In this lecture we shall discuss the various forms of business organizations including sole proprietorship, partnership, companies, public corporations, parastatal bodies and co-operative societies.
General Objectives
By the of the course the learner should be able to identify and explain various legal forms of businesses available in Kenya At the end of this lecture you should be able to:
- Explain the various forms of business organizations
- Discuss the advantages and disadvantages of sole proprietorship
- Explain the procedure of formation of partnership
- Explain the various forms of partnership
- Discuss the merits and demerits of partnership
- Explain the formation of companies
- Discuss the advantages and disadvantages of companies.
- Identify types of co-operatives
- Discuss the advantages and disadvantages of co-operatives
4.1 Unincorporated Business
- These are business which do not have separate entity ( existence from that of their owners)
- According to law such organizations are one and same in the existence of the owner.
- They do not have separate rights and obligations from those of their owners
- They include
1. sole proprietors
2. partnership
4.1.1 Sole Proprietorship
- Sole means single while proprietorship refers to the owner of a business owned by one person who takes responsibility on risks of the business.
- He either enjoys the profits or servers the losses of the business alone.
Formation of Sole Proprietorship
It is simple and easy to form since legally only licensed from the government is required. If the name of the business is different from that of the owner the business name should be registered with the registrar.
Management of Sole Proprietor
The owner of the business is the manager of the business
- He makes decisions operating the day to day activities the business.
- He may employ people to work in the business or be assisted by family members.
Sources of Capital
The term capital is used her to refer to the resource required to start and operate the business. He may obtain capital from;
- his own savings
- borrowing from friends and relatives
- banks and other financial institutions
- credit suppliers
- borrowing from government institutions i.e. KIE, ICDC
- funding from non-government organizations
- hire purchase funds
- The business itself from retained profits.
Liability
Liability refers to the extent which the owner of the business can be called upon to meet the debts of the business. A sole proprietorship is viewed as being one and the same with the owner hence does not have separate rights and obligation. Where a sole proprietorship business can not pay its liabilities all its assets and the business properties are sold in order to clear the business debts.
The responsibility of the owner of the sole proprietorship business is thus unlimited. The sole proprietor is therefore said to have unlimited liability. This means that the liability of the owner is no just restricted to capital contributed but extends to include its personal property.
Features of a Sole Proprietorship
1. Is a business owned by one person
2. It had no separate legal existence from its owner
3. It has a limited legal life since its existence depends on the life of the owner.
4. The owner has unlimited liability in the business.
Advantages of a Sole Proprietorship
1. It is easy to start since only a license is required
2. Quick decision making
3. Freedom of action at any time
4. Flexibility in adopting quickly to changes in customers needs
5. Profits are entirely on the owner’s hands
6. There is control over business secrets
7. Easy to use family labor cheaply.
Disadvantages of Sole Proprietorship
1. Limited life in case of death of the owner
2. Unlimited liability may cause the owner to loosing personal property.
3. The sole proprietor serves loses entirely by himself
4. Limited capital may delay expansion.
5. working for longer hours may result to fatigue
6. Lack of essential skills may cause mis-management.
Circumstances under which the Sole Proprietorship ideal
1 When customers show preference to specialized services
2 Where small capital is required to start up a business
3 Where returns are low and may not warrantee existence of a large business.
4 Where the market experiences frequent demand changes
5 Where locations are remote and the population may be small.
Dissolution of a Sole Proprietorship
Dissolution refers to the termination of the legal existence of the business. This may be caused by;
- The death of the owner
- The transfer of the business to another person.
Problems the Sole Proprietorship may face.
1. Lack of continuity in case of death.
2. Lack of skills may lead to mis-management
3. Working for longer hours may lead to fatigue
4. Loses are served by the owner
5. Limited capital to facilitate expansion functions.
6. Lack of consultancy may lead to poor decision making
7. Unlimited liability may cause lose of property.
4.1.2 Partnership
According to the partnership Act. A partnership is referred to as a relationship which subsists between persons carrying on a business in common with view of making profits. A partnership is thus an extension of sole proprietorship and is in fact necessitated by the fact that a sole trader may for several reasons fail to carry out his business efficiently and profitability. Partners pull the financial and managerial skills together in order to make profit.
Formation
According to the partnership Act (934) a partnership business may come into existence through any of the following ways.
- Orally
- By actions of persons concerned
- By a simple put in written
- By a partnership deed
NB the above ways of forming a partnership are allowed by the partnership Act, However its better to remember that it may be made illegal under the following circumstances.
Circumstances under which the Partnership is illegal
- If the partnership has been formed for an illegal purpose e.g. theft.
- If is formed and the partners do not meet the minimum qualifications e.g. auditing
- Where the partnership contains more than 20 members
- Where the partnership wants to run their business with the name which does not disclose the true names of all the partners or the name had not been registered under the registration of the business Act under which it is deemed illegal.
