CHAPTER FIVE
FORMS OF BUSINESS ORGANIZATIONS
Business Units
A business unit is an organization formed by one or more people with a view of engaging in a profitable
activity.
Note: Private sector comprises of business organizations owned by private individuals while the public sector
comprises business organizations owned by the government
1. SOLE PROPRIETORSHIP
This is a business enterprise owned by one person who is called a sole trader or a sole proprietor. It is the most
common form of business unit and usually found in retail trade e.g. in small shops, kiosks, agriculture etc. and for
direct services e.g. cobblers saloons etc.
Characteristics/Features
The business is owned by one person
The capital is contributed by the owner and is usually small. The main source is from his savings and other sources
can be from friends, bank or getting an inheritance
The owner enjoys all the profits alone and also suffers the losses alone
The owner is personally responsible for the management of the business and sometimes he is assisted by members
of his family or a few employees. He remains responsible for the success or failure of his/her business.
The sole proprietor has unlimited liability meaning that incase of failure to meet debts, his creditor can claim his
personal property
There are very few legal requirements to start the business unit.
Sole proprietorship is flexible; it is very easy to change the location or the nature of business.
Formation
The formation of a sole proprietorship is very simple. Few legal formalities are required i.e. to start a sole
proprietorship, one need only to raise the capital required and then apply for a trading license to operate the business
small fee is paid and the trade license issued.
Sources of capital
The amount of capital required to start a sole proprietorship is small compared to other forms of business
organizations. The main source of capital is the Owners savings. Additional capital may however be raised from the
following;
Borrowing from friends, banks and other money lending institutions such as industries and commercial
Development corporation(ICDC)and Kenya industrial estates
Inheritance
Personal savings
Getting goods on credit
Getting goods on hire purchase
Leasing or renting out one’s properties
Donations from friends and relatives
Ploughing back profit.
Management
The management of this kind of a business is under one person. The owner may however employ other people or get
assistance from family members to run the business.
Some sole proprietorship may be big business organizations with several departments and quite a number of
employees. However, the sole proprietor remains solely responsible for the success of failure of the business
COMMERCE COURSE NOTES CHAPTER 5 – FORMS OF BUSINESS ORGANIZATIONS PREPARED BY MR. ANTONY AMBIA Page 1
,Advantages of sole proprietorship
1. The capital required to start the business is small hence anybody who can spare small amounts of money
can start one.
2. Few formal/legal procedures are required to set up this business
3. Decision making and implementation is fast because the proprietor does not have to consult anybody
4. The trader has close and personal contact with customers. This helps them in knowing exactly what the
customers need and hence satisfying those needs
5. A sole proprietor is able to assess the credit-worthiness of his or her customers because of close personal
relationship. Extending credit to a few carefully selected customers reduce the probability of bad debts.
6. The trader is accountable to him/herself
7. A sole trader is able to keep the top secrets of the business operations
8. He/she enjoys all the profit
9. A sole proprietorship is flexible. One can change the nature or even the location of business as need arises.
Disadvantages of sole proprietorship
1. Has unlimited liability. This means that if the assets available in the business are not enough to pay all the
business debts the personal property of the owner such as house will be sold to meet the debts
2. There is insufficient capital for expansion because of scarce resources and lack of access to other sources
3. He/she is overworked and has no time for recreation.
4. There is lack of continuity in the sole proprietorship i.e. the business is affected by sickness or death of the
owner.
5. A sole proprietorship may not benefit from advantages realized by large scale enterprises (economies of
large scale) such as access to loan facilities and large trade discounts.
6. Lack of specialization in the running of the business may lead to poor performance. This is because one
person cannot manage all aspects of the business effectively. One maybe a good salesman for examples but
a poor accountant.
7. Due to the size of the business, sole proprietorships do not attract and retain highly qualified and trained
personnel.
Dissolution of sole proprietorships
Dissolution refers to the termination of the legal life of a business. The following circumstances may lead to the
dissolution of a sole proprietorship:
Death or insanity of the owner.
Transfer of the business to another person- this transfers the rights and obligations of the business to the
new owner.
Bankruptcy of the owner- this means that the owner lacks the financial capability to run the business.
The owner voluntarily decides to dissolve the business e.g. due to continued loss making.
