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Business Units - Business Studies Form 2

Dissolution
Sole proprietorships are dissolved under the following circumstances

    • When there is continuous losses
    • Due to  the death of the owner/ proprietor
    • On a voluntary decision
    • Through a court order


Objectives of Forms of Business Units

By the end of the topic, you should be able to;

  1. Identify the various forms of business units.
  2. Explain the characteristics of each form of business unit
  3. Discuss the formation and management of each form of business unit.
  4. Discuss the sources of capital for each form of business unit.
  5. Discuss the role of stock exchange as a market for securities.
  6. Explain the advantages and disadvantages of each form of business unit.
  7. Recognize the circumstances under which the various forms of business units may be dissolved
  8. Discuss trends in business ownership.

Objectives

By the end of the topic, you should be able to:

  • Identify a Sole proprietorship.
  • Explain the characteristics of a Sole proprietorship.
  • Discuss the formation and management a Sole proprietorship.
  • Discuss the sources of capital for a Sole proprietorship.
  • Explain the advantages and disadvantages of a Sole proprietorship.
  • Recognize the circumstances under which a Sole proprietorship may be dissolved.

Business involves movement of goods and services. This movement is necessary so that goods and services can be taken to places where they are needed. This increases their utility.This movement of goods and services is referred to as transport.


Objectives

By the end of the topic, you should be able to:

  1. Identify the various forms of business units.
  2. Explain the characteristics of each form of business unit
  3. Discuss the formation and management of each form of business unit.
  4. Discuss the sources of capital for each form of business unit.
  5. Discuss the role of stock exchange as a market for securities.
  6. Explain the advantages and disadvantages of each form of business unit.
  7. Recognize the circumstances under which the various forms of business units may be dissolved
  8. Discuss trends in business ownership

Background

In form one you learnt that a business is any activity that is carried out by an individual or an organization with an aim of making profit. It could be in producing goods or offering services. Businesses are organized in certain recognizable units. These units are classified using ownership structures or the status of legal control. Some business units are small while others are very large. In this topic you shall learn about the various business units that are operated by business people.

Introduction

Business units are also referred to as business organizations. Each unit is unique in terms of formation,ownership and management. The figure below shows an illustration of business units structure in Kenya.

Business Units

Business units can be found in all sectors of the economy.They are owned by one or more people and have distinct characteristics.They provide either goods or services.

Meaning of Business Units

A business unit is an organization formed by one or more people to produce goods and services with an aim of making profit.Examples of business units are sole proprietorships,partnerships,co-operatives,companies,public corporations and parastatals.


Definition

A Sole proprietorship is a business unit owned by one person.

Most kiosks are Sole proprietorships.

Background.

A business starts with an idea. The idea is then evaluated. The evaluation includes deciding the form or type the business will take. Sometimes the business person  forms and runs the business alone. This type of business is called Sole proprietorship

Background
In form one you learnt that a business is any activity that is carried out by an individual or an organization with an aim of making profits. It could be producing goods or offering services. Businesses are organized in certain recognizable units. The units are classified using ownership structures or the status of legal control. Some business units are small while others are very large. In this topic you shall learn about the various business units that can be operated.

Formation of sole proprietorship

A Sole proprietorship is formed through an application and acquisition of trading licence from a local authority.

A carpenter working in his workshop.

Objectives

By the end of the topic, you should be able to:

  1. Identify a soleproprietorship
  2. Explain the characteristics a soleproprietorship
  3. Discuss the formation and management of a soleproprietorship
  4. Discuss the sources of capital for a soleproprietorship
  5. Explain the advantages and disadvantages of a soleproprietorship
  6. Recognize the circumstances under which a soleproprietorship may be dissolved

Objectives

By the end of the topic, you should be able to:

  • Identify a soleproprietorship
  • Explain the characteristics a soleproprietorship
  • Discuss the formation and management of a soleproprietorship
  • Discuss the sources of capital for a soleproprietorship
  • Explain the advantages and disadvantages of a soleproprietorship
  • Recognize the circumstances under which a soleproprietorship may be dissolved

Sole proprietorships

Sources of capital

Sources of capital for sole proprietorships include:

  • Personal savings
  • Borrowing from banks
  • Donations from friends and relatives
  • Trade credit

Management

Sole proprietorships are managed by the owner who is sometimes assisted by family members.