Requirements for the Registration of a Business Name.
Under the partnership Act , the partners must furnish the registrar of business names for the following
- The business name
- The general nature of the business
- The principle place of location of the business
- The present Christian and sir names together with their usual residential address.
- The nationality of each partners
- Any other occupation of the partners
- The date of commencement of their business.
Types of Partners
1. General partners
These are the real partners in new sense of the partners which refers to those partners who are the most active partners in the partnership. In most cases the general partner is a reliable of the debts of the partnership.
2. Limited partners
This is a partner whose liabilities are limited to the amount of capital contributed to the partnership business. This type of partners do not usually participate in the management of the partnership becus4 if thy do they loose their limited liability in respect to the
transaction and decisions participated in.
3. Active partner
This is the type of partner who takes the active part in the running of the business. In most cases such a partner may be employed somewhere or may be in another business all together. The partner contributes capital to the partnership business and the profits or losses at lower proportions.
Articles of Partnership/ Partnership Deed.
Although it is not a statutory requirement the partnership can be formed by a written agreement, it is usual for the partnership business in particular those involved in huge commitments to write articles of a partnership also known as a partnership deed. The aim of this document is to safeguard the interest of each partner and it constitutes a legal contract among the partners.
Contents of a Partnership Deed
1. The nature of the business to be carried out
2. The capital and property of the firm together with the respective capital contributions of each partner.
3. The sharing of profits or loses by partners.
4. The rules as to the case of interest on capital and drawings by partners.
5. Provision for proper accounts and their audit
6. The power of each partner.
7. The drowns for the resolution of the partnership
8. The method of determining the value of good will on retirement of drafting in of a new partner.
9. The method of determining the amount payable to a deceased partner.
10. No partners may should carry on a competing business
11. Any changes in partnership composition must be agreed upon by all partners.
Management of Partnership
Members of a partnership are correctively responsible for the management of the business. The members may share responsibilities and duties according to their respective skills and availability in order to ensure effectiveness in management of the partnership. The partners may decide to hire skilled or non-skilled labour to assist the management of the partners.
Features/ characteristics of a Partnership
1. Mutual agency – each partner is an agent of the partnership and therefore any action by one partner with transacting the business binds the rest of the partners provided his actions are within the partners express or implied authority.
2. Limited life- since the partnership is a relationship originating from an agreement between two or more members any changes in their relationship caused by factors such as- death withdrawal of a partner e.t.c terminates the partnership or
dissolves it.
3. Unlimited liability
In a partnership the partners’ liability is not limited to the amount of capital investment. The partners are separately held liable for the debts of business and their personal properties may be sold to meet such debts.
4. Ownership of interests – the interest of a partner in a partnership business e.g. right to inspect the accounting records of a firm of a firm, admission or dismissal of partner transit of interest e.t.c must have the full consent of the partnership.
5. Sharing of profits
Each partners share of profits of proportional to his/her investment in the partnership. And any agreement of non-partner to share the profits does not make a non-partner a partner.
NB circumstances under which a non-partner may be included in sharing the partnership profits and losses.
1. As compensation for services rendered to the partnership
2. As compensation for the partnership use of his/her property or name.
3. As payments for loans advanced to the firm
4. As payment to the next of kin.
Sources of Capital of a Partnership
1. contributions from partners
2. Loans from commercial banks and other financial institutions
3. Stock from hire purchase firms
4. Credit facilities from suppliers
5. Loans from government institutions e.g. K.I.E e.t.c.
6. Plough backs from retained profits
Classification of Partnerships
There are five ways through which partnership are classified.
1. By trading
A partnership may be classified was
- Non-trading partnerships- these partnerships whose activities are to offer services e.g. legal, medical, accountancy, teaching e.t.c.
- Trading partnerships – these are partnerships whose main activities are manufacturing, purchasing or sales of goods.
2. By liability
- General partnerships – are partnerships in which all partners may publicity act on behalf of the firm and each partner individually be held responsible for the debts of the firm. Their properties may be attached to clear the debts of their
partnership. - Limited partnerships – a partnership whose activities of certain partners are limited. The personal liabilities of such partners (limited partners) are limited to a certain amount stated. These amounts are normally equivalent to the amount of their contributions.
NB the following conditions must be fulfilled for a limited partnership to be formed.
1. The partnership should not consist more than 20 partners.
2. The partnership must consist one or more general partners.
3. The limited partners are not liable to the partnership debts beyond his capital contribution.
NB Restrictions of the limited partners.
1. Is entitled to inspect the books of the firm and examine the partnership state at any time.
2. The death, withdrawal bankruptcy of a partner shall not cause dissolution of a partnership or the partnership can not be dissolved by a court order because of lunacy of the partner.