Passing of a law which renders the activities of the business illegal.
The expiry of the period during which the business was meant to operate.
2. PARTNERSHIP
This is a relationship between persons who engage in a business with an aim of making profits/ an association of
two or more persons who run a business as co-owners. The owners are called Partners.
It is owned by a minimum of 2 and a maximum of 20 except for partnership who provide professional services e.g.
medicine and law which have a maximum of 50 persons.
Characteristics of partnership
Capital is contributed by the partners themselves.
Partnership has limited life that is it may end anytime because of the death, bankruptcy or withdrawal of
partners.
Each partner acts as an agent of the firm with authority to enter into contracts.
Partners are co-owners of a business, having an interest or claim in the business.
Responsibility, profit and losses are shared on an agreed basis.
All partners have equal right to participate in the management of the business. This right arises from the
interest or claim of the partner as a co-owner of the business.
Types of partnership
Partnerships can be classified/ categorized in either of the following ways:
1. According to the type/liability of partners
COMMERCE COURSE NOTES CHAPTER 5 – FORMS OF BUSINESS ORGANIZATIONS PREPARED BY MR. ANTONY AMBIA Page 2
, 2. According to the period of operation
3. According to their activities.
(a) According to the type or liability of partners
Under this classification, partnerships can either be;
i) General/ordinary partnership- Here all members have unlimited liability which means in case a partnership is
unable to pay its debts, the personal properties of the partner will be sold off to pay the debts.
ii) Limited partnerships- In limited partnership members have limited liabilities where liability or responsibility is
restricted to the capital contributed.
This means that incase the partnership cannot pay its debts; the partners only lose the amount of capital each has
contributed to the business and not their personal property. However, there must be one partner whose liabilities are
unlimited.
(b) According to the period/duration of operation
When partnerships are classified according to duration of operation, they can either be;
i. Temporary partnership - These are partnerships that are formed to carry out a specific task for a specific time
after which the business automatically dissolves.
ii. Permanent partnerships - These are partnerships formed to operate indefinitely. They are also called a
partnership at will.
(c) According to their Activity- Under this mode of classification, partnerships can either be:
1. Trading partnerships - This is a partnership whose main activity is processing, manufacturing,
construction or purchase and sale of goods.
2. Non – trading partnerships - This is a partnership whose main activity is to offer services such as legal,
medical or accounting services to members of the public.
Classification of partners
Partners may be classified according to;
i) Role played by the partners
1. Active partner; He is also known as acting partner as he plays an active part in the day-to-day running of
the business.
2. Sleeping/dormant partner; He does not participate in the management of the partnership business.
Although he invests his capital in the partnership, his profit is lower as he is not active. He is also referred
to as passive or silent partner.
ii) Liabilities of the partners for the business debts;
1. General partner; He/she has unlimited liabilities.
2. Limited partner; He/she has limited liabilities
iii) Ages of partners
1. Major partner; this is a partner who is 18 years and above. He is responsible for all debts of the business.
2. Minor partner; this is a partner who has not attained the age of 18 years but has been admitted with the
consent of other partners. Once he reaches 18 years, he then decides if he wants to be a partner or not.
Before he attains the age of 18, he takes part in the sharing of profits but does not take part in the
management of the business.
iv)Capital contribution
1. Nominal/Quasi partner; He does not contribute capital but allows the business to use his/ her name as a
partner; for the purpose of influencing customers or for prestige. He/she can also be a person who was once
a partner and has retired in form of a loan. This loan carries interest at an agreed rate. The quasi partner
shares the profit of the business as a reward for using his/her name.
2. Real partner; He/she is one who contributes capital to the business.
Other types of partners include secret partners, retiring partners and incoming partners
1. A secret partner; is one who actively participates in the management of the firm but is not disclosed to the
public. In most cases secret partners are also limited partners.
2. A retiring partner; Also known as outgoing partner is one who is leaving a partnership. He may retire with
the consent of all the other partners or according to a previous agreement.
3. Incoming partner; is one who is admitted to an existing partnership.
Formation
COMMERCE COURSE NOTES CHAPTER 5 – FORMS OF BUSINESS ORGANIZATIONS PREPARED BY MR. ANTONY AMBIA Page 3
FORMS OF BUSINESS ORGANIZATIONS
Business Units
A business unit is an organization formed by one or more people with a view of engaging in a profitable
activity.
