Gregory Kinyae
3.0 THE HOSPITALITY ENTREPRISE
When establishing the hospitality business, the entrepreneur has to make number of major
decisions about the form the business will take.
3.1 Choosing the form of Business Enterprise
This decision must be made before trading can start. It affects the size, scope, financing of the
business and other operational criteria. Based on the type of business chosen, certain formalities
may or may not have to be carried out; those financing the business may or may not be protected
by limited liability and the potential growth and financial resources of the enterprise may also be
determined.
The choice of the form of business enterprise depends on the following factors:
a) Limited liability
This means that the financial liability of each person responsible as a member of the
business is fixed from the onset and limited to a fixed amount. The people investing in a
business know from the beginning the extent of their potential financial loss should the
enterprise fail. This knowledge has motivated many entrepreneurs to protect themselves
through the concept of limited liability.
b) The limited company
This means is a distinct and separate legal entity from the people who own it, which
provides limited liability. The shareholders are liable only to the extent of their value of
the paid shares, i.e. they can only loose the value of their share in the company.
c) Limited partnership
This is a specialized form provided for by the Limited Partnership Act, 1907. Limited
Partnership is not, however, a popular form of Business enterprise. It comprises of both
limited and general partners, and only limited partners can claim limited liability.
©Gregory Kinyae 2020 Page 1
, Gregory Kinyae
The full partners, of which there must be at least one, are liable to the full extent of their
personal assets. The limited must not participate in the management of the partnership.
This partner contributes a fixed amount of capital when joining the partnership and this
money must remain in the business. Any interference by limited partners in the running
of the business renders them personally liable for all debts, as with full partners.
However, limited partners, have a right to advise full partners, which they have a choice
to follow or not.
d) Involvement in the management of enterprise
Sole trader/ proprietors have total control over the management of their business. The
proprietor is accountable to no one in running of the business, since they are the ones to
incur full financial loss in case of failure of the business. The autonomous nature of the
sole trader is an attractive feature in these businesses.
A partner is entitled to full participation in the management of the partnership. However,
since the essence of this is the relationship between partners, to be successful business
decisions must be made with the agreement of all partners. So there is some loss of
independence and agreement with other partners is needed in order to make worthwhile
business decisions.
A company, being a separate legal entity, makes decisions through the annual general
meetings of shareholders and its board of directors. Any decisions made about the
management of the company require a consensus of a majority of shareholders.
Limitation is further imposed on those running the company, by the company’s
Memorandum of Association (MOA), which sets out the scope of operation for the
company.
e) Financial considerations
There are various financial issues which affect the decision as to which form of business
enterprise to undertake. These are:
i. Raising capital
©Gregory Kinyae 2020 Page 2
, Gregory Kinyae
Since neither sole trader nor the partnership is protected by limited liability, both
find difficulty in raising enough money to start trading. This is because both
businesses are identical to the persons who own them; their credit worthiness is
that of those individuals. Such entrepreneurs have to guarantee loans/ credit by
their own personal assets.
Companies, on the other hand, may create a ‘floating charge’ – an instrument
which gives security for the loan. The floating charge is a financial device that
gives the lender continuing security against all company assets, e.g. stock in trade,
plant, Land, buildings, etc. Therefore, the company, by virtue of the floating
charge, has a distinct benefit in securing finance over the other forms of business.
ii. Expense of formation
Sole traders and partnerships are not inhibited by legal formalities when
commencing trading. For companies, certain fees may be payable because of the
legal formalities to be followed. A lawyer is required to draft Memorandum and
Articles of Association, and a registration fee is payable.
Also, substantial expenses are incurred for the annual publication of Audited
accounts. The accounts must be filed with the registrar of companies, at a fee.
Companies must also make statutory returns to the registrar of companies, which
comprise;
The Audited accounts
Minutes of board meetings held, and
Minutes of Annual General Meetings held.
Therefore, the administrative costs of running companies are greater than those of
other forms of businesses.
iii. Taxation
Different forms of businesses are subjected to different types of taxes, e.g. income
and Value Added Taxes
Income tax: - Sole trader and partners pay income tax, subject to
allowances, on all profits, even if reinvested in the business. In companies,
©Gregory Kinyae 2020 Page 3
3.0 THE HOSPITALITY ENTREPRISE
When establishing the hospitality business, the entrepreneur has to make number of major
decisions about the form the business will take.