This fruit seller manages the business with the daughter(standing by)

Characteristics

Characteristics of sole proprietorships include:

  • Unlimited liability
  • Profits not shared
  • Few legal requirements during formation
  • Owner makes decision alone.

Dissolution

Sole proprietorship may be dissolved due to the following reasons:

  • Due to continuous losses.
  • Through a court order.
  • As a result of death of the owner.
  • After transfer of business to another person.
.

Advantages and Disadvantages of Soleprorietorships

Advantages

  • Easy to start because only a trading licence is required
  • Quick decision making since there is no consultation with any other person.
  • Enjoys all profits alone
  • Has control of all business secrets
  • They are easy to manage

Disadvantages

  • Suffers losses alone
  • Has unlimited liabilities
  • Has limited sources of capital
  • May suffer fatigue due to long working hours
  • Lack of continuity due to death,insanity or bankruptcy of owner.

Ownership

A Partnership is owned by;

i) 2-20 members for ordinary partnerships.

ii) 2-50 members for professional partnerships.


Many authors of textbooks write in partnerships.

Formation

Formation of partnerships involves the following process;


    preparation of partnership deed.
    • adoption of partnership act.
    • application of trading license or registration

Formation

Formation of a partnership business involves the following process:

  • Preparation of partnership deed.
  • Adoption of the Partnership Act.
  • Application for a trading licence or registration.

Sources of capital

Sources of capital for partnerships include:

  • partners contribution
  • loans from financial institutions.
  • trade credits
  • hire purchase
  • leasing
  • renting
  • retained profits.

Management

Management of partnerships is by partners and hired managers.

Sometimes partners meet over a cup of tea to discuss their business.


Characteristics

The characteristics of partnerships include:

  • Profits and losses are shared.
  • Unlimited liability
  • Decision made by partners
  • Minimum membership of 2 to 20 for ordinary partnerships and 2 to50 for professional partnerships.

Dissolution

Partnership may be dissolved due to the following reasons:

  • Due to continuous losses
  • As a result of continuous disagreements among members
  • Court order
  • After completion of the intended purpose of the partnership

Advantages and Disadvantages of Partnerships

Advantages

  • Work is shared among partners
  • They share various professionalism
  • They mostly use hired qualified managers
  • Losses are shared
  • There is less government control

Disadvantages

  • Profits are shared
  • Slow decision making
  • Possibility of disagreement among partners
  • There is unlimited liability
  • They cannot raise capital through the stock exchange market.

Roll over or point at each box to view the summary

Objectives

By the end of the topic, you should be able to:

  • Identify a private limited company.
  • Explain the characteristics of each form of business unit
  • Discuss the formation and management of a private limited company.
  • Discuss the sources of capital for a private limited company.
  • Explain the advantages and disadvantages of a private limited company.
  • Recognize the circumstances under which a private limited company may be dissolved
  • Discuss trends in business ownership

Advantages and Disadvantages

Advantages

  • The company is separate from the owners
  • Losses are shared
  • Owners have limited liabilities
  • Ability to hire professional services
  • Can start operating with atleast one director
  • Starts operating after acquisation of Certificate of Incorporation

Disadvantages

  • There is restricted transfer of shares
  • They do not sell shares to the members of public
  • Decision making is slow
  • There is lack of secrecy
  • Cannot raise capital through the stock exchange market

Formation

The initial people intending to form the company submit the following documents to the Registrar of companies

  • Memorandum of association
  • Articles of association
  • List of directors
  • Directors declarations

On approval, the Registrar of companies issues the certificate of incorporation.At this stage the company starts operating.

Sources of capital

Sources of capital for private limited companies are:

  • Share capital
  • Loans from financial institutions
  • Finances from government agencies
  • Trade credit
  • Retained profit
  • Hire purchase
  • Leasing and renting .
.

Management

Private Limited Companies are managed by the board of directors and hired professional managers.

Some private limited companies need hired professional to manage the company for example in construction.

Characteristics

The characteristics of Private Limited Companies include:

    • Restricted transfer of shares
    • They do not sell shares to the members of public
    • Slow decision making
    • There is lack of secrets

Dissolution

Private Limited Companies may be dissolved due to the following reasons:

  • Deregistration by the Registrar of companies
  • Insolvency or bankruptcy- Inability to meet its financial obligations
  • Resolution by members to voluntarily wind up
  • Court order
  • Creditors action


Meaning of public limited companies

A Public Limited Companies is a business unit that has a separate legal entity from the owners. It is formed by a minimum of 7 persons and no maximum.

