This term used to describe a business wholly owned by one person, although there may be a number of people employed in running the business. However, these employees have no legal responsibility for the conduct of the business. The principal sources of finance are set out below:

1. (1) The sole trader's own savings.
2. (2) Borrowing from friends and relatives
3. (3) Borrowing from banks and building societies
4. (4) Trade credit: this means obtaining stock without having to pay until the goods have been sold and the business has had time to generate some cash.
5. (5) Investing retained profits is an important source of capital for small businesses, which are trying to expand.

Advantages:

1. (1) No legal formalities: They are easy to establish in the sense that no formal procedures are required to set up such a business.
2. (2) Ownership and control: As only one person owns the business, the decision making process is simplified. There is considerable self-interest and a complete and simple link between successful management and the owner's income.
3. (3) Accountability: The sole proprietor is not accountable to another person for the way in which the business is conducted.
4. (4) Better professional relationship: Generally there is a better understanding between the owner and the business' employees because the business is smaller and more personal.
5. (5) Privacy: The affairs of the business can be kept private.
6. (6) Personal service: Often there is more personal services offered to the customer.
7. (7) Interest: The sole trader has a personal interest in the business.

Other advantages:

1. d Free & flexibility
2. d Secrecy
3. d Enjoyment of all profits
4. d Low taxes

Disadvantages:

1. (1) Limited sources of finance: the sources of finance available to the business are very limited. This makes expansion & growth difficult.
2. (2) Unlimited liability: If the firm incurs debts which can not be paid from the assets of the business, the owner's personal assets (house, car, furniture) can be taken to settle the debts.
3. (3) Lack of specialization: there is little chance of specialization in the management of the business. (4) High production cost: A major draw back faced by all small firms is the higher cost of goods or materials when buying in smaller quantities which increases production cost.
4. (5) Uncertain future growth: it is often necessary for the sole trader to work long and unsocial hours. Therefore if the owner dies or becomes ill the business is unlikely to be able to continue.

Other disadvantages are:

1. c Limited scope for economies of scale
2. c Full personal responsibility for decisions and for the debts of the business
3. c No continuity of existence.

Partnerships are groups of people who contribute capital and management expertise to the same business enterprise and accept joint responsibility for the operation of the business and for its debts. The minimum number of partners is two & the maximum is 20. Partners are liable for all the debts and conduct of their business. The partnership act 1890 lays down procedures of rules and regulations to follow in absence of formal partnership deed.

1. (1) All partners are entitled to an equal share of the profits.
2. (2) Each partner is entitled to participate in the management of the firm.
3. (3) Decisions are settled on the majority basis. It is common for the partners to draw up a legal document called a deed of partnership.

The partnership agreement should deal with

1. (1) The nature of the business and date of commencement.
2. (2) The amount of capital put into the business by each partner.
3. (3) The method by which profits (or losses) are to be shared.
4. (4) Voting rights.
5. (5) The role of each partner.
6. (6) The duration of the partnership and methods of dissolving the partnership.
7. (7) Arbitration procedure if partners can not reach agreement.
8. (8) Arrangements to cover absence, retirement and the admission of new partners.
9. (9) Arrangements concerning finances, book keeping, banking & insurance.
10. (10) Authority to sign contracts.

There are two different types of partnership:

(a) The ordinary partnership: It is regulated by the partnership Act 1870 and in this type of business all the partners have unlimited personal liability.

(b) The limited partnership: Limited partnerships are allowed by the Limited Partnership Act 1907, which the 1870 Act. The major change this made was to allow some partners to join the business who would contribute money only. They take no part in the management of the business and have no right to be consulted about decisions. However, these partners can enjoy limited liability, i.e. they are not liable for the debts of the business beyond the amount they have already contributed. However the Partnership Act 1907 does stipulate that at least one partner shall be an ordinary partner i.e. there must be at least one partner with unlimited liability. This partner is known as a general partner. Limited partners who contribute money only are often known as sleeping partners because they are not actively involved in the running of the business.

Advantages:

1. (1) Additional sources of capital: As a large number of people contribute finance, which helps to create a large amount of capital.
2. (2) More ideas and initiate: There are more people involved in the business and therefore more ideas and initiative to make the business a success.
3. (3) Sharing responsibilities: Decision-making can be shared so that the burden of management is reduced.
4. (4) Specialization: It is common for specialization to occur in partnerships, with partners concentrating on different aspects of the business.

