TOPIC 1: FORMS OF BUSINESS UNITS
TOPIC OBJECTIVES
BUSINESS UNITS
A business unit is an organization formed by one or more people with a view
of engaging in a profitable activity.
Business units are generally classified into private or public sector business
units’ i.e
Note: Private sector comprises of business organizations owned by private
individuals while the public sector comprises business organizations owned
by the government.
● 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 e.t.c
and for direct services e.g. cobblers saloons e.t.c
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.
1
, 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
Advantages of sole proprietorship
● The capital required to start the business is small hence anybody who can
spare small amounts of money can start one.
● Few formal/legal procedures are required to set up this business
2
,● Decision making and implementation is fast because the proprietor does
not have to consult anybody
● The trader has close and personal contact with customers. This helps
them in knowing exactly what the customers need and hence satisfying
those needs
● 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.
● The trader is accountable to him/herself
● A sole trader is able to keep the top secrets of the business operations
● He/she enjoys all the profit
● A sole proprietorship is flexible. One can change the nature or even the
location of business as need arises.
Disadvantages of sole proprietorship
● 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
● There is insufficient capital for expansion because of scarce resources and
lack of access to other sources
● He/she is overworked and has no time for recreation.
● There is lack of continuity in the sole proprietorship i.e the business is
affected by sickness or death of the owner.
● 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.
● 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.
● Due to the size of the business, sole proprietorships do not attract and
retain highly qualified and trained personnel.
3
, 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.
4
TOPIC OBJECTIVES
BUSINESS UNITS
A business unit is an organization formed by one or more people with a view
of engaging in a profitable activity.
Business units are generally classified into private or public sector business
units’ i.e
Note: Private sector comprises of business organizations owned by private
individuals while the public sector comprises business organizations owned
by the government.
● 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 e.t.c
and for direct services e.g. cobblers saloons e.t.c
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.
1
, 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
Advantages of sole proprietorship
● The capital required to start the business is small hence anybody who can
spare small amounts of money can start one.
● Few formal/legal procedures are required to set up this business
2
,● Decision making and implementation is fast because the proprietor does
not have to consult anybody
● The trader has close and personal contact with customers. This helps
them in knowing exactly what the customers need and hence satisfying
those needs
● 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.
● The trader is accountable to him/herself
● A sole trader is able to keep the top secrets of the business operations
● He/she enjoys all the profit
● A sole proprietorship is flexible. One can change the nature or even the
location of business as need arises.
Disadvantages of sole proprietorship
● 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
● There is insufficient capital for expansion because of scarce resources and
lack of access to other sources
● He/she is overworked and has no time for recreation.
● There is lack of continuity in the sole proprietorship i.e the business is
affected by sickness or death of the owner.
● 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.
● 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.
● Due to the size of the business, sole proprietorships do not attract and
retain highly qualified and trained personnel.
3
, 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.
4
