Business Units

1. What is a Business Unit?

A business unit is an organization or firm involved in the production, distribution, or provision of goods and services, primary aimed at making a profit. It can be established by an individual or a group, and its scale of operation largely depends on the capital invested.

2. Classification of Business Sectors

                        ┌──────────────────────────────┐
                        │    Forms of Business Units   │
                        └──────────────┬───────────────┘
                                       │
            ┌──────────────────────────┴──────────────────────────┐
            ▼                                                     ▼
┌───────────────────────┐                             ┌───────────────────────┐
│     Public Sector     │                             │    Private Sector     │
│ (Government-Owned)    │                             │  (Privately-Owned)    │
└───────────┬───────────┘                             └───────────┬───────────┘
            │                                                     │
 ├── Public Corporations                                   ├── Sole Proprietorship
 ├── Parastatals                                           ├── Partnership
 └── Local Government Authorities                          ├── Private Limited Company (Ltd)
                                                           ├── Public Limited Company (PLC)
                                                           └── Cooperative Societies

3. Sole Proprietorship (Sole Trader)

Definition: A business owned, financed, and managed by a single individual who receives all profits and assumes all risks and liabilities.

Characteristics

• Single Ownership: Owned and operated by one person.
• Capital Provision: Capital is sourced entirely from personal savings, family, or personal loans.
• Decision-Making: The owner holds absolute authority over business decisions.
• Profit & Loss: The owner absorbs 100% of the profits and losses.
• Unlimited Liability: The business and the owner are legally the same entity.

What is Unlimited Liability?

Unlimited liability means the owner and the business are not legally separate. If the business cannot pay its debts, the owner’s personal assets (like homes, cars, or personal savings) can be seized by creditors.

Steps to Establish a Sole Proprietorship

1. Location Selection: Choose a suitable, accessible business location that complies with zoning laws.
2. Capital Mobilization: Secure the initial funds required to start operations.
3. Tax Registration: Register with tax authorities (e.g., TRA) for tax assessment and TIN assignment.
4. Obtain a Trading License: Acquire legal permission from relevant local authorities to commence operations.
5. Commence Operations: Begin business activities once the required licenses are secured.

Advantages & Disadvantages

Advantages	Disadvantages
Simple Setup: Easy and inexpensive to organize; minimal legal procedures.	Unlimited Liability: Personal assets are at risk if the business fails.
Retention of Profits: The owner keeps all profits generated by the business.	Limited Capital: Growth is restricted by the owner’s personal wealth/borrowing capacity.
Quick Decision-Making: No need to consult board members or partners.	Lack of Specialization: One person must handle management, accounting, marketing, etc.
Business Secrecy: Financial records and strategies remain completely private.	Total Risk Burden: All operational losses are borne entirely by the owner.
Operational Flexibility: Can alter business activities without internal friction.	Lack of Continuity: Death, illness, or bankruptcy of the owner can terminate the business.

4. Partnership

Definition: An association of two or more individuals carrying on a business together with a view to making a profit.

Key Features

• Membership Size:
  • Ordinary Partnerships: Minimum 2, Maximum 20.
  • Professional Partnerships (e.g., Lawyers, Accountants, Doctors): Maximum up to 50.
• Mutual Agency: Every partner acts as an agent of the firm. An action or contract made by one partner binds all other partners.
• Capital Contribution: Sourced jointly through partner contributions according to the Partnership Deed.
• Profit and Loss Sharing: Distributed based on the agreed ratios outlined in the partnership contract.
• Legal Status: Lacks separate legal personality (unlimited liability applies to general partners).

Classification of Partners

A. By Role & Participation

• Active (Working) Partner: Takes an active role in daily management and operations. May receive a salary in addition to their share of profits.
• Dormant (Sleeping/Financing) Partner: Contributes capital and shares in profits/losses, but takes no active part in day-to-day operations.

B. By Liability

• General Partner: Has unlimited liability for all obligations and debts incurred by the firm.
• Limited Partner: Liability is strictly limited to the amount of capital they contributed to the firm.

C. By Legal Age

• Major Partner: An individual aged 18 or above who carries full legal liability for firm debts.
• Minor Partner: An individual under 18 admitted to the benefits of the partnership. A minor is not personally liable for debts beyond their invested capital.

D. By Capital & Standing

• Real Partner: Contributes capital, participates in operations, and shares profits and losses.
• Quasi (Nominal) Partner: Does not contribute capital or participate in management, but allows the business to use their name/reputation. They receive a fee or profit share for this privilege.

The Partnership Deed (Agreement)

A Partnership Deed is the written document governing the relationship between partners.

Typical Contents:

1. Name, physical address, and nature of the business.
2. Names, addresses, and designations of all partners.
3. Amount of capital contributed by each partner.
4. Profit and loss sharing ratios.
5. Partner rights regarding drawings, salaries, and interest on capital.
6. Valuation methods for goodwill upon admission, retirement, or death of a partner.
7. Partnership duration (Temporary vs. Permanent).
8. Dissolution procedures and dispute-resolution methods.

Rights & Duties of Partners

• Duty of Good Faith: Partners must act honestly and disclose all financial information to each other.
• Indemnity: Partners must be reimbursed by the firm for expenses incurred while conducting business operations.
• Consent for New Members: No new partner can be admitted without the unanimous consent of existing partners.
• Non-Compete Duty: Partners must not run a private business that directly competes with the partnership. Profit made from competing businesses must be handed over to the firm.

