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Forms of Business organizations

The concept of a business entity; A business is treated as separate from its
owners. We are able to account for the business as a separate economic
unit. Flows of money between the business and the proprietors are also
separately identified from other money flows. The link between the owner
and the business is the amount stated as capital which is the amount the
business owes the proprietor.
Sole / one man’s business:
A business where an individual introduces his own capital, uses his own skill
and intelligence in the management of business affairs and is solely
responsible for the results in the operations.
All one requires is capital from savings or borrow from friends.

Characteristics:
 Single ownership and one-man control
 Unlimited liability,
 Undivided risk (bears the risks alone)
 The owner and the business are the same / no separate legal entity
 No government intervention
Advantages:
 Easy decision-making
 Easy to begin and dissolve
 Direct motivation because of unshared profits
 It is flexible
 Secrecy
 Freedom from government regulation
Demerits
 Lack of collateral security therefore difficulty to borrow and lack of
enough capital to expand
 Unlimited liability
 Uncertainty of duration
 Poor decision making / limited managerial skills
 Demotivation because of unshared losses
 Mixing business with family issues
 Poor or no book keeping

Conclusion
Sole proprietorships are only ideal where capital requirements are small and
risk isn’t too high, where quickness of decision making is very important,
where customers need personal attention via taste and fashion.

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PARTNERSHIP

Limitations of a sole proprietorship prove to be a hindrance to the

requirements of an expanding business hence the need for association of
business persons.
Definition: This is an association of two or more people who agree to share
profits of a business carried on by all or some on behalf of others. OR
It is a relationship, which exists between two or more people with a view of
making profit.

Characteristics:
- There has to be a business
- Plurality of persons that is more than one
- Contractual agreement usually by a partnership deed.
- Principal – agent relationship.
- Unlimited liability.
- Profit motive

Who can be a partner?

Anybody who is legally capable of contracting / contractual capacity that
is sane, financially sound can be a partner.
A minor below 18 but is not liable for the firm’s debts but his share of
partnership property and profits.
Companies if their memorandum of association permits.

Formation of a partnership:
- By word of mouth (expression / oral agreement)
- By writing (partnership deed) / regulation
- By implication (implied agreement)

In Uganda, partnerships are registered under the partnership ACT 1932.

Partnership deed is the agreement that spells out the right and obligations
of the partner made out by partners and witnessed by a solicitor. It is not a
must to sign an agreement but it is desirable for clarity and permanence. If
it is absent, the Partnership Act prevails.
Contents
a) Mode of sharing the profits
b) Names and signatures of partners
c) Interest on capital and drawings
d) Winding up / changes and dissolution
e) Nature of business

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f) Capital contribution per partner

g) Preparation and auditing of accounts
h) The ratios in which profits/losses will be shared
i) Amounts, if any, partners may draw in advance before
ascertainment of profits.
j) Partners’ salaries if any
k) Admission of new members
l) Duration of the partnership

Kinds of Partners
1. Active partners / active management of businesses are liable to third
parties.
2. Dormant partners / sleeping partners also liable to outsider.
3. Nominal partners / quasi- do not have capital in the business, he is
known, he is liable to third parties too, gets something like good will
for using his name.
4. Minor partner who enjoys limited liability. His decisions are not legally
binding.
5. Partner in profits only/ not active in management.
6. Sub partner shares profits with one of the partners, has no rights
against the firm.
7. Partner by Estoppel – one who, without being a partner, conducts
himself in such a manner as to lead third parties believe he is or is
liable to such third parties.
8. The general partner - has unlimited liability for the firm’s debts.

Advantages
1. Going concern / survival capacity if provisions are made.
2. Increased capital
3. Motivation
4. Better management skill
5. More access to credit
6. Pooling of risks
7. Losses are shared / risks are spread
8. Relatively easy to form
9. Legal protection / legally binding
10. Flexibility in management
11. Form of employment
12. Relatively easy decision making

Demerits
1. Unlimited liability

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2. A mistake by a partner will affect other partners- Risk of implied

authority
3. Less secrecy
4. Relatively limited resources
5. Non-transferability of interest (members expressly stated one cannot
just move out his capital in favor of other business ventures).
6. Delays in decision-making or lack of harmony
7. Instability of business/ uncertainty of continuity
When one member leaves for any reason say death or another person is
admitted the partnership dissolves. This does not mean winding up the
business. The dissolution occurs because terms of the new partnership will
be different. The relationships are new e.g. capital contribution, profit and
loss sharing ratio e.t.c.