Note: Private sector comprises of business organizations owned by private individuals while the public sector
comprises business organizations owned by the government
1. SOLE PROPRIETORSHIP
This is a business enterprise owned by one person who is called a sole trader or a sole proprietor. It is the most
common form of business unit and usually found in retail trade e.g. in small shops, kiosks, agriculture etc. and for
direct services e.g. cobblers saloons etc.
Characteristics/Features
The business is owned by one person
The capital is contributed by the owner and is usually small. The main source is from his savings and other sources
can be from friends, bank or getting an inheritance
The owner enjoys all the profits alone and also suffers the losses alone
The owner is personally responsible for the management of the business and sometimes he is assisted by members
of his family or a few employees. He remains responsible for the success or failure of his/her business.
The sole proprietor has unlimited liability meaning that incase of failure to meet debts, his creditor can claim his
personal property
There are very few legal requirements to start the business unit.
Sole proprietorship is flexible; it is very easy to change the location or the nature of business.
Formation
The formation of a sole proprietorship is very simple. Few legal formalities are required i.e. to start a sole
proprietorship, one need only to raise the capital required and then apply for a trading license to operate the business
small fee is paid and the trade license issued.
Sources of capital
The amount of capital required to start a sole proprietorship is small compared to other forms of business
organizations. The main source of capital is the Owners savings. Additional capital may however be raised from the
following;
Borrowing from friends, banks and other money lending institutions such as industries and commercial
Development corporation(ICDC)and Kenya industrial estates
Inheritance
Personal savings
Getting goods on credit
Getting goods on hire purchase
Leasing or renting out one’s properties
Donations from friends and relatives
Ploughing back profit.
Management
The management of this kind of a business is under one person. The owner may however employ other people or get
assistance from family members to run the business.
Some sole proprietorship may be big business organizations with several departments and quite a number of
employees. However, the sole proprietor remains solely responsible for the success of failure of the business
COMMERCE COURSE NOTES CHAPTER 5 – FORMS OF BUSINESS ORGANIZATIONS PREPARED BY MR. ANTONY AMBIA Page 1
,Advantages of sole proprietorship
1. The capital required to start the business is small hence anybody who can spare small amounts of money
can start one.
2. Few formal/legal procedures are required to set up this business
3. Decision making and implementation is fast because the proprietor does not have to consult anybody
4. The trader has close and personal contact with customers. This helps them in knowing exactly what the
customers need and hence satisfying those needs
5. A sole proprietor is able to assess the credit-worthiness of his or her customers because of close personal
relationship. Extending credit to a few carefully selected customers reduce the probability of bad debts.
6. The trader is accountable to him/herself
7. A sole trader is able to keep the top secrets of the business operations
8. He/she enjoys all the profit
9. A sole proprietorship is flexible. One can change the nature or even the location of business as need arises.
Disadvantages of sole proprietorship
1. Has unlimited liability. This means that if the assets available in the business are not enough to pay all the
business debts the personal property of the owner such as house will be sold to meet the debts
2. There is insufficient capital for expansion because of scarce resources and lack of access to other sources
3. He/she is overworked and has no time for recreation.
4. There is lack of continuity in the sole proprietorship i.e. the business is affected by sickness or death of the
owner.
5. A sole proprietorship may not benefit from advantages realized by large scale enterprises (economies of
large scale) such as access to loan facilities and large trade discounts.
6. Lack of specialization in the running of the business may lead to poor performance. This is because one
person cannot manage all aspects of the business effectively. One maybe a good salesman for examples but
a poor accountant.
7. Due to the size of the business, sole proprietorships do not attract and retain highly qualified and trained
personnel.
Dissolution of sole proprietorships
Dissolution refers to the termination of the legal life of a business. The following circumstances may lead to the
dissolution of a sole proprietorship:
Death or insanity of the owner.
Transfer of the business to another person- this transfers the rights and obligations of the business to the
new owner.
Bankruptcy of the owner- this means that the owner lacks the financial capability to run the business.
The owner voluntarily decides to dissolve the business e.g. due to continued loss making.
