Business organizations are indifferent forms and sizes. It is important to know the nature of each unit so that you, as a potential business man and as a consumer of business products and services can determine which unit best suits your needs. Business units include the sole proprietor/trader, who controls and runs his outfit; Partnership, in which two or more people gather to run a business; Joint Stock Companies which may involve many more people in the ownership and management of a business; Public Companies and Cooperative Societies.
We all have come across sole traders and we all have relatives who are sole traders. More importantly, we all have at one time or another had to patronize them. Sole traders include some of the food sellers and the tailors we know. The sole trader is one who runs a business on his own account, and is therefore under no obligation or compulsion to share his profits with any other person. The business belongs to him alone, he bears all the risk, all the liabilities and he enjoys all the profits.
Sole trader is the oldest and simplest form of business organization. The capital is usually small in amount, and this is obtained from his own savings or loan from a bank or some other financial institutions. Because of this limitation in the source of his capital, the activities of the sole trader are limited. Sole trader outfits remains the most numerous type of business today because of the many advantages this business form enjoys.
A sole trader business is relatively easy to set up. He has full control of his company. He enjoys a feeling of independence which results from managing his own business instead of working for a fixed salary. His business may provide employment for members of his family. The business premises may provide accommodation for members of his family who acts as assistants when necessary.
Other advantages include his being in personal contact with customers, whereas large corporate organizations are often formal and inaccessible. The sole trader often gives credit to individual customers, since he knows many of them. Large companies rarely do this. Since the sole trader’s income is directly linked to his effectiveness in managing his company, he is forced to work hard and to think hard. Not for him the lazy habits of the company worker whose salary is guaranteed at the end of the month. He is forced to exercise initiative in order to make profit. The sole trader business is easy to run. Decision making process is simple. This compares favorably with the bureaucratic nightmare in many large companies.
The disadvantage part is that the sole trader does not always have enough capital for the development of his business. This is because sources of his funds are limited. He bears all the risks. He is responsible for all debts and losses. Many have been ruined when their small business failed since the sole trader does not enjoy the safety valves available to other business units. The sole trader loses the advantages of specialization. He often has to perform a large variety of tasks on his own. He also loses the economies of scale. This refers to the advantage accruable when production purchases or sales are made on a large scale. In his small business, he buys and sells on terms which are not as advantageous as those which large companies enjoy.
Lastly, the business of the sole trader may lack continuity. When the sole trader dies or retires, his business may fold up.
This takes us to the next business unit-Partnership. A partnership may be defined as an association of persons who carry on a business for the purpose of making profit. The number of partners may vary from 2 to 20. Each partner has a share in the ownership of the company and in the profits. In Liberia, partnership operates mainly among professionals, like accountants, lawyers, etc.
Ordinary Partnership – This refers to the type in which all the partners have equal contractual power and responsibilities. Each ordinary partner may take part in the management of the business, and each partner is liable for the firm’s debts.
Limited Partnership – Here there must be at least one ordinary member who is responsible for all the firms’ debts and he has greater powers than the limited partners. The limited partners take no active part in the firm’s management, and their liabilities are limited to the amount of capital invested. What this means is that a partnership of any type must have at least one ordinary member who bears special responsibility and enjoys special advantages. Limited Partnership has the advantage of limited liability, but at least one person will have unlimited liability.
The fact that some people goes into partnership is an indication that it has some advantages. These advantages include: A convenient way of introducing new blood into a business. A Lawyer may form a partnership with his newly qualified son; an accountant may bring in a qualified young graduate. Additional capital may be obtained by forming partnerships since each new partner will come in with some capital.
Other advantages include the possibility of some degree of specialization – various aspects of the business (Finance, Sales, etc.) may be allotted according to individual’s specializations and abilities. In a partnership, the individuality of each partner is not lost. The letter head paper bears the names of all the partners. Partnership retains many of the advantages of the sole trader. There is also greater continuity in partnership than in a sole trader business and lastly, partnerships enjoys greater flexibility than joint stock companies. Capital may be increased or reduced by mutual consent.
(Chealy Brown Dennis is a marketing and business development consultant. He is also a much sought after motivational speaker and offers training in leadership and organizational development, creative sales and marketing, strategic planning, wealth creation and team building and offers on-location and train-the-trainer formats. He can be contacted through email at: email@example.com or on phone at: 0886-264-611 or 0776-545-394)