1.0 INTRODUCTION
An entrepreneur is an important factor in the operation of any
business enterprise. He is the investor who put his money into the running of a
business. This makes him to be the sole decision-maker of
which business to
venture into. When he has decided which line of business to invest his money,
he decides on what form of business organization he needs to set up to make him
realize his business objectives. The way
a business concern is organized usually has an implication for its growth and
development, for instance, the way it can raise capital, as well as how
benefits and losses of the business may be shared. All these have to do with
the ownership form. In this note, we shall discuss the forms of business
existing in Nigeria.
2.0 OBJECTIVES
By the end of this note, you should be able to:
·
discuss the various forms of businesses in Nigeria
·
outline advantages and disadvantages of each of the forms of business
in Nigeria.
3.0 MAIN CONTENT
3.1 Sole Proprietorship This is sometimes called one-man business. This is a form of
business owned and run by one person. The sole trading business has no legal requirements
before it is established. With little capital or skill, a man can start a sole
trading business.
This form of business is very common in Nigeria today, especially with
the economy down turn, which has necessitated many people to find a means of
sustaining their lives. Many factors has made people to start a sole
proprietorship on their own, these factors include inheritance of business from
a relative, desire to be independent, desire to build a fortune, unemployment
and exploitation of ideas.
Advantages of Sole Proprietorship
1. It is easy to start with minimum cost and no legal intricacies.
2. All profits belong to the entrepreneur.
3. Sole trading does not pay tax like statutory companies. They
only pay personal income tax.
4. The business can be liquidated easily if the need arises just
as it was started.
5. Decision can be taken quickly since the owner need not consult anybody.
6. The owner enjoys privacy in the matters of his business affair.
Disadvantages
1. Unlimited liability of the owner, all loses are the
responsibilities of the owner and if he fails to bear the losses his property
may be forfeited.
2. The business lacks originality in that the owner may not be
able to get expert ideas that may be required in running a modern business.
3. There is no continuity in the business as it may die with the owner.
4. Insufficiency of capital is one of the major drawbacks to this form
of business.
Conditions Favorable For
Establishing a Sole Proprietorship Business
1. When capital is small and there is a desire to go into business
2. When there is a need to start the business quickly and urgently
in order to exploit an advantage.
3. When the skill of the
owner is an important consideration in the operation of the enterprise
4. When risk is very low,
such that it does not pose much threat to the economic survival of the
entrepreneur
3.2 Partnership
When two or more persons come together to conduct a business enterprise,
a partnership is said to exist. These people come together with the sole aim of
sharing profits and losses arising from the partnership. It is formed to boost
capital base of a business and benefits from the contributions of the owners.
The nature of partnership is such that the partners are co-owners
of the business. Partnership can operate under different degrees of formality
ranging from an informal oral understanding to a written state.
Formation of Partnership C
ommon law provisions and other statutes guide formation of partnership
in Nigeria. It can be oral or written working agreement. However, it must be
stated that a written agreement witnessed by a Notary Public, is preferable to
an oral agreement because of its reliability and dependability.
Some provisions in the partnership agreement include the
following:
1. Name of the business including names of the partners and their addresses
2. Amount contributed by each partner and how it is to be paid
3. Other contributions to be made by partners such as personal service
or property
4. Relative amount of authority or voting power of each partner
5. Methods by which partners are to be compensated for the services
rendered.
6. How the business may be dissolved, if the need arises for instance,
in the event of death, withdrawal of a partner, bankruptcy of a partner, and
legal declaration of insanity
7. Life span of the business
Forms of Partnership
1. General Partner (Active
Partners): Unless otherwise stated, all partners are regarded as general
partners. Such partners have unlimited liability and may personally bear the
responsibility of the debt of the business, especially in cases where others
could not meet up with their liabilities.
2. Special Partners: These are partners whose liabilities are limited by the agreement.
Such partners do not normally involve themselves in the management of the
business.
3. Sleeping or Dormant Partners: These partners are
not known by the public to be actively involved in the business. They are silent
partners and do not involved themselves in the daily management of the
business.
Conditions Favorable for the Operation of Partnership
1. When a moderate amount of capital is required and where diversified
managerial talents could be got from partners.
2. Professionals who specialized in different areas could find an opportunity
in partnership agreement.
3. When risk is relatively low and could be borne by the partner.
Advantages of Partnership
1. Partners could have diversified skills, which could be put to
the business advantage.
2. The business has the opportunity
of securing more capital in that there is more than one owner.
3. The operation of the business is relatively free from
government control.
4. It is easy to form and organized in that there are no
complicated legal requirements to meet before starting.
Disadvantages
1. Inability to transfer ownership in partnership business poses a
drawback to this form of enterprise.
2. The partners are jointly and separately liable for business
debt. This means that if a partner is unable to meet the claims resulting from
the liquidation of the partnership, the remaining partners must take over the
unsatisfied claims, drawing on their personal assets if necessary. It may be
difficult to find compatible partners who could work together peacefully,
especially in a situation where people do not trust each other.
3. Uncertainty of the lifespan of the business. If a partner
withdraws or dies, the withdrawal or death of the partner dissolves the partnership.
3.3 Limited Liability Companies
Limited liability companies are usually guided by statute (state
laws) in their operations. The law recognizes them as a legal entity, distinct
from its owner and managers. It has an unlimited life and can continue after its
original owners and managers are dead. The stockholders are not personally
liable for the debt of the firm and it permits easy transferability of
ownership interest in the firm.
