COMMERCE: FORM FOUR: Topic 3 - BUSINESS UNITS

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TOPIC 3: BUSINESS UNITS

Business Units

The Term Business Units

Explain the term business units

A business organisation is one unit of control which is engaged in the production or distribution of any commodity.business organisation are of business nature from the point of view of ownership,control and size.

It comprise the following

1. sole proprietorship
2. partnership
3. joint stock companies
4. cooperative

Meaning of Sole trading; Partnership; Joint Stock Company; Public Enterprise Parastatals; Cooperative Organization

Define the following business units: Sole trading; Partnership; Joint stock company; Public enterprise parastatals; Cooperative organization

A sole proprietorship, also known as the sole trader or simply a proprietorship, is a type of business entity that is owned and run by one natural person and in which there is no legal distinction between the owner and the business.

A partnership is an arrangement in which two or more individuals share theprofitsandliabilitiesof a business venture. Various arrangements are possible: all partners might share liabilities and profits equally, or some partners may havelimited liability. Not every partner is necessarily involved in the management and day-to-day operations of the venture. In some jurisdictions, partnerships enjoy favorable tax treatment relative tocorporations.

A joint stock company is an organization that falls between the definitions of a partnership and corporation in terms ofshareholderliability. In the United States, shareholders of joint stock companies haveunlimited liabilityfor company debts, but in the United Kingdom, shareholder liability is limited to thenominal valueof shares held by each shareholder.

The shares of a joint stock company are transferable, so for a public joint stock company, the shares may be traded on a registered exchange, but for a private joint stock company, they are transferable between private parties.

A state-owned enterprise (SOE), also called state-owned company, state-owned entity, state enterprise, publicly owned corporation, government business enterprise, crown corporation, government-owned corporation, commercial government agency, public sector undertaking, or parastatal, is a legal entity that undertakes commercial activities on behalf of an owner, the government.

The legal status of SOEs varies from being a part of the government to being stock companies with the state as a regular stockholder. The defining characteristics of SOEs are that they have a distinct legal form and are established to operate in commercial affairs. While they may also have public policy objectives, SOEs should be differentiated from other forms of government agencies or state entities established to pursue purely nonfinancial objectives.

Government-owned corporations are common withnatural monopoliesand infrastructure, such as railways and telecommunications, strategic goods and services (mail, weapons), natural resources and energy, politically sensitive business, broadcasting, demerit goods (alcohol), and merit goods (healthcare).

How Each Business Units is Formed and Organized

Point out how each business units is formed and organized

Sole proprietorship is the simplest and easiest to form. It does not require legal recognition and attendant formalities. This form is the most popular form in India due to the distinct advantages it offers. William R. Basset opines that “The one-man control is the best in the world if that man is big enough to manage everything”.

The main features of proprietorship form of business can be listed as follows:

1. One Man Ownership: In proprietorship, only one man is the owner of the enterprise.
2. No Separate Business Entity: No distinction is made between the business concern and the proprietor. Both are one and the same.
3. No Separation between Ownership and Management: In proprietorship, management rests with the proprietor himself/herself. The proprietor is a manager also.
4. Unlimited Liability: Unlimited liability means that in case the enterprise incurs losses, the private property of the proprietor can also be utilized for meeting the business obligations to outside parties.
5. All Profits or Losses to the Proprietor: Being the sole owner of the enterprise, the proprietor enjoys all the profits earned and bears the full brunt of all losses incurred by the enterprise.
6. Less Formalities: A proprietorship business can be started without completing much legal formalities. There are some businesses that too can be started simply after obtaining necessary manufacturing licence and permits.

PARNERSHIP is a relationship between persons carrying on a business in common with a view of profit.The persons who own the partnership business are individually called ‘partners’ and collectively they are called as ‘firm’ or ‘partnership firm’. The name under which partnership business is carried on is called ‘Firm Name’. In a way, the firm is nothing but an abbreviation for partners.

Based on the above definitions, we can now list the main features of partnership form of business ownership/organisation in a more orderly manner as follows:

1. More Persons: As against proprietorship, there should be at least two persons subject to a maximum of ten persons for banking business and twenty for non-banking business to form a partnership firm.
2. Profit and Loss Sharing: There is an agreement among the partners to share the profits earned and losses incurred in partnership business.
3. Contractual Relationship: Partnership is formed by an agreement-oral or written-among the partners.
4. Existence of Lawful Business: Partnership is formed to carry on some lawful business and share its profits or losses. If the purpose is to carry some charitable works, for example, it is not regarded as partnership.
5. Utmost Good Faith and Honesty: A partnership business solely rests on utmost good faith and trust among the partners.
6. Unlimited Liability: Like proprietorship, each partner has unlimited liability in the firm. This means that if the assets of the partnership firm fall short to meet the firm’s obligations, the partners’ private assets will also be used for the purpose.
7. Restrictions on Transfer of Share: No partner can transfer his share to any outside person without seeking the consent of all other partners.
8. Principal-Agent Relationship: The partnership firm may be carried on by all partners or any of them acting for all. While dealing with firm’s transactions, each partner is entitled to represent the firm and other partners. In this way, a partner is an agent of the firm and of the other partners.