3.1 Choosing the form of Business Enterprise
This decision must be made before trading can start. It affects the size, scope, financing of the
business and other operational criteria. Based on the type of business chosen, certain formalities
may or may not have to be carried out; those financing the business may or may not be protected
by limited liability and the potential growth and financial resources of the enterprise may also be
determined.
The choice of the form of business enterprise depends on the following factors:
a) Limited liability
This means that the financial liability of each person responsible as a member of the
business is fixed from the onset and limited to a fixed amount. The people investing in a
business know from the beginning the extent of their potential financial loss should the
enterprise fail. This knowledge has motivated many entrepreneurs to protect themselves
through the concept of limited liability.
b) The limited company
This means is a distinct and separate legal entity from the people who own it, which
provides limited liability. The shareholders are liable only to the extent of their value of
the paid shares, i.e. they can only loose the value of their share in the company.
c) Limited partnership
This is a specialized form provided for by the Limited Partnership Act, 1907. Limited
Partnership is not, however, a popular form of Business enterprise. It comprises of both
limited and general partners, and only limited partners can claim limited liability.
©Gregory Kinyae 2020 Page 1
, Gregory Kinyae
The full partners, of which there must be at least one, are liable to the full extent of their
personal assets. The limited must not participate in the management of the partnership.
This partner contributes a fixed amount of capital when joining the partnership and this
money must remain in the business. Any interference by limited partners in the running
of the business renders them personally liable for all debts, as with full partners.
However, limited partners, have a right to advise full partners, which they have a choice
to follow or not.
d) Involvement in the management of enterprise
Sole trader/ proprietors have total control over the management of their business. The
proprietor is accountable to no one in running of the business, since they are the ones to
incur full financial loss in case of failure of the business. The autonomous nature of the
sole trader is an attractive feature in these businesses.
A partner is entitled to full participation in the management of the partnership. However,
since the essence of this is the relationship between partners, to be successful business
decisions must be made with the agreement of all partners. So there is some loss of
independence and agreement with other partners is needed in order to make worthwhile
business decisions.
A company, being a separate legal entity, makes decisions through the annual general
meetings of shareholders and its board of directors. Any decisions made about the
management of the company require a consensus of a majority of shareholders.
Limitation is further imposed on those running the company, by the company’s
Memorandum of Association (MOA), which sets out the scope of operation for the
company.
e) Financial considerations
There are various financial issues which affect the decision as to which form of business
enterprise to undertake. These are:
i. Raising capital
©Gregory Kinyae 2020 Page 2
, Gregory Kinyae
Since neither sole trader nor the partnership is protected by limited liability, both
find difficulty in raising enough money to start trading. This is because both
businesses are identical to the persons who own them; their credit worthiness is
that of those individuals. Such entrepreneurs have to guarantee loans/ credit by
their own personal assets.
Companies, on the other hand, may create a ‘floating charge’ – an instrument
which gives security for the loan. The floating charge is a financial device that
gives the lender continuing security against all company assets, e.g. stock in trade,
plant, Land, buildings, etc. Therefore, the company, by virtue of the floating
charge, has a distinct benefit in securing finance over the other forms of business.
ii. Expense of formation
Sole traders and partnerships are not inhibited by legal formalities when
commencing trading. For companies, certain fees may be payable because of the
legal formalities to be followed. A lawyer is required to draft Memorandum and
Articles of Association, and a registration fee is payable.
Also, substantial expenses are incurred for the annual publication of Audited
accounts. The accounts must be filed with the registrar of companies, at a fee.
Companies must also make statutory returns to the registrar of companies, which
comprise;
The Audited accounts
Minutes of board meetings held, and
Minutes of Annual General Meetings held.
Therefore, the administrative costs of running companies are greater than those of
other forms of businesses.
iii. Taxation
Different forms of businesses are subjected to different types of taxes, e.g. income
and Value Added Taxes
Income tax: - Sole trader and partners pay income tax, subject to
allowances, on all profits, even if reinvested in the business. In companies,
©Gregory Kinyae 2020 Page 3
