Business Organization – Sole Proprietorship and Partnership

Business Organisation

Types and Basic Features of Business Enterprises

The types of business enterprises include sole-proprietorship, partnership, Joint Stock Companies (private and public), cooperatives, Public Corporations and Joint ventures.

Sole Proprietorship

Meaning of Sole Proprietorship

The Sole proprietorship is an unincorporated business organization owned by one person, who provides the capital, runs the business and undertakes the risks and profits of the business alone. It is popularly referred to as one-man business, and also the oldest and the most common type of business organization.

Examples of Sole proprietorship are tailors, barbers, hairdressers etc.

Characteristics of Sole Proprietorship

1. Ownership:It is owned and run by one person, though he may have employees.
2. Source of capital:He provides the capital required for starting and running the business.
3. Life span:The life span of the business depends on the owner. The business can fold up anytime.
4. Liability:The sole proprietor has unlimited liability. This means that if the business liquidates, the owner of the business may have to lose his private assets to offset the debt of the business.

Advantages or Merits of Sole Proprietorship

1. Decision-making: Quick decisions are easily taken by the sole proprietor alone without the consent of other workers in the organization.
2. Capital required: the sole proprietorship requires very small capital to set up.
3. Establishment:it is very easy to establish because of the small capital requirement.
4. Profits: all the profits derived from the business belong to the owner of the business because the capital outlay came from him.

Disadvantages or Demerits of Sole Proprietorship

1. Problem of continuity:the death of the owner may cause the business to die with him, especially when there is no successor to take over from him.
2. Unlimited liability: he bears the entire risk of the business alone. If the business fails, he bears the entire loss and his personal belongings have to be sold to pay his creditors.
3. Lack of specialization: the proprietor is personally involved in every section of the business. He works very hard. He does not usually take leave. He therefore tends to over work himself to the detriment of health.

Sources of Funds for a Sole Trader

• Personal saving
• Borrowing particularly from friends and relatives
• Credit purchase from manufacturers or wholesalers
• Taking loan from bank
• Ploughed back profit

The Partnership

Definition of Partnership

Partnership is a type of business organization formed by an association of two to twenty persons having similar interests, and by agreement (usually legal) decide and plan to run a business together with the sole aim of making profit.

Examples of partnership in Nigeria are Diya Fatimilehin & Co (Estate Firm), Oni & Sons Nigeria Ltd etc.

Formation of Partnership

A partnership is usually governed by a written agreement which is usually drawn up by a legal practitioner. The agreement is called a deed of partnership (made for the internal activities of the business) or articles of partnership (deals with the provision for the business relationship with the outsiders)

The agreement contains the following rules and regulations;

1. The names of the partners
2. The name of the firm.
3. The nature of the business formed
4. The rights and duties of each partner
5. The proportion of the capital to be provided and whether interest should be paid.
6. The signatories on the cheques
7. The sharing of profits and provision of drawings
8. Duration of partnership
9. The circumstances which can dissolve the partnership
10. The payment of partners’ salary
11. The method of admission of new partners
12. The objective of the firm.

Features of Partnership 

1. Ownership:the number of partners ranges from two to twenty for most business, but two to ten for banking business.
2. Life span:the life span of partnership depends on the agreement signed by the partners involved.
3. Management: the business has no board of directors. The active partners control and manage the business.
4. Objectives: the main objective of partnership is to make profit.
5. Legal entity: it is not a legal entity as the partners do not have a separate identity from the business.

Types of Partnership

There are two types of partnership, these are:

Ordinary Partnership

In this type of partnership, all the partners have equal responsibility in the management of the business and are generally liable for any loss or risk. They have equal powers, unlimited liabilities, take active part, and profits are shared equally.

Limited Partnership

In this, the debts of any member are restricted to the amount of money contributed in running the business. Not all the partners take active part in the management of the business but there must be a member who takes part in the running of the business and also bears the risk.

Types/Kinds of Partners

1. Nominal or Quasi-Partner: He contributes only his name but does not take active part in the running of business. His influence in the business can give access to certain privileges. He is entitled to the profit of the business as stated in the deeds of partnership.
2. Sleeping or Dormant Partner: He contributes capital but takes no part in the conduct and management of the business. He takes part in the profit or the loss of the business as specified in the partnership agreement.
3. Active Partner: This is the partner that takes part in the formation, financing and management of the business. Salary is paid to active partner who serves as the managing director of the business if it is indicated in the partnership deed.

Advantages or Merits of Partnership

1. Joint decision making: When two or more partners put heads together and take joint decisions on the enterprise, better results are derived.
2. There is privacy: There is privacy in conducting business affairs since it is not required to make its accounts available for public inspection.
3. Greater Continuity: The death of a partner may not lead to a total dissolution of the business since the other partners can still go ahead.
4. Loan facilities: A partnership can easily obtain loan from creditors since they are jointly liable.
5. Personal Contact: There is still an element of personal contact with both employees and customers. This is because of the relatively small size of the business when compared with the limited liability companies.

Disadvantages or Demerits of Partnership

1. Disagreement between partners can end the business.
2. The partners especially in ordinary partnership can have unlimited liability in the case of liquidation of business.
3. It may be difficult to manage because different opinion of a partner can hinder the decision making in the business.
4. It experiences limited growth since it has no legal right to obtain more capital through share.
5. Business is not a legal entity because it cannot stand as a person in the court of law.

Sources of Finance for Partnership

1. Contribution from members;
2. Borrowing from bank;
3. Ploughed back profit;
4. Borrowing private individuals;
5. Sale of business assets.

EVALUATION (Post ANSWER BELOW FOR EVALUATION AND DISCUSSION)

1. What do you understand by‘sole proprietorship’?
2. What are the merits and demerits of partnership?
3. Compare a sole proprietorship with partnership.
4. Mention types of partners you know.