Other advantages:

1. c Partners can arrange to cover for each other e.g. for holidays.
2. c Partners are able to borrow more capital than a sole trader.
3. c A partnership can maintain its secrecy
4. c Sharing of losses is possible.

Disadvantages:

1. (1) Accountability for individual decision: Each partner is legally capable of making decisions on behalf of all the partners. One partner's decisions will be legally binding on the others.
2. (2) Unlimited liability: In an ordinary partnership business all the partners have unlimited liability. Thus they risk their personal assets if the business is not a success.
3. (3) Disagreements: Disputes between the partners, which in extreme cases may lead to the dissolution of the partnership.
4. (4) Uncertain continuity: the continuity of the business is uncertain. If one of the partners dies the partnership may have to be dissolved.

Other disadvantages:

1. c Partnerships can only raise limited amount of capital
2. c Number of partners can not be increased beyond 20.

A limited company is a separate body in law from its shareholders and directors. The company may form contracts, sue and be sued on its own name. The shareholders are not liable for the company's debts except for the value of their shareholdings. There are two types of limited company, the private limited company and the public limited company. The principal differences are in the size of the company and in how the shares are bought and sold. Where large-scale operations are involved the limited company is the normal type of business unit. The rules regarding the establishment of a limited company are laid down in the Companies Act 1948 to 1989. The company has to be registered with the registrar of companies. To do this the promoters of the company must provide certain documents setting out the important information regarding the company.

The types of documents, which must be provided, are explained below:

(a) Memorandum of association: This governs the company's relationship with the outside world. The main contents are as follows:

1. (1) The company's name, which must contain the word limited. This is a warning to anyone dealing with the company that they cannot look beyond the company for the redress of any grievance.
2. (2) The address of the company's registered office.
3. (3) The objectives of the company. Prospective shareholders then know what they are committing their funds to, and have a legitimate claim against the company if their money is used for anything else.
4. (4) A statement of the limited liability of shareholders.
5. (5) The amount of capital to be raised by issuing shares and the types of shares issued.
6. (6) The agreement of the founder members that they wish to form a limited company and that they will purchase the stated number of shares.
7. (b) The Articles of Association: These control the internal running of the company. They will usually follow the model articles set out in the Companies Act 1948, rather than being a tailored made set of articles. These cover the following information:
8. (1) The procedure for calling a general meeting of shareholders.
9. (2) The rights and obligations of directors.
10. (3) The election of directors.
11. (4) The borrowing power of the company.

(c) The Statutory Declaration: This is simply a signed statement by the promoters of the company that they have complied with all the requirements of the company's acts. These 3 documents are presented to the Registrar and if all are in order he will issue a Certificate of Incorporation, which establishes the business as a separate legal entity. Though the procedure for setting up a company is the same for both private and public companies but the public limited companies require one further document. This is a Certificate of Trading, which is issued by the Registrar when he is satisfied that the company has raised the necessary amount of capital.

The Public Limited Company: The largest and most important businesses in the private sector are public limited companies. Some are very large, e.g. in 1986 Imperial Chemical Industries (ICI) employed 119000 people and sold goods to the value of £1.07 billion. Currently about 2% of all companies are public.

The basic requirements to form a public company are listed below:

1. (1) The minimum number of persons necessary to form a public limited company is 2. There is no upper limit on the number of shareholders.
2. (2) There is a minimum authorized share capital (£50000 as at 1 January 1990).
3. (3) Clause 2 of the company's Memorandum of Association must state that the company is a public limited company.
4. (4) The name of the company must end with the words Public Limited Company or PLC. The Private Limited Company: Any registered company, which does not comply with the regulations above, is by definition a private company.

The essential features of a private company are:

1. (1) There is no longer a limit on the number of shareholders. (Until 1981 this was the major difference between private and public companies)
2. (2) The name of the company must contain the words "company limited".
3. (3) The company is not allowed to sell shares or debentures to the general public.

Advantages of limited companies:

1. (1) Incorporation creates a new legal entity, independent of its shareholders. The company can own property and can sue and be sued in its own name.
2. (2) Shareholders have limited liability; thus they know in advance that their liability is limited to the amount they have invested.
3. (3) The company has continuity of existence and is unaffected by the death or retirement of one of its members.
4. (4) It has greater opportunities for raising capital for expansion.

Other advantages:

1. T It is often easier to raise finance from banks.
2. T It becomes possible to operate on a larger scale.
3. T It becomes possible to employ specialists.
4. T Suppliers feel confident about trading with legally established bodies.
5. T It is easy to expand.
6. T The company name is protected by law.
7. T There are tax advantages associated with giving shares to employees.
8. T Larger outputs can be produced at lower unit cost.