Dissolution of a Partnership

A partnership may be dissolved under the following circumstances:

• Expiration of the agreed timeframe or completion of a temporary project.
• Serving a formal notice of dissolution by any partner (if it is a partnership at will).
• Bankruptcy, insanity, or death of a partner.
• Outbreak of events making the business activities unlawful.
• Court order mandating winding up due to internal disputes or misconduct.

5. Joint Stock Companies (Limited Companies)

Definition: An incorporated association created by law, possessing a separate legal identity distinct from its owners (shareholders), with perpetual succession and a common seal.

Read Also:

Taxation

Literature Analysis

                         ┌────────────────────────────────┐
                         │   Types of Joint Stock Corps   │
                         └───────────────┬────────────────┘
                                         │
            ┌────────────────────────────┴────────────────────────────┐
            ▼                                                         ▼
┌─────────────────────────┐                               ┌─────────────────────────┐
│   Statutory Companies   │                               │   Registered Companies  │
│ (Created by Parliament) │                               │  (Companies Act Reg.)   │
└─────────────────────────┘                               └────────────┬────────────┘
                                                                       │
                                           ┌───────────────────────────┴───────────────────────────┐
                                           ▼                                                       ▼
                               ┌───────────────────────┐                               ┌───────────────────────┐
                               │ Private Limited (Ltd) │                               │ Public Limited (PLC)  │
                               └───────────────────────┘                               └───────────────────────┘

Private vs. Public Limited Companies

Feature	Private Limited Company (Ltd)	Public Limited Company (PLC)
Membership	2 to 50 members	Minimum 7 (No upper limit)
Share Transfer	Restricted; cannot sell to the public	Shares are freely tradable on stock exchanges
Capital Generation	Private subscriptions only	Public offer through prospectuses
Commencement	Can start upon receiving Certificate of Incorporation	Must obtain both Certificate of Incorporation and Trading Certificate
Financial Statements	Not required to publish accounts publicly	Must publish audited annual accounts publicly

Key Legal Documents for Formation

1. Memorandum of Association (MOA)

Defines the company’s relationship with the external world and specifies its authority boundaries.

• Name Clause: Specifies the company’s legal name (must end with “Limited” or “PLC”).
• Situation Clause: Specifies the physical location of the registered office.
• Objectives Clause: Outlines the primary business activities the company is authorized to pursue.
• Capital Clause: Details the authorized share capital structure.
• Liability Clause: States that members carry limited liability.
• Association/Declaration Clause: Confirms the founders’ desire to form the company.

2. Articles of Association (AOA)

Contains the internal rules, regulations, and operational guidelines governing management, including:

• Voting rights and procedures for issuing/transferring shares.
• Directors’ powers, duties, and appointment processes.
• Meeting procedures and dividend payout guidelines.

3. Certificate of Incorporation & Certificate of Trading

• Certificate of Incorporation: Issued by the Registrar of Companies to bring the business into legal existence as an independent entity.
• Certificate of Trading: Issued to public companies allowing them to raise public capital and commence operations.

6. Shares and Debentures

                               ┌────────────────────────┐
                               │   Capital Structure    │
                               └───────────┬────────────┘
                                           │
            ┌──────────────────────────────┴──────────────────────────────┐
            ▼                                                             ▼
┌───────────────────────┐                                     ┌───────────────────────┐
│        Shares         │                                     │      Debentures       │
│  (Equity Ownership)   │                                     │    (Creditor Debt)    │
└───────────┬───────────┘                                     └───────────┬───────────┘
            │                                                             │
 ├── Ordinary Shares                                           ├── Naked Debentures (Unsecured)
 └── Preference Shares                                         ├── Secured Debentures
      ├── Cumulative                                           ├── Redeemable Debentures
      ├── Non-Cumulative                                       └── Irredeemable Debentures
      ├── Redeemable
      └── Irredeemable

Understanding Shares

Definition: A share represents a unit of ownership in a company’s total equity capital. Income earned on shares is distributed as a dividend.

Types of Shares:

1. Ordinary Shares (Common Stock):
   • Do not carry a fixed dividend rate (payout depends on corporate profits).
   • Shareholders carry voting rights at Annual General Meetings (AGMs).
   • Dividend claims are satisfied after preference shares.
2. Preference Shares:
   • Carry a fixed percentage dividend rate.
   • Take priority over ordinary shares during dividend payouts and liquidation return of capital.
   • Cumulative: Unpaid dividends accumulate and must be settled in future years.
   • Non-Cumulative: Unpaid dividends do not accumulate into future years.
   • Redeemable: Shares that can be bought back by the firm after a specified date.
   • Irredeemable: Shares retained continuously through the life of the firm.

Understanding Debentures

Definition: A debenture is a certificate representing a long-term loan made by an investor to a company. Income paid on debentures is called interest.

Key Distinctions:

• Secured Debentures: Backed by company assets pledged as collateral.
• Naked (Unsecured) Debentures: Issued based on corporate credibility without collateral backing.
• Redeemable Debentures: Repaid by the company at a specified maturity date.
• Irredeemable Debentures: Repayable only when the company goes into liquidation.

Shares vs. Debentures

Feature	Shares	Debentures
Status of Holder	Owners (Shareholders)	Creditors (Lenders)
Return Received	Dividends (Variable/Conditional)	Interest (Fixed/Mandatory)
Voting Rights	Holds voting rights	No voting rights
Financial Risk	Higher risk (Paid after creditors)	Lower risk (Paid before equity holders)
Tax Treatment	Paid out of after-tax profit	Interest expense is tax-deductible