Public limted companies sell their shares through the stock exchange.


Objectives

By the end of the topic, you should be able to:

  • Identify a Private Limited Company.
  • Explain the characteristics of a Private Limited Company.
  • Discuss the formation and management of a Private Limited Company.
  • Discuss the sources of capital for a Private Limited Company.
  • Explain the advantages and disadvantages of a Private Limited Company.
  • Recognize the circumstances under which a Private Limited Company may be dissolved.

Formation of Public Limited Companies

1) Initial people intending to form the company submit the following documents to the registrar of companies

  • memorandum of association
  • Articles of association
  • List of directors
  • Directors declaration

2) On approval, the registrar of company issues the certificate of incorporation.

3) After raising the required capital, it then issued with a certificate of trading.Note that the public company must get the certificate of trading before it starts operating.

Objectives

By the end of the topic, you should be able to:

  • Identify a Public Limited Company.
  • Explain the characteristics of a Public Limited Company..
  • Discuss the formation and management of a Public Limited Company.
  • Discuss the sources of capital for a Public Limited Company..
  • Explain the advantages and disadvantages of a Public Limited Company..
  • Recognize the circumstances under which a Public Limited Company may be dissolved.





Definition of partnership

Partnership is a business unit formed by two or more people to undertake an activity with a view of making profit.

Introduction

In form one you learnt that a business is any activity that is carried out by an individual or an organization with an aim of making profits. It could be producing goods or offering services. Businesses are organized in certain recognizable units. The units are classified using ownership structures or the status of legal control. Some business units are small while others are very large. In this topic you shall learn about the various business units that can be operated.


Objectives

By the end of the topic, you should be able to:

  • Identify a partnership.
  • Explain the characteristics of a partnership
  • Discuss the formation and management of a partnership
  • Discuss the sources of capital for a partnership
  • Explain the advantages and disadvantages of a partnership
  • Recognize the circumstances under which the a partnership may be dissolved.
    • Meaning of a Private Limited Company

      A private limited company is a business entity formed by 2 to 50 persons.A private limited company is a separate legal entity from its owners.


      The Unilever Kenya Ltd,manufacturers of various soaps is an example of a private company.



      Ownership
      A private limited company is owned by the shareholders.

      The New KCC is a private company owned by shareholders.


      Ownership of Public Limited Companies

      A Public Limited Company is owned by the shareholders.

      A share is a unit of ownership.

      The people who buy shares from the stock exchange market automatically become owners of the company they buy shares from.

      Sources of capital

      Sources of capital for the company include:

      • Sales of shares
      • Financial institutions
      • Government agencies
      • Trade credit
      • Retained profit
      • Hire purchase
      • Leasing and renting of company assets.

      Management

      Public Limited Companies are managed by board of directors and hired professional managers.


      Directors of a Public Limited Company dicussing company issues.

      Characteristics

      The characteristics of Public Limited Companies include:l

      • Formed by a minimum of 7 persons and no maximum
      • Operates with a minimum of 3 directors
      • Shares are freely transferrable
      • Starts operating after obtaining a Certificate of trading .
      • Invites members of public to subscribe for its shares
      • It must have a minimum authorized share capital

      Dissolution

      Public Limited Companies may be dissolved due to the following reasons:

      • Deregistration of the company
      • Due to insolvency
      • Through a resolution by members to dissolve the company
      • Through a court order
      • As a result of creditors action

      Advantages and disadvantages

      Advantages

      Public Limited Companies has the following advantages

      • the ability to raise large capital
      • can employ specialized personnel
      • limited  liability
      • the company is a legal entity.
      • Free transfer of shares
      • Disadvantages

      Public Limited Companies has the following disadvantages


        • decision making process is long.
        • Lengthy legal procedures required during formation
        • lack of personal contact with the customers
        • shareholders do not have a say in day to day running of the business
        • Lack of secrecy.

      ADVANTAGES AND DISADVANTAGES

      Advantages

      Public Limited Companies have the following advantages:

      • It has the ability to raise large capital through the stock exchange market
      • It can employ specialized personnel
      • There is limited liability
      • The company is a legal entity
      • Free transfer of shares
      • There is perpetual existence of the business

      Disadvantages

      Public Limited Companies have the following disadvantages

      • Decision making process is long.
      • Lengthy legal procedures required during formation
      • Lack of personal contact with the customers
      • shareholders do not have a say in day to day running of the business
      • Lack of secrecy.

