Business Organization (Sole proprietorship and partnership)

WEEK: 2

TOPIC: BUSINESS ORGANIZATION

SUB-TOPIC: SOLE PROPRIETORSHIP AND PARTNERSHIP

Meaning of Sole Proprietorship

A sole proprietorship is a form of business organisation owned, financed, controlled, and managed by one person, who bears all the risks and enjoys all the profits of the business.

Examples in Nigeria:
Provision store, barber shop, tailoring shop, small farm, roadside food seller.

Features / Characteristics of Sole Proprietorship

1. Single ownership – Owned by one person
2. Easy to set up – Little capital and few legal requirements
3. Unlimited liability – Owner is personally responsible for all debts
4. Personal control – Owner makes all decisions
5. Profit motive – Owner enjoys all profits
6. No separate legal entity – Business and owner are the same
7. Small size – Usually operates on a small scale

Source s of Capital to a sole proprietorship

• Personal savings
• Loans from friends and relatives
• Cooperative societies
• Bank loans (small scale)

Advantages of Sole Proprietorship

1. Easy formation and dissolution
2. Quick decision making
3. Close contact with customers
4. High level of secrecy
5. All profits belong to the owner
6. Personal attention to business

Disadvantages of Sole Proprietorship

1. Limited capital
2. Unlimited liability
3. Limited managerial ability
4. Lack of continuity (business may end if owner dies)
5. Heavy workload on the owner
6. Limited expansion

Reasons for the Prevalence of Sole Proprietorship in Nigeria

1. Low level of capital requirement
2. High unemployment
3. Easy to establish
4. Low level of technology
5. Desire for independence
6. Limited access to credit facilities

PARTNERSHIP

Meaning of Partnership

A partnership is a form of business organisation in which two or more persons (between 2 and 20, except for banks where it is 2–10) agree to contribute capital, share profits and losses, and jointly manage a business with the aim of making profit.

Definition of Partnership

According to the Partnership Act of 1890, a partnership is “the relationship which subsists between persons carrying on a business in common with a view to profit.”

Features / Characteristics of Partnership

1. Two or more persons – Minimum of 2 and maximum of 20 partners
2. Agreement or deed – Partnership is based on an agreement (oral or written)
3. Joint ownership – Business is jointly owned by partners
4. Profit and loss sharing – Shared according to agreement
5. Unlimited liability – Partners are personally liable for business debts
6. Mutual agency – Each partner can act on behalf of others
7. No separate legal entity – Business and partners are not legally separate

Types of Partners

1. Active (Managing) Partner – Takes part in daily management
2. Sleeping (Dormant) Partner – Contributes capital but does not manage
3. Limited Partner – Liability limited to capital contributed
4. Nominal Partner – Name used but does not invest capital
5. Minor Partner – Under 18; shares profit but not liable for losses

Sources of Capital for a partnership business

• Contributions from partners
• Bank loans
• Retained profits
• Cooperative societies

Advantages of Partnership

1. More capital than sole proprietorship
2. Division of labour and specialization
3. Better decision making
4. Sharing of risks and losses
5. Easy to form
6. Flexibility in management

Disadvantages of Partnership

1. Unlimited liability of partners
2. Possibility of disagreement among partners
3. Limited capital compared to companies
4. Lack of continuity (death or withdrawal of a partner)
5. Delay in decision making
6. No secrecy

Partnership Deed

A partnership deed is a written agreement stating the terms and conditions governing the partnership.

Contents of a Partnership Deed

• Name of the business
• Names and addresses of partners
• Capital contribution of each partner
• Profit and loss sharing ratio
• Duties and rights of partners
• Procedure for admission or retirement
• Duration of the partnership

Reasons for the Growth of Partnership in Nigeria

1. Pooling of resources
2. Need for shared skills and ideas
3. Expansion beyond sole proprietorship
4. Sharing of risks
5. Ease of formation