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Commerce – Students’ Guide
Department of Business and Computing
• Profits: The profits of the private The profits of the public corporations are
sector are enjoyed by the owners used for the general expenses of the
of the business and it is used for government and the economic
the expansion of their business. development of the country.
• Losses: The loss of the private The loss of one public corporation is
industries are borne or shared by compensated for by the profits of other
the owners of the business. public corporations.
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Commerce – Students’ Guide
Department of Business and Computing
• Control and management: The sole trader controls the business himself.
So there is direct relationship between the employees and the sole trader.
• Personal attention: The sole trader is able to have personal contact with his
customers. This ensures a better employer-customer relationship.
• Flexibility: The sole trader can change his business tactics at any time. He
does not have to rely on anyone.
• Privacy: The sole trader can keep all the business secrets to himself. He
does not have to share it with others.
PARTNERSHIP
Features:
• Definition: The relationship between persons who have agreed to share
the profits of a business carried on by all or any of them acting for all.
• Formation: It is formed by agreement among persons to do a business
and to share the profits and losses of the business.
• Number of members: It can be owned by two to twenty persons in
ordinary partnership business. There is no limit to the number of partners in
a professional partnership business.
• Capital: The partners provide capital for the business. They may provide
their own resources or they may take loans.
• Profits and losses: The profits and losses are shared among the partners
in an agreed ratio according to the terms of agreement.
• Unlimited liability: The partners also have unlimited liability. Even their
personal assets can be taken for business debts.
• Control and Management: All the partners can control the affairs of the
business and have a right to access books of accounts at any time.
However one or more partners may manage the business on behalf of all
the partners.
• Agency relationship: One or more partners can act on behalf of all the
partners. This is possible only in partnership business.
Advantages of partnership
Disadvantages of partnership
• Lack of continuity: The death, insolvency or insanity of any partner brings
the business to a temporary halt.
• Future conflicts: Partnership is based on agreement. So if there is any
disagreement between partners it could be fatal for the business.
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Commerce – Students’ Guide
Department of Business and Computing
owned and controlled by a single join and agree to share the profits and
person. losses of the business.
• Formation: When a person It is formed by agreement among
decides to start the business. It is persons to do a business and share the
very easy as there are no complex profits and losses of the business.
legal formalities.
• Members: There is a single owner. There are 2-20 partners for ordinary
partnerships and there is no limit for
professional partnerships.
• Capital: Capital is provided by the The partners provide the capital
sole trader. It is small and so his themselves or they may borrow from
business is also small. He may banks. As there are many partners the
raise the capital by himself or by capital is large and so their business is
borrowing from his relatives, also large.
friends or from banks.
• Management: The sole trader The partners manage all the affairs of
manages all the affairs of his their business. Sometimes one partner
business. He is helped by his may manage the business on behalf of
family members. all the partners.
• Profits and Losses: The sole trader The partners share the profits and losses
enjoys all the profits and suffers all in an agreed ratio.
the losses.
• Decision Making: The sole trader All the partners discuss and make the
makes all the decisions himself. It best decisions.
is quick but sometimes hasty.
• Flexibility: The trader’s Unless all the partners agree, they can
sole
business is more flexible. He can change their business tactics.
change his business tactics at
anytime.
• Agency Relationship: There is no There is agency relationship. One partner
agency relationship. The sole can act on behalf of all the other
trader acts for himself. partners.
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Commerce – Students’ Guide
Department of Business and Computing
LIMITED COMPANIES
Features:
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Commerce – Students’ Guide
Department of Business and Computing
Certificate of Trading so that the public limited company can start its
business.
A company issued the following shares, which were fully paid up for:
6.5% Preference shares 200,000 @ $0.50
Ordinary shares 200,000 @ $1.00
The company also issued debentures worth $150,000, which carried an
interest of 8%. The net profit available for distribution before paying the
debenture interest was $45,000. The company decides to distribute three
fourths of the net profit to the shareholders and to keep the balance as
ploughed back profit.
Calculate: i. Debenture interest;
ii. ploughed back profit;
iii. Preference dividend;
iv. Rate of dividend per ordinary share.
Profit $ 45,000
Debenture interest (150,000x8/100) = $ 12,000
Balance Net profit $ 33,000
$ 0.09 x 100 = 9%
$1.00
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Commerce – Students’ Guide
Department of Business and Computing
SHARES DEBENTURES
Features:
• It is registered under the Companies Act with the word ‘Ltd’ as part of its
name.
• The business is a separate legal entity from its shareholders. The company
can enter into contracts, sue and be sued in its own name.