      Objectives

      By the end of the topic, you should be able to:

      • Identify a Co-operative
      • Explain the characteristics of a Co-operative
      • Discuss the formation and management of a Co-operative
      • Discuss the sources of capital for a Co-operative.
      • Explain the advantages and disadvantages of a Co-operative
      • Recognize the circumstances under which a Co-operative may be dissolved

      Meaning Co-operatives

      A Co-operative is an association of people with common interest in undertaking an activity for their own welfare.

      Dairy farmers from Githunguri formed a co-operative society which produces Fresha Dairy Products.

      Ownership

      A Co-operative is owned by people with a common interest who become its members.The members come together and form a co-operative to persue their common interest.

      Dairy farmers from Githunguri in Kiambu formed a co-operative society.

      Formation

      A co-operative is formed by a minimum of 10 people and no maximum. The process of formation involves:

      • Preparation of by-laws
      • Adoption of the by-laws prepared by the commissioner of co-operatives
      • Registration of the co-operative
      • Acquisition of a certificate to operate.

      Sources of capital

      Sources of capital for cooperatives include:

      • Members contribution
      • Financial institutions
      • Government agencies
      • Retained surplus
      • Hire purchase
      • Leasing and renting

      Management

      A Co-operatives is managed by:

      • An elected committee
      • Hired profesionals

      Characteristics

      The characteristics of Co-operatives include:

      • Membership of 10 and no maximum
      • There is perpetual existence of the business
      • There is mutual interest
      • There is limited liability
      • membership is voluntary

      Dissolution

      Co-operatives can be dissolved due to the following reasons:

      • Insolvency or bankruptcy-If it is unable to meet its financial obligations
      • Voluntary dissolution
      • If membership fall below 10 members
      • Through a court order
      • After completion of the intended purpose
      • If commissioner of co-operatives deems it fit to dissolve.

      Advantages and Disadvantages

      The following are the advantages and the disadvantages of Co-operatives:

      Advantages

      • Separate legal entity
      • Enjoys government support
      • Free withdrawal of members
      • Democratic administration
      • Enjoys large capital base

      Disadvantages

      • Lack of full time commitment by the committee members
      • Limited capital.
      • May suffer political interference
      • Lack of secrecy
      • Very large hence have control problems

      Objectives

      By the end of the topic, you should be able to:

      • Identify a Public Corporation
      • Explain the characteristics of a Public Corporation
      • Discuss the formation and management of a Public Corporation
      • Discuss the sources of capital for a Co-operative.
      • Explain the advantages and disadvantages of a Public Corporation
      • Recognize the circumstances under which a Public Corporation may be dissolved.

      Meaning of public corporation

      Public Corporation is a business unit in which the government owns majority of shares.

      Postal Corporation of Kenya is a public corporation.

      Objectives
      By the end of the topic, you should be able to:


        • Identify a Public Corporations
        • Explain the characteristics of a Public Corporation
        • Discuss the formation and management of a  Public Corporation Discuss the sources of capital for a  Co-operative.
        • Explain the advantages and disadvantages of a Public Corporation
        • Recognize the circumstances under which the a Public Corporation may be dissolved

      Ownership

      A Public Corporation is owned by:

      • Government
      • Shareholders

      Formation

      A Public Corporation is formed through an Act of parliament.

      The building with a clock is the parliament.

      Sources of capital

      Sources Of Capital for Public Corporations include:

      • Government shares
      • Loans from financial institutions
      • Grants

      Management

      A Public Corporation is managed by Board of directors appointed by the government and the shareholders.The main staff that manage a company involve:

      • Board of Directors
      • Chief Executive/Managing Director
      • Professional Managers
      • Shareholders/Government

      Characteristics

      The following are characteristics of Public Corporation:

      • Provide essential services.
      • Formed by an Act of parliament.
      • Separate legal entity
      • Limited liability
      • Government owns majority of shares

      Dissolution of Public Corporation

      A Public Corporation may be dissolved through:

      • The act of parliament
      • Due to perpetual losses
      • Court order
      • Action of creditors.

      Advantages and disadvantages

      Advantages

      The following are the advantages of public corporations:

      • They provide essential goods and services to the public.
      • They improve the standards of living of members of public
      • They enjoy large capital from the government
      • They provide revenue to the government
      • They sometimes enjoy monopoly power.