Passing of a law which renders the activities of the business illegal.
The expiry of the period during which the business was meant to operate.
2. PARTNERSHIP
This is a relationship between persons who engage in a business with an aim of making profits/ an association of
two or more persons who run a business as co-owners. The owners are called Partners.
It is owned by a minimum of 2 and a maximum of 20 except for partnership who provide professional services e.g.
medicine and law which have a maximum of 50 persons.
Characteristics of partnership
Capital is contributed by the partners themselves.
Partnership has limited life that is it may end anytime because of the death, bankruptcy or withdrawal of
partners.
Each partner acts as an agent of the firm with authority to enter into contracts.
Partners are co-owners of a business, having an interest or claim in the business.
Responsibility, profit and losses are shared on an agreed basis.
All partners have equal right to participate in the management of the business. This right arises from the
interest or claim of the partner as a co-owner of the business.
Types of partnership
Partnerships can be classified/ categorized in either of the following ways:
1. According to the type/liability of partners
COMMERCE COURSE NOTES CHAPTER 5 – FORMS OF BUSINESS ORGANIZATIONS PREPARED BY MR. ANTONY AMBIA Page 2
, 2. According to the period of operation
3. According to their activities.
(a) According to the type or liability of partners
Under this classification, partnerships can either be;
i) General/ordinary partnership- Here all members have unlimited liability which means in case a partnership is
unable to pay its debts, the personal properties of the partner will be sold off to pay the debts.
ii) Limited partnerships- In limited partnership members have limited liabilities where liability or responsibility is
restricted to the capital contributed.
This means that incase the partnership cannot pay its debts; the partners only lose the amount of capital each has
contributed to the business and not their personal property. However, there must be one partner whose liabilities are
unlimited.
(b) According to the period/duration of operation
When partnerships are classified according to duration of operation, they can either be;
i. Temporary partnership - These are partnerships that are formed to carry out a specific task for a specific time
after which the business automatically dissolves.
ii. Permanent partnerships - These are partnerships formed to operate indefinitely. They are also called a
partnership at will.
(c) According to their Activity- Under this mode of classification, partnerships can either be:
1. Trading partnerships - This is a partnership whose main activity is processing, manufacturing,
construction or purchase and sale of goods.
2. Non – trading partnerships - This is a partnership whose main activity is to offer services such as legal,
medical or accounting services to members of the public.
Classification of partners
Partners may be classified according to;
i) Role played by the partners
1. Active partner; He is also known as acting partner as he plays an active part in the day-to-day running of
the business.
2. Sleeping/dormant partner; He does not participate in the management of the partnership business.
Although he invests his capital in the partnership, his profit is lower as he is not active. He is also referred
to as passive or silent partner.
ii) Liabilities of the partners for the business debts;
1. General partner; He/she has unlimited liabilities.
2. Limited partner; He/she has limited liabilities
iii) Ages of partners
1. Major partner; this is a partner who is 18 years and above. He is responsible for all debts of the business.
2. Minor partner; this is a partner who has not attained the age of 18 years but has been admitted with the
consent of other partners. Once he reaches 18 years, he then decides if he wants to be a partner or not.
Before he attains the age of 18, he takes part in the sharing of profits but does not take part in the
management of the business.
iv)Capital contribution
1. Nominal/Quasi partner; He does not contribute capital but allows the business to use his/ her name as a
partner; for the purpose of influencing customers or for prestige. He/she can also be a person who was once
a partner and has retired in form of a loan. This loan carries interest at an agreed rate. The quasi partner
shares the profit of the business as a reward for using his/her name.
2. Real partner; He/she is one who contributes capital to the business.
Other types of partners include secret partners, retiring partners and incoming partners
1. A secret partner; is one who actively participates in the management of the firm but is not disclosed to the
public. In most cases secret partners are also limited partners.
2. A retiring partner; Also known as outgoing partner is one who is leaving a partnership. He may retire with
the consent of all the other partners or according to a previous agreement.
3. Incoming partner; is one who is admitted to an existing partnership.
Formation
COMMERCE COURSE NOTES CHAPTER 5 – FORMS OF BUSINESS ORGANIZATIONS PREPARED BY MR. ANTONY AMBIA Page 3
