transfer his shares without the consent of the company.
• Public invitation: it cannot invite the general public to subscribe for shares.
• Name: it usually ends with “Limited” (Ltd).

What is a public company?

A public company is a limited liability company that may invite the general public to buy its shares.

• Membership: it needs at least seven shareholders, with no maximum number.
• Incorporation: the promoters apply to the Corporate Affairs Commission, Abuja, and lodge the required documents with the registrar of companies.
• Name: it usually ends with “Plc” (public limited company).

What is the difference between a private company and a public company?

What are the advantages of a private limited liability company?

• Large capital: it can raise more than a sole trader or a partnership.
• Legal entity: the company can own property and sue in its own name.
• Limited liability: shareholders risk only the money they invested.
• Continuity of existence: the company goes on when a member dies or leaves.
• Efficient management: skilled directors can be appointed to run it.
• Large profits: bigger capital allows bigger business and more profit.
• Possible expansion: more funds allow the company to grow.

What are the disadvantages of a private limited liability company?

• Limited capital: it is smaller than that of a public company.
• No sale of shares to the public: this restricts the funds it can raise.
• Shares not easily transferable: the company must consent first.
• Lack of privacy: it must file returns with the Corporate Affairs Commission.
• Corporate tax: the company pays tax on its profit.
• Lack of personal contact: owners and workers are further apart than in a small firm.
• Delay in decisions: decisions pass through directors and meetings.

What are the advantages of a public limited liability company?

• Legal entity: it is separate from its owners.
• Perpetual existence: it continues despite changes in its members.
• Limited liability: shareholders lose only what they invested.
• Large capital: it sells shares to the general public.
• Transferability of shares: shareholders can sell their shares freely.
• Loan facilities: banks lend to it readily because of its assets.
• Economies of large-scale production: cost per unit falls as output rises.
• Democracy in management: shareholders vote at general meetings.
• Owners separated from management: trained managers run the business.
• Employees as co-owners: workers can buy shares.

What are the disadvantages of a public limited liability company?

• Lack of privacy: its accounts and affairs are published.
• Conflict of interest: shareholders, directors and workers may want different things.
• Slow decision-making: many people must agree.
• Separation of owners from control: shareholders have little say in daily running.
• Hard to establish: it needs many documents and legal steps.
• Large corporate tax: it pays heavy tax on profit.
• Lack of flexibility: it must follow its legal rules and published objects.
• Decrease in personal interest: managers and workers may care less than an owner would.
• Large capital requirement: it needs much money to start.

How do the three forms of business organisation compare?

Evaluation

1. Define a sole trader and state four features of sole proprietorship.
2. State five advantages of a partnership.
3. What is the usual maximum number of persons in a partnership, and what is the maximum in banking business?
4. State two differences between a private company and a public company.
5. State three disadvantages of a public limited liability company.

Assignment

1. Draw a table that compares a sole trader and a partnership under these headings: number of owners, source of capital, liability, legal entity and life span.