JOINT STOCK COMPANY

A Joint Stock Company is a voluntary association of persons to carry on the business. It is an association of persons who contribute money which is called capital for some common purpose. These persons are members of the company. The proportion of capital to which each member is entitled is his share and every member holding such share is called shareholders and the capital of the company is known as share capital. The Companies Act 1956 defines a joint stock company as an artificial person created by law, having separate legal entity from its owner with perpetual succession and a common seal. Shareholders of Joint Stock Company have limited liability i.e liability limited by guarantee or shares. Shares of such company are easily transferable. From the above definition the following characteristics of a Joint Stock Company can be easily identified:

The Advantages and Disadvantages of Business Units

Indicate the advantages and disadvantages of business units

The various advantages that proprietorship form of business offers are as follows:

1. Simple Form of Organisation: Proprietorship is the simplest form of organisation. The entrepreneur can start his/her enterprise after obtaining license and permits. There is no need to go through the legal formalities. For starting a small enterprise, no formal registration is statutorily needed.
2. Owner’s Freedom to Take Decisions: The owner, i.e. the proprietor is free to make all decisions and reap all the fruits of his labour. There is no other person who can interfere or weigh him down.
3. High Secrecy: Secrecy is another major advantage offered by proprietorship. This is because the whole business is handled by the proprietor himself and, as such, the business secrets are known to him only. Added to it, the proprietor is not bound to reveal or publish his accounts. In present day business atmosphere, the less a competitor knows about one’s business, better off one is. What the competitors can make is guesstimates only.
4. Tax Advantage: As compared to other forms of ownership, the proprietorship form of ownership enjoys certain tax advantages. For example, a proprietor’s income is taxed only once while corporate income is, at occasions taxed twice, say, double taxation.
5. Easy Dissolution: In proprietorship business, the entrepreneur is all in all. As there are no co-owners or partners, therefore, there is no scope for the difference of opinion in the case the proprietor/entrepreneur-wants to dissolve the business. It is due to the easy formation and dissolution, proprietorship is often used to test the business ideas.

Pro prietorship form of ownership suffers from some disadvantages also.

1. Limited Resources: A proprietor has limited resources at his/her command. The proprietor mainly relies on his/her funds and savings and, to a limited extent, borrowings from relatives and friends. Thus, the scope for raising funds is highly limited in proprietorship. This, in turn’ deters the expansion and development of an enterprise.
2. Limited Ability: Proprietorship is characterised as one-man show. One man may be expert in one or two areas, but not in all areas like production, finance, marketing, personnel, etc. Then, due to the lack of adequate and relevant knowledge, the decisions taken by him be imbalanced.
3. Unlimited Liability: Proprietorship is characterised by unlimited liability also. It means that in case of loss, the private property of the proprietor will also be used to clear the business obligations. Hence, the proprietor avoid taking risk.
4. Limited Life of Enterprise Form: The life of a proprietary enterprise depends solely upon the life of the proprietor. When he dies or becomes insolvent or insane or permanently incapacitated, there is very likelihood of closure of enterprise. Say, enterprise also dies with its proprietor

The various advantages that partnership form of business offers are as follows:

1. Easy Formation: Partnership is a contractual agreement between the partners to run an enterprise. Hence, it is relatively ease to form. Legal formalities associated with formation are minimal. Though, the registration of a partnership is desirable, but not obligatory.
2. More Capital Available: We have just seen that sole proprietorship suffers from the limitation of limited funds. Partnership overcomes this problem, to a great extent, because now there are more than one person who provide funds to the enterprise. It also increases the borrowing capacity of the firm. Moreover, the lending institutions also perceive less risk in granting credit to a partnership than to a proprietorship because the risk of loss is spread over a number of partners rather than only one. .
3. Combined Talent, Judgement and Skill: As there are more than one owners in partnership, all the partners are involved in decision making. Usually, partners are pooled from different specialised areas to complement each other. For example, if there are three partners, one partner might be a specialist in production, another in finance and the third in marketing. This gives the firm an advantage of collective expertise for taking better decisions. Thus, the old maxim of “two heads being better than one” aptly applies to partnership.
4. Diffusion of Risk: You have just seen that the entire losses are borne by the sole proprietor only but in case of partnership, the losses of the firm are shared by all the partners as per their agreed profit-sharing ratios. Thus, the share of loss in case of each partner will be less than that in case of proprietorship.
5. Flexibility: Like proprietorship, the partnership business is also flexible. The partners can easily appreciate and quickly react to the changing conditions. No giant business organisation can stifle so quick and creative responses to new opportunities.
6. Tax Advantage: Taxation rates applicable to partnership are lower than proprietorship and company forms of business ownership.

In spite of above advantages, there are certain drawbacks also associated with the partnership form of business organisation.

1. Unlimited Liability: In partnership firm, the liability of partners is unlimited. Just as in proprietorship, the partners’ personal assets may be at risk if the business cannot pay its debts.
2. Divided Authority: Sometimes the earlier stated maxim of two heads better than one may turn into “too many cooks spoil the broth.” Each partner can discharge his responsibilities in his concerned individual area. But, in case of areas like policy formulation for the whole enterprise, there are chances for conflicts between the partners. Disagreements between the partners over enterprise matters have destroyed many a partnership.
3. Lack of Continuity: Death or withdrawal of one partner causes the partnership to come to an end. So, there remains uncertainty in continuity of partnership.
4. Risk of Implied Authority: Each partner is an agent for the partnership business. Hence, the decisions made by him bind all the partners. At times, an incompetent partner may lend the firm into difficulties by taking wrong decisions. Risk involved in decisions taken by one partner is to be borne by other partners also. Choosing a business partner is, therefore, much like choosing a marriage mate life partner.