Business Organization – SS3 Book Keeping Lesson Note (First Term)

Business is the activity of individuals, institutions and organisations that promote and distribute goods and services to satisfy human wants in society. Businesses are classified by the activities they engage in, and they operate through different types of organisation, such as the sole trader, the partnership and the limited liability company.

Behavioural objectives

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

1. Define business.
2. State the objectives of business.
3. Classify businesses according to the activities they engage in, with examples.
4. List the major types of business organisation.
5. Describe the main features of each type of business organisation.
6. Compare the sole trader, the partnership and the limited liability company.

What is a business?

Business is the activity of individuals, institutions and organisations to promote and distribute goods and services that satisfy human wants in society at large.

• Goods: physical items that can be seen and touched, such as rice, shoes and cement.
• Services: work done for others, such as teaching, banking and transport.
• Human wants: the things people need or desire, such as food, clothing, shelter and education.
• Exchange: goods and services are sold or traded, usually for money.

What are the objectives of business?

The objectives of business are the aims a business sets out to achieve.

1. Satisfying customers: producing goods and services that meet customers’ needs and desires.
2. Creating employment: giving people jobs and a means of earning income.
3. Improving living standards: maintaining and improving the standard of living of people in society for better health and well-being.
4. Providing social amenities: supplying facilities that benefit the community.
5. Making profit: earning more income than the cost of running the business, so that it can survive and grow.

How is business classified according to the activities it engages in?

Business is classified into four groups: basic extractive production, processing (secondary) production, distribution (commercial industry) and services.

1. Basic extractive production

• Meaning: taking raw materials directly from nature.
• Examples: farming, forestry, mining, fishing and similar activities.

2. Processing or secondary production

• Meaning: changing raw materials into finished or semi-finished goods, or building with them.
• Examples: construction, manufacturing, printing, oil refining and similar activities.

3. Distribution (commercial industry)

• Meaning: moving goods from producers to consumers and supporting that movement.
• Examples: retail and wholesale trading, transportation, warehousing, advertising and similar activities.

4. Services

• Government services: local, state and federal government services.
• Professional services: law, surveying, medicine, insurance, real estate, finance and publicity.
• Personal services: services given directly to individuals.

What are the types of business organisation?

There are seven major types of business unit: the sole trader, the partnership, limited liability companies, statutory corporations, cooperative societies, trade associations, and the civil services and local authorities.

• The sole trader.
• The partnership.
• Limited liability companies (private and public).
• Statutory corporations.
• Cooperative societies.
• Trade associations: chambers of commerce, employers’ associations and manufacturers’ associations.
• The civil services and local authorities.

What is a sole trader?

A sole trader is a business owned, financed and usually managed by one person.

• Advantages: easy to start, quick decisions, and the owner keeps all the profit.
• Disadvantages: limited capital, heavy workload, and the owner has unlimited liability for the debts of the business.
• Examples: a provision shop, a tailor, a hair salon.

What is a partnership?

A partnership is a business owned by two or more people who agree to share its profit and loss.

• Partnership agreement: a written agreement (deed) states each partner’s capital, duties and share of profit.
• Advantages: more capital, shared skills and shared workload.
• Disadvantages: disagreements between partners, and partners are usually liable for all the debts of the firm.
• Examples: firms of lawyers, accountants and medical doctors.

What is a limited liability company?

A limited liability company is a business registered as a separate legal person, owned by shareholders who are liable only up to the amount of their shares.

• Registration: companies are registered with the Corporate Affairs Commission (CAC).
• Management: shareholders own the company and directors run it.
• Private limited company: shares are not offered to the general public, and its name ends with “Limited” (Ltd).
• Public limited company: shares may be offered to the general public, and its name ends with “Plc”.
• Advantages: limited liability, large capital and continuity of the business.
• Disadvantages: costly to set up, many legal rules, and less secrecy.

What is a statutory corporation?

A statutory corporation is a business set up by an Act of the legislature to provide a public service.

• Ownership: the government owns and controls it.
• Purpose: to provide essential services, not only to make profit.
• Example: the Nigerian Ports Authority.

What is a cooperative society?

A cooperative society is a business formed by people who join voluntarily to help one another in their common economic interest.

• Membership: open and voluntary.
• Voting: each member has one vote, whatever the number of shares held.
• Types: consumer, producer, marketing, and thrift and credit societies.

What is a trade association?

A trade association is a body formed by businesses or business owners to protect and promote their common interests.

• Chambers of commerce: bodies of traders and industrialists in a town or area.
• Employers’ associations: bodies of employers who deal with matters about workers and wages.
• Manufacturers’ associations: bodies of manufacturers who promote local production.

What are the civil services and local authorities?

The civil service and local authorities are government bodies that provide public services.

• Civil service: carries out government policies through ministries and departments, staffed by civil servants.
• Local authorities: local government councils that provide local services such as markets, roads and refuse collection.

What is the difference between a sole trader, a partnership and a limited liability company?

The three differ mainly in ownership, capital and liability, as the table shows.

Evaluation

1. Define business.
2. State four objectives of business.
3. Name the four classes of business according to the activities they engage in, and give one example of each.
4. List five major types of business organisation.
5. State two differences between a sole trader and a limited liability company.

Assignment

List the objectives of business and the major types of business unit given in this lesson. Under distribution, name three examples of businesses.