Disadvantages:

1. (1) The ability of the company to control is limited by the objects clause in the memorandum of association.
2. (2) There is a legal obligation to disclose certain information, for example contractual powers, rules relating to the internal conduct of the business or annual accounts.
3. (3) There may be a divorce between ownership and control.
4. (4) Internal procedures may prevent the company from adapting quickly to changed market conditions.
5. (5) Close relationships between the company, its customers and employees are often precluded by size.

Other disadvantages:

1. T Formation and running costs can be expensive.
2. T Decisions can be slow and red tape can be a problem.
3. T Diseconomies of scale may arise due to its large size.
4. T Employees and shareholders are distanced from one another.
5. T Affairs are tightly regulated under various companies Acts.
6. T Heavy penalties are imposed if rules are broken.

The ownership and control of limited companies

In all public limited and private limited companies there is a divorce of ownership and control i.e. shareholders are not responsible for the day-to-day decisions on how the business is run. Instead arrangements are made to delegate the control of the company to a small group of shareholders. Each year the company must hold its AGM to elect a board of directors, which will be responsible for managing the business over the coming year. The size of the board will be laid down in the Articles of Association and will depend on the size of the company. Each ordinary shareholder has one vote for each share they own. However, if shareholders are not satisfied with how the business is being run they can call an extraordinary general meeting and vote in a new board, but this is rare practice. Once the board has been elected it will elect one of its members to be the managing director. It is the MD who is the principal decision-maker with regard to how the business is run on a day-to-day basis. For certain issues a special resolution has to be passed. This requires 75% majority and is necessary when changes to the firm's constitution are proposed, e.g. Change of name; change in articles, change in Memorandum, and a change to the objects clause.

Functions of the board of directors:

1. (1) Setting objectives (both short and long term)
2. (2) Determining strategy
3. (3) Approving plans of business deals.
4. (4) Monitoring business progress.
5. (5) Determining firm's policies regarding marketing, production, distribution and credit strategy.
6. (6) Company financing (Internal and external finance)
7. (7) Appointment of senior executives.
8. (8) Approving the management structure of the firm.

Directors can be either executive directors or non-executive directors. The formers are employed as full time salaried executives within the company. In addition to a MD (chief executive), there might be executive directors covering functional areas such as sales, marketing, finance, personnel and production. In addition to contributing to board decisions, executive directors implement decisions. Their value is that of a specialist with detailed knowledge of the company. Non-executive directors act in a part time capacity. They attend board meetings but take no part in the day-to-day management of the company.

Non-executive Directors: non-executive directors can bring to board meetings experience gained outside the company, academic experience, or experience of international trading relations. It is only by ensuring a diverse blend of knowledge and skill on a board of directors that a company will benefit from a broad perspective of business trends.

Functions of non-executive directors:

1. (1) Independent non-executive directors should be appointed to monitor activities of the company.
2. (2) Director's remuneration should be clearly disclosed and reviewed by a committee of non-executive directors.
3. (3) Companies should appoint an audit committee composed of non-executive directors to appoint auditors and approve the accounts.

A board of directors will be responsible for

1. r appointing senior managers including the MD
2. r deciding on how profits will be distributed
3. r deciding on how to raise capital
4. r establishing the major policies of a company
5. r ensuring that all legal requirements are complied with
6. r ensuring that the company is successful

The board of directors will select a chairperson with the responsibility for acting as a 'figurehead' for the company. He will be responsible for chairing all board meetings and for making major public policy statements.

Directors can be removed:

1. r by normal rotation
2. r at the retirement age of 70
3. r by ordinary resolution of members in a general meeting. A simple majority is sufficient to remove a director.

The following disqualify a person from being a company director:

1. r persistence breaches of the companies' acts
2. r offence in relation to the companies acts
3. r fraudulent trading
4. r general unfitness.

The shares of a limited company:

There are different types of shares that a company can issue. Some shares carry a fixed rate of return and guarantee payment, while others have no fixed return and no guarantee of payment.

(a) Ordinary shares:

These represent the risk of the business. The holders of such shares are not guaranteed a dividend at the end of the year; this will depend on the size of the company's profits. However, they do have voting rights, which allows these shareholders to elect the board of directors. When a dividend is paid on ordinary shares each share will be paid the same; hence theses shares are also known as equities. Ordinary shares in first class sound public companies are sometimes called blue chips.