Conclusion
A partnership is an improvement of a sole proprietorship and is suited for
business activities where investment is not very large and where application
of personal skill and judgment is required.

JOINT STOCK COMPANY

Emerged as a result of the short comings of the earlier forms of business.
(Sole proprietorship and partnership) most especially unlimited liability and
Ltd resources etc
A Joint stock company is a voluntary association of persons incorporated
into a business having joint capital divided into transferable shares of a fixed
face value, with limited liability, perpetual succession, and a common seal.
FEATURES OF A COMPANY.
1. Voluntary association of persons in co-operation: Two or more persons
come together voluntarily for the purpose of carrying on business and
are incorporated under the companies Act.
2. Artificial person: It is a legal person created by law. However, it possesses
only those properties which the charter of its creation confers upon it like
immortality (doesn’t die) individuality e.t.c
3. Separate legal entity: A company has an existence entirely distinct from
and independent of its members. It can sue and be sued; it can own
property and enter into contracts in its own name.
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4. Common seal: A company being an artificial person cannot sign for it

self therefore; it acts through agents who are the directors. Therefore,
any document bearing a company’s name is signed by the two or more
of the directors.
5. Limited liability: Members are only liable up to the face value of the
shares bought or amount guaranteed/ subscribed. In terms of winding
up, they can’t contribute more than that.
6. Transferability of shares: For public limited companies unlike private
limited companies, shares can easily be sold and bought by the general
public at stock exchange markets.
7. Perpetual succession: A company enjoys continuous or uninterrupted
existence and its life is not affected by death, insolvency, lunacy or
retirement etc of its members or directors.

TYPES OF COMPANIES
These are classified according to their nature and origin and they basically
include;
1) Companies incorporated under royal charter / special charter.
2) Companies incorporated under the companies Act.
3) Companies incorporated under statute / Acts of parliament.
1) COMPANIES INCORPORATED UNDER THE SPECIAL / ROYAL CHARTER These
are companies most of which originated from U.K under thepermission of
the queen of England with a royal / special charter. Theystarted in early
16000 and the common ones were:
a) British South African Company (BSACo),
b) Imperial British East African Company (IBEACo),
c) British East Indian Company (BEICo.)
These remained only historical and a new phase of companies under
special /royal charter was formed. These include:
a) The Chartered Institute of Accountants.
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b) The Chartered Institute of Bankers.

c) Association of Chartered Certified Accountants
d) Institute of Chartered Secretaries and Administrators.
2) COMPANIES INCORPORATED UNDER THE COMPANY’S ACT
In Uganda the companies Act lays down procedures into which a
company can be brought into existence. The majority of companies in Uganda and the
world at large fall under this category. These mainly take3 forms; -
a) Companies ltd by shares.
b) Companies ltd by guarantee.
c) Unlimited companies
a) Companies ltd by shares.
These are companies where liability of members is limited to the face value
of the shares they own. These are the most, popular and common in
Uganda. These include the following;
i. Private limited companies
ii. Public limited companies
iii. Government companies

(i) PRIVATE LIMITED COMPANIES

These are companies which by their articles of association lay down the
rules and regulations for the internal organisation of the company and have
the following features in addition to the general ones.
• Restricts transferability of shares.
• Limited number of members’ / shareholders i.e. minimum is 2 and
maximum is 50
• Prohibits invitation to the general public to buy shares and debentures.
Examples in Uganda include; Mukwano Group of companies, Nile
Breweries, Monitor publication, etc
(ii) PUBLIC LIMITED COMPANIES

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These are companies which by their articles of association have the

following features in addition to the general ones
i. No restriction on the transfer of shares.
ii. No limited number of members i.e. minimum numbers is 7 and maximum
is infinity or no upper limit.
iii. Limited by shares.
iv. It invites the members and the general public to subscribe/ buy its shares
and debentures.
v. It must hold a statutory meeting and file a statutory report
vi. It cannot commence business without a certificate of commencement
of business allowing it to commence business.
Examples of such companies include; E.A.B.L, Uganda clays, Stanbic bank,
New Vision, D.F.C.U, Bank of Baroda, B.A.T e.t.c