In Nigeria, Company and Allied Matters Act of 1990 governs the formation
of limited liability companies. The law states that such companies must be
registered with the Corporate Affairs Commission (CAC). In addition to this,
they must:
i. Apply formally to
Registrar of Companies, at the Federal Ministry of Trade, Abuja.
ii. Be formed by at least two persons in the case of private companies
(and a maximum of fifty persons) or at least seven persons (in the case of a
public company with no maximum).
iii. Provide a Memorandum of Association, which will state details
of external relationship of the company including:
a. Name of the proposed company
b. Nature of business and aims
c. Liabilities of shareholders
d. Objectives of the company
e. Amount and type of share capital
f. Number of directors
g. Names and addresses of directors
iv. Submit Article of Association, which will give details of
internal operations of the company such as:
a. Time and schedule of meetings
b. Power(authority) of directors
The limited liability companies are usually divided into two basic
types in Nigeria. They are:
·
Public limited liability companies whose shares are not quoted on the
stock exchange market that is, the public do not subscribe to their shares.
·
Public limited companies or Joint Stock Companies whose shares are
quoted on the stock exchange and subscribed to by the public. Such companies
usually add public limited company (PLC) to their name to distinguish them from
the private companies.
Advantages of Limited Liability Companies
i. The company enjoys continuity in that the company is expected to
exist forever (expect if dissolved by the law).
ii. Liabilities of owners are limited to the amount of capital contributed.
iii. It is easier to raise additional capital on identity of the
company either by issuing shares or borrowing.
iv. Shares can easily be transferred.
v. It gives wide scope to different investment.
Disadvantages of Limited Liability Companies
i. Limited liability companies suffer too much control from government.
ii. There are great
difficulties in starting the company because of the legal requirements.
iii. They suffer from double taxation for example, companies pay
tax on profit, dividend, properties, etc.
iv. The growth of bureaucracy can bring slow decision-making.
v. Possibility of impersonal relationship between management of the
company and its workers.
3.4 Co-Operative Societies
As the name suggest, a cooperative society is a form of enterprise
or organizational arrangement, which fosters cooperation among its members with
the view to enhancing mutual and self-help; promote economic interest and
welfare of the participating members.
A cooperative society derives its strength from the interest and
patronage of its members who provide nearly all its finance, own, manage and
control its operations. They are usually guided by statutes and sponsored by
government especially because of their aim, which is to make life better for
people in terms standard of living.
Types of Co-Operative
Society in Nigeria
The types of co-operatives Societies in Nigeria include:
i. Producers’ Co-operatives: This form of co-operative society involves
co-operation in production area to facilitate greater output, economies of
scale, better pricing and improved marketing of product to minimized members’
exploitation.
ii. Consumers’ Co-operatives: This co-operative society is based on
consumer ownership and control. Consumers’ co-operative society involves
co-operation in retail distributive trades. The society purchases consumer
goods in bulk and at wholesale prices and sell to its members. Their objective
is to eliminate intermediaries in the distribution of goods thereby enabling members
to buy at lower cost.
iii. Thrift and Credit Co-operatives: These co-operatives
societies are formed with the aim of promoting culture among members. In this
form of co-operative society, members save money in the association based on
their ability. The major objective of the thrift and credit or saving
co-operatives is to discourage the habit of living from hand to mouth and
encourage the habit of saving among members. Funds pooled together through
savings are given as loan to members at lower interest rates than that of the financial
market. Members of these co-operatives are often drawn from the low income people.
Advantages of
Co-Operative Societies
i. They facilitate easy access to some external sources of
finance.
ii. Members obtain economies of scale.
iii. They serve as useful agents of economic development in that through
the societies, incomes of members are raised and more businesses are
established by obtaining capital from the cooperative.
iv. The thrift and credit societies have encouraged saving habit among
people.
v. Co-operative societies enjoy less tax from government (since government
sees them as agent of development).
Disadvantages of Co-Operative Societies
i. Co-operatives suffer from the lack of adequate finance. Insufficient
funds can put severe limitations on the growth, development and expansion or
range of activities of the society.
ii. Co-operative societies are mostly run by inexperienced
managers who are not versed in the techniques of modern management.
3.5 Public Corporation
Public Corporation is a business organization whose ownership is
vested in the government who also owns the capital. The corporation has its own
legal existence and; it is usually organized along a business line. It has no
shareholders and it is not essentially established to make profits.
There are many corporations in Nigeria. For each corporation, a legislative
(act of the government) determines the scope of activity and the broad
policies; outlines the format of the Organization; and formulates the financial
structure and other basic features. The management and control of a public
corporation is vested in a Board of Directors whose members are appointed by a
Commissioner/Minister of the State/Federal Government.
Public corporations in an economy are undertaken in areas of public
utility such as electricity, telecommunication, water, steel development, television
authority etc.
Justification for Government Ownership of Business Organization
1. Some corporations provide services that cannot be left in the hands
of private individuals. Examples are the services Central Bank of Nigeria and
Nigerian Minting and Security Press.
2. The capital requirement for some projects is so enormous that
an individual may not be able to afford it.
3. The desire for rapid economic development may necessitate the government
to provide (through ownership), long-term capital projects such as
infrastructures and basic services which require huge sums for their
investments and which cannot, therefore, be profitably attractive to/and
undertaken through private investment.
4. Government’s ownership in business is necessary because, provision
of certain goods and services by private enterprises may not be adequate in a
way that can promote social justice.
4.0 CONCLUSION
Our discussion so far showed that there are many forms of
businesses existing in the Nigerian economy. While sole proprietorship and partnership
enterprises are easy to form, a limited liability company is not easy to form.
Company profit and other earnings are taxed at the expense of the owners as
regular income. Owners are also personally liable for the debt of the business.
Limited Liability Companies has the advantage of limiting the liability of the
participant, but it is generally more expensive to organize.
5.0 SUMMARY
In this note, we have been able to look at the various forms of
business enterprises and the conditions, for establishing each of them. We have
examined the need for government’s participation in business enterprises.
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