(b) Preference shares:

These shares carry a fixed dividend e.g. 8% per annum. This means that the shareholder is entitled to a sum of equal to 8% of his or her capital invested at the end of the trading year providing the company has made sufficient profit. The dividend on these shares must be paid first before the ordinary shareholders receive a dividend. There are a number of different types of preference shares:

1. (1) Basic preference shares: these will receive their fixed dividend if the firm makes a profit. If there is no profit in a particular year then the dividend is lost.
2. (2) Cumulative preference share: if the holders of these shares fail to receive a dividend one year because of poor profitability the dividend will be carried over to the next year.
3. (3) Participating preference shares: these carry a fixed dividend but also entitle the holder to a further share of the profits if the dividend paid to ordinary shareholders exceeds a certain amount. Preference shareholders do not carry voting rights. Therefore preference shareholders have no say in the control of the company.

(C) Deferred ordinary shares: These shares are usually held by the promoters of the company as a way of keeping control with very little capital outlay. They are worth very little but carry voting rights. They do not receive a dividend until the dividend on ordinary shares has reached a certain level. Because of their function they are also known as founders' shares. In addition to shares, companies can also issue debentures.

Debentures:

A debenture is not a share although it can be bought and sold in the same way as a share. A debenture is a loan to the company, which will receive a fixed interest payment every year.

People who buy debentures in a company do not become shareholders; they are creditors of the company. The interest on debentures constitutes cost to the business and must therefore be paid before a profit for the year can be declared. Debentures are a secure form of investment because they are usually issued on the value of the company's property. This means if the company fails debenture holders are assured of the return of their capital through the sale of the property. If the debenture holders do not receive their annual interest payment they can force the company into liquidation.

Duty of the company secretary:

1. (1) organizes shareholders' meetings
2. (2) is the link between company and members
3. (3) services the board
4. (4) has various administrative duties

Annual Reports of Companies

All limited companies must prepare annual reports in accordance of company's law. It is mandatory to disclose of information to shareholders and other interested parties because of the requirements of

1. r the Companies Act 1985
2. r professional accountancy standards (SSAPS)
3. r Stock exchange requirement

The annual report of a company consists of:

(a) Financial statements:

1. l profit and loss account
2. l balance sheet
3. l cash flow statement

(b) Reports from:

1. l the chairman
2. l the directors
3. l the auditors

The chairman's report will include the following items:

1. / a review of results, including information on divisional and product performance;
2. / a summary of financial reports with comments;
3. / a statement of paid and proposed dividends
4. / an explanation of steps taken to improve efficiency
5. / details of acquisition with purpose and target
6. / information about directors
7. / comments about prospects (future vision)

The directors' report will contain:

1. / a review of the business and its prospects
2. / details of changes in fixed assets (including new and disposed)
3. / an indication of likely future developments in the business (Expansion, introducing new products, brands etc)
4. / an indication of its R & D activities (areas and purpose)
5. / details of dividends and proposed transfer to reserves
6. / details of directors and their shareholding (numbers and values)
7. / disclosure of donations (political and charity)
8. / information on health and safety policies (for workers)
9. / a statement of company's policy regarding the employment of underprivileged people.

The auditor's report will contain:

1. a verification of the company's financial report
2. comments and remarks
3. after verification and investigation signature of the chief audit.

(1) Retail co-operative societies have a separate legal entity and they enjoy limited liability.

(2) The retail cooperatives resemble department stores and multiple stores because of their wide range products and centralized purchasing.

(3) They make a surplus to pay out interest to their shareholders and finance expansion.

(4) Retail cooperatives are registered with the registrar of societies under the cooperative ordinance.

(5) Funds are collected by both share and loans.

(6) Membership is open to individual adults. A person can buy any number of shares between £1 and £10,000

(7) Control is in the hand of an elected management committee or board of directors. Interest on capital is paid at a flat rate determined by the board.

(1) Producer cooperatives are organized as partnerships or limited companies. In this type of business producers join together to form producer cooperative.

(2) Producer cooperatives resemble large and medium scale producers.

(3) The motive of forming producer cooperative is to afford purchasing equipment that they (producers) could not afford individually.

(4) It takes the form either of a society registered under the Industrial and Provident Societies Act or it may be a company limited by a guarantee.

(5) Funds are collected in the form of loan stock rather than in the form of capital contributions.

(6) Membership is open to producers.

(7) Producers' cooperative is owned and operated by the members and sharing profits in an agreed way.

(8) Cooperative Development Agencies (CDAs) assist producers' cooperative in areas of investment, finance and marketing