      Disadvantages

      The following are the disadvantages of public corporations:

      • Their nature limits competition
      • They are prone to corruption and political influence
      • They are sometimes affected by government changes.
      • There is limited profit motivation
      • They sometimes operate on losses.

      Objectives

      By the end of the topic, you should be able to:

      • Identify a Parastatal
      • Explain the characteristics of a Parastatal
      • Discuss the formation and management of a Parastatal
      • Discuss the sources of capital for a Parastatal.
      • Explain the advantages and disadvantages of a Parastatal
      • Recognize the circumstances under which a Parastatal may be dissolved

      Parastatal

      A parastatal is a business unit which is fully owned and managed by the government.

      Kenya Railway was fully owned by government.

      Objectives
      By the end of the topic, you should be able to:


        • Identify a Parastatals
        • Explain the characteristics of Parastatals Discuss the formation and management of a  Parastatals
        • Discuss the sources of capital for a  Parastatals
        • Explain the advantages and disadvantages of a Parastatals
        • Recognize the circumstances under which the a Parastatals may be dissolved.

      Ownership

      A parastatal is a business unit owned by government.

      Kenya Commercial Bank was a parastatal formed by government to provide capital to businesses.

      Formation of a parastatal

      A parastatal is formed through an Act of parliament.

      Sources of capital for parastatals

      Sources Of Capital for parastatal include:

      • government
      • Loans from financial institutions
      • Grants
      • Trade credit
      • Leasing and renting of property

      Management of parastatals

      Parastatals are managed by board of directors appointed by the government.

       

      Mombasa Beach Hotel is a parastatal run by government appointed directors.

      Characteristics of parastatals

      The following are characteristics of Parastatals:

      • Fully owned by the government
      • Formed by an Act of parliament
      • Provide essential goods and services
      • Have a limited liability
      • Its a separate legal entity
      • Usually operates as a monopoly

      Dissolution of parastatals

      Parastatals may be dissolved through the following ways:

      • Nullification through Act of parliament.
      • Creditors action
      • Court order.
      • Outright Insolvency
      • Perpetual operation at a loss

      Advantages And Disadvantages of Parastatals

      Advantages

      The following are the advantages of parastatals:

    • They provide essential goods and services to public.
    • They improve the standards of living of members of the public
    • They enjoy large capital sources from government
    • They provide revenue to the government
    • There is limited liability
    • Most are large hence enjoy economies of scale.
      • Disadvantages

        The following are the disadvantages of parastatals

      • Their nature limits competition
      • They are sometimes affected by government change
      • There is limited profit motivationes.
      • They suffer from political interference
      • Slow decision making
        • Meaning of stock exchange market.

          A Stock Exchange is a market where large and small investors buy and sell shares and securities.It provides trading facilities for stock brokers and traders to trade in stocks and other securities.It is also referred to as a bourse.

          Terminologies

          The following are some terminologies used in the stock exchange:

          Share

          A Share is a unit of capital or ownership for quoted (listed) companies

          Quoted company

          A quoted company is an organization which is registered with the stock exchange market thus obtaining permission to buy and sell securities through it.

          Security

          A security is a transferable instrument representing financial value for example shares and bonds.

          Bond

          A bond is a unit of loan traded in the stock exchange. It has a maturity date and carries fixed interest rate.

          Role of stock exchange

          The role of stock exchange include

          • Facilitates buying and selling of securities.
          • Provide opportunities for people to invest
          • It gauges the economic performance of a country.
          • Provide an opportunity for a company to sell new shares to the members of public.
          • Provide information which can be used to measure the performance of specific sectors of companies.

          Trends in business ownership

          The following are trends in business ownership. Click on each of them to learn more about them.

          Globalisation
          Globalisation is a process where by business activities in the world are brought together into one market through modern technology.
          E.g. buying and selling shares through the internet.


          GLOBALIZATION

          Globalization is a process where by business activities in the world are brought together into one market through modern technology.An example is buying and selling of shares for companies all over the world by use of the internet.

          Privatisation


          Privatisation is a process of changing ownership of a government owned business unit to members of the public through the sale of shares.A good example is the sale of Kengen and Safaricom shares through Initial Public Offers(IPO) in 2007 and 2008 respectively.

          Amalgamation
          Amalgamation is the process of bringing two or more different business units into joint ownership.

          Franchising
          Franchising is the granting of production rights and operations to another firm or individual to produce similar goods under the name of the original business at a fee.

          A Sole proprietorship is formed through an application and acquisition of trading license from a local authority

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