• All the shareholders have limited liability. They are liable for business debts
up to the nominal value of shares they hold in the company.
• The company is controlled by a board of directors, elected by the
shareholders by the principle of ‘one share-one vote’.
• Ownership is opened to private individuals, whose shares are not
transferable without the consent of the other shareholders.
• The company is not allowed to issue shares to the general public.
• The company can start their business after receiving the Certificate of
Incorporation from the registrar.
Advantages:
• The private limited company has independent legal status. It can enter into
contracts, sue and be sued in its own name. Anything the shareholders do
will not affect the company.
• The shareholders of a private limited company enjoy limited liability. They
are liable for business debts up to the nominal value of shares they hold in
the company.
• With limited liability, the company is able to attract more capital.
• In a private company, the founders of a business can usually keep control
of it by holding majority of the shares.
Disadvantages:
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Commerce – Students’ Guide
Department of Business and Computing
• The shareholders in a private company can transfer shares only with the
consent of the other shareholders.
• A private company is not allowed to appeal to the public for extra capital.
• The accounts of the company must be filed annually with the Registrar of
Companies.
Features:
• It is registered under the Companies Act with the word ‘Plc’ as part of its
name.
• The business is a separate legal entity from its shareholders. The company
can enter into contracts, sue and be sued in its own name.
• All the shareholders have limited liability. They are liable for business debts
up to the nominal value of shares they hold in the company.
• The company is controlled by a board of directors, elected by the
shareholders by the principle of ‘one share-one vote’.
• Shares can be issued to the general public and the shares are freely
transferable.
• The company can start their business after the Certificate of Trading is
issued.
• The issued capital of a public limited company must be at least £50,000.
Advantages:
• The public limited company has independent legal status. It can enter into
contracts, sue and be sued in its own name. Anything the shareholders do
will not affect the company.
• The shareholders of a public limited company enjoy limited liability. They
are liable for business debts up to the nominal value of shares they hold in
the company.
• With limited liability, the company is able to attract more capital.
• A public limited company is allowed to appeal to the public for extra capital.
Disadvantages:
• Profit: Profit is shared by all the Profit is distributed to the shareholders as dividend.
partners in an agreed ratio.
• Liability: Partners have unlimited
liability. Even their personal assets Shareholders have limited liability. They are liable
up to the nominal value of shares they hold in the
are liable for business debts.
• Uncertainty: The death, insolvency or company.
insanity of a partner brings the The death, insolvency or insanity of a shareholder
business to an end. does not affect the company.
• Legal Entity: Partners have no
A company has separate legal entity. The company
separate legal entity. The business can enter into contracts, sue and be sued in its
and the partners are one and the own name. A company has perpetual succession.
same person. There is no perpetual
succession.
• Flexibility: The partners can change It is very difficult to change the business in a
their business very easily by company, as there are many legal complex
agreement. formalities.
• Agency Relationship: Partners have This is absent in the case of a company.
agency relationship. One partner can
16 Prepared By: Emmanuel George|
The Business Unit
FRANCHISES
Form of business organisation or method of marketing where a large
organisation makes an agreement with many small traders to offer them a
franchise in a particular good/service.
The potential entrepreneur or franchisee pays to use the products,
techniques or services of the franchiser who receives a lump sum and a share of
profits of the business.
The franchisee receives the majority of the profits, but must also meet the
cost of any loss. In return for the money received, the franchiser allows the use of
their name, products, techniques or services, and usually provides extensive
marketing back-ups.
Fast food giants such as Wimpy, Kentucky Fried Chicken and Burger King
are good examples of franchise businesses.
MULTINATIONAL COMPANIES
Multinational companies are companies that have subsidiaries or branches in
more than one country. They are usually large, public limited companies who aim
to obtain a large share of the global market. They are controlled from head office
where the parent company is located
Examples of multinational companies are Nestle, Guinness Stout, Unilever, Shell,
Exxon, and IBM.
One argument put forward in favour of multinationals is that they create jobs. For
example, the establishment of the Toyota plant near Derby created a lot of local
jobs and was welcomed by many people in the area. The disadvantage is that
multinationals can just as easily pull out of a country as stay in. If they feel that it
is more advantageous to set up elsewhere they can close down large plants at a
moment's notice.
4 Social responsibility
Multinationals have received the most scathing criticism for the social costs of
some of their activities, e.g. destroying local communities, pollution, etc.
5 Government control
The size and financial power of multinationals can make it difficult for
governments to control them. For example, MNEs may be able to win
concessions as a result of their size and influence. Some corporations evade
taxation by transferring profits from one country to another, declaring high profits
in low-tax countries and low profits in high-tax countries.
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