(iii) GOVERNMENT COMPANIES

Government can establish a company under the companies Act.
Government companies incorporated under the companies Act are
usually established as a joint ownership by the government and the private
sector. These have the following features / characteristics on
addition to the general ones.
• The government must own over 51% of the shares
• Liabilities limited by shares.
• May have other features of a private or public company or may not.
Example of government companies include; - New Vision, UEDCL e.t.c
(b) Companies limited by guarantee.
These can be defined or described by the following features
i. They are usually non- trading businesses like;- clubs, associations, NGOs
etc
ii. The members pay subscriptions fees rather than shares for the
company’s case.
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iii. They are governed by aboard of governors rather than aboard of

directors for companies.
iv. In case of liquidation, members guarantee to contribute up to a certain
amount if assets don’t sufficiently cover the company’s debts.
Such companies include; - clubs, associations like KACITA, NGOs like save
the children’s fund, football clubs etc
(c) Unlimited companies
These are mostly multinational companies, they are not in Uganda and
therefore the companies Act is silent about them.
(3) COMPANIES INCORPORATED UNDER STATUTE / ACTS OF
PARLIAMENT
These are also referred to as statutory corporations/ parastals/ public
enterprises.
These are companies incorporated under a special statute that lays down
the duties and obligations of the company and the specific laws that
govern its activities such companies are 100% owned by the government
example include;- Bank of Uganda (BOU), post Bank Ltd, and Regulatory
Bodies like;- U.R.A, Civil Aviation Authority, NSSF etc

ADVANTAGE OF JOINT STOCK COMPANIES

1. Free transferability of shares from one person to another which promotes
investment and liquidity un like private Limited companies which limit
transfer of shares.
2. Large financial resources: Based on the nature of operation for joint
stock companies they are able to raise more funds in form of share
capital and debentures.
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3. Going concern / continuity: A company being a separate legal entity

distinct from its members can not be affected by any eventuality e.g.
insanity, death etc. therefore enjoys perpetual succession.
4. Limited liability: In any company with limited liability, the share holders
are liable only to the face value of shares held by them; however if they
cause losses to creditors carelessly the law of “lift the cooperate veil”
can be applied.
5. Economies of scale: The large financial base enables companies to
enjoy the merits of large scale operation. E.g. large-scale production,
purchase discounts, selling management, research and development
etc.
6. Professionalisation of management: The companies hire specialized
professionals with different managerial abilities and skills hence
competence in management, efficiency and expertise in their fields of
specialization
7. Public confidence because its activities are regulated by the
Government under the companies Act.
8. Tax benefits: Since companies are taxed at uniform rate on their net
income in their right they therefore pay lower tax rates compared to
individuals.
9. Diffused risk: The risk of loss in a company is spread over a large number
of members unlike in a sole proprietorship.
DISADVANTAGE OF JOINT STOCK COMPANIES
1) Delays in decision making: A lot of time is wasted in calling and holding
meetings and in passing resolutions since the management of these
companies usually rests in the hands of non-owners making it hard to
make quick and prompt decisions.
2) Oligarchies management: In theory the management of a company is
supposed to be democratic but in actual practice the company
becomes an oligarchy (rule by a few) since most share holders do not
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attend meetings, show no interest and lack information and unity

among tem selves
3) Lack of secrecy: Under the companies Act, a company is required to
disclose and publish to the public a variety of information about its
management, operation and performance annually, which makes it
hard to keep business secrets.
4) Difficulty and costly formation: It is very difficult and expensive to form a
company since the promoters have to file with the registrar of
companies a number of documents e.g. M.O.U, A.O.A
5) Lack of motivation and personal attention
The management of public companies lies in the hands of hired
professionals. The owners i.e. share holders may not have personal
involvement and stake, touch and attention to customers and the
company at large which impacts on the success of the company.

6) Excessive regulations: By the very nature of its formation a company is

subject to elaborate statutory regulations in its day to day operations. it
has to submit periodical reports, auditing and publication of accounts is
obligatory and any changes to be made in the management of the
company are subjects to the law.
7) Social evils: Giant companies may give rise to monopolies,
concentration of economic power in a few hands, interference in the
political system and cause of industrial unrest e.g. oil producing
companies, IBM etc.
8) Conflict of interest: Due to the size of operation of companies and
ownership being different from management conflicts may occur
between shareholders and board of Directors, management and
workers etc.

REASONS FOR DISSOLUTION

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• Bankruptcy
• Acting out of their articles of association.
• Agreement among members to change line of business
• etc

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