TEST BANK
F2 BUSINESS STUDIES NOTES @2019
Page 1
,FORM OF BUSINESS UNITS
A business unit is an organization formed by one or more people with a view of engaging in a profitable activity.
The following are some of the business units:
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.
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
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.
Owners savings- The main source of capital
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 sole proprietor remains solely responsible for the success or failure
of the business. 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.
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.
F2 BUSINESS STUDIES NOTES @2019
Page 2
, 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. 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.
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:
(a) According to the type/liability of partners
(b) According to the period of operation
(c) 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.
F2 BUSINESS STUDIES NOTES @2019
Page 3
, (c) According to their Activity
Under this mode of classification, partnerships can either be:
i) Trading partnerships
This is a partnership whose main activity is processing, manufacturing, construction or purchase and sale of goods.
ii) 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.
Types of partners
Partners may be classified according to;
i) Role played by the partners
a) Active partner; He is also known as acting partner as he plays an active part in the day-to-day running of the
business.
b) 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;
a) General partner; He/she has unlimited liabilities.
b) Limited partner; He/she has limited liabilities
iii) Ages of partners
a) Major partner; This is a partner who is 18 years and above.
He is responsible for all debts of the business.
b) 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
a) 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.
b) Real partner; He/she is one who contributes capital to the business.
-Other types of partners include secret partners, retiring partners and incoming partners
i) 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.
ii) 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.
iii) Incoming partner; Is one who is admitted to an existing partnership?
Formation
-People who want to form a partnership must come together and agree on how the proposed business will be run to avoid future
misunderstanding.
-The agreement can either be oral (by use of mouth) or within down. A written agreement is called a partnership deed.
-The contents of the partnership deed vary from one partnership to another depending on the nature of the business, but generally it
contains;
a) Name, location and address of the business
b) Name, address and occupation of the partners
c) The purpose of the business
d) Capital to be contributed by cash partner
F2 BUSINESS STUDIES NOTES @2019
Page 4
F2 BUSINESS STUDIES NOTES @2019
Page 1
,FORM OF BUSINESS UNITS
A business unit is an organization formed by one or more people with a view of engaging in a profitable activity.
The following are some of the business units:
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.
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
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.
Owners savings- The main source of capital
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 sole proprietor remains solely responsible for the success or failure
of the business. 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.
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.
F2 BUSINESS STUDIES NOTES @2019
Page 2
, 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. 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.
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:
(a) According to the type/liability of partners
(b) According to the period of operation
(c) 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.
F2 BUSINESS STUDIES NOTES @2019
Page 3
, (c) According to their Activity
Under this mode of classification, partnerships can either be:
i) Trading partnerships
This is a partnership whose main activity is processing, manufacturing, construction or purchase and sale of goods.
ii) 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.
Types of partners
Partners may be classified according to;
i) Role played by the partners
a) Active partner; He is also known as acting partner as he plays an active part in the day-to-day running of the
business.
b) 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;
a) General partner; He/she has unlimited liabilities.
b) Limited partner; He/she has limited liabilities
iii) Ages of partners
a) Major partner; This is a partner who is 18 years and above.
He is responsible for all debts of the business.
b) 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
a) 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.
b) Real partner; He/she is one who contributes capital to the business.
-Other types of partners include secret partners, retiring partners and incoming partners
i) 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.
ii) 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.
iii) Incoming partner; Is one who is admitted to an existing partnership?
Formation
-People who want to form a partnership must come together and agree on how the proposed business will be run to avoid future
misunderstanding.
-The agreement can either be oral (by use of mouth) or within down. A written agreement is called a partnership deed.
-The contents of the partnership deed vary from one partnership to another depending on the nature of the business, but generally it
contains;
a) Name, location and address of the business
b) Name, address and occupation of the partners
c) The purpose of the business
d) Capital to be contributed by cash partner
F2 BUSINESS STUDIES NOTES @2019
Page 4