3. A limited partnership is only dissolved by the general partners unless brought through a court order.
4. Any differences on partnership matters can only be decided by a majority of the general partners.
5. With the consent of the general partners a limited partner may assign his/her shares in the partnership to another person.
6. A person may be introduced into the partnership without the consent of the limited partners.
3. By time duration
- A temporally partnership ( joint venture partnership) – this is a partnership formed for a specified period of time
- Termination of the stated period or accomplishment of the purpose may cause the partnership to come to an end.
- a permanent partnership (partnership at will) – This is a partnership formed to carry the business indefinitely. It does not have a fixed life of fulfilling its purpose
4. By activity
- Active partner – this is a partner who is actively involved in the day to day management of the partnership and may be paid a salary for these services. And the partner is held liable for the debts of the firm.
- A dormant /sleeping partner – does not take part of the day to day management of the partnership but contributes capital, shares profits and is liable for the business debts
5. By capital contributed
- Real partner – a partner who contributes capital into the business and whose name may be used in relation to transactions of the business and enjoys the profits of the partnerships.
- Nominal partner – is a partner who has not contributed any capital to the business but allows his or her name to be used in the business. They are usually influential persons whose names can be used.
- He is not fully liable to the partnership debts however is he presents himself to the public in a manner that portrays him a general partner he will be held liable.
Quinsy-partners – a partner who has retired from the partnership but has left his capital in the partnership business which is treated as a loan, he earns interest
6. By age
- Majority partner – A partner who has attained the age of 18 years and above. Such a partner unless stated to the centrally can be held liable for the partner.
- Partner shares only profits and not losses since he didn’t participate in decision making that may have caused such losses.
- The liability of the minor is limited only to the amount of capital contributed to the business since any liabilities arising may not be part his decision making.
- The minor partners can act on behalf the partnership and such acts shall be binding on the other partnership
- When the minor partner attains the age of majority he/she has up to six months to decide whether or not to continue with the partnership. If he/she decides to stay, he has full responsibilities and rights of a major partner.
Termination/ Dissolution of Partnership
Although the partnership deed or articles of partnership will contain regulations of terminating the partnership, nevertheless in the absence of our subject these regulations, a partnership may be dissolved in the following ways.
1. When the fixed time if any are stated in the articles of the partnership expires.
2. If the partnership was specifically entered into for a given venture, transactions or undertakings the completion of which or achievement will automatically dissolve the partnership.
3. If the partnership is a partnership at will, it can be dissolved by any partner giving notice of his intention to dissolve the partnership.
4. By mutual consent of all partners
5. By bankruptcy or death of one the partners.
6. By one partner’s shares in the partnership being changed or attached by a court order for private debts.
7. If any events occur which will make the partnership business illegal, the partnership will stand dissolved irrespective of the content of the partnership deed.
8. Automatic or compulsory dissolution as it is provided section 39 of the partnership Act which lay the following grounds under which a partnership may be dissolved by a court order.
- If any one of the partners becomes insane
- If any of one partner becomes permanently incase of performing his/her duties through in capabilities, accidents or disabilities
- Where a partner has acted in a manner which is pre-judicial to the carrying out firm’s business and may bring the name of the business to its disables.
- Where a partner was found guilty of breach the partnership contract.
- Where the firm has been operating in losses.
Circumstances under which the Partnership Deed is ideal.
1. In a business where the amount of capital required is reasonably large.
2. If professional were pulling together effort for efficiency and better performance.
3. If professional areas where the law prohibits a couple of days.
Advantages of Operating a Business under a Partnership
1. A partnership business benefits from the talents of individual ensuring almost efficiency and acceptance.
2. Since a partnership would be owned by a no. of partners it sets a basis of pulling together saving to raise large capital for investments
3. Sound decision making through consultative processes
4. A higher growth rate as a result of combining ambitious from different partners.
5. Partnerships have a good will and financial influence enabling it to raise finance easily.
6. Collateral or security of loans can be easily be raised.
7. Formation of partnership business requires minimal government interventions.
Disadvantages of Operating a Business under a Partnership
1. Slow decision making due to long discussion processes
2. Sharing of profits tends to disregard hard working partners.
3. Partnership business have limited life incase of retirement or dead of one partner.
4. Disagreements make partnerships business vulnerable to disputes among partners.
5. The partners have unlimited liability which lead to loosing personal property in the event the partnership business cannot settle its debts.
6. The agency burden where every partner is an agent of the partnership and one’s partner’s mistake may affect the rest.
7. Limited managerial skill may lead to mismanagement of the business.
4.2 Incorporated Business / Joint Stock Companies
1. Incorporated Business
We have so far looked at unincorporated business and have seen the main features of such business is that they do not have a separate legal existence from the owners. We shall now focus on business units that are legally viewed as separate and distinct units from their owners Such businesses are called in co-operated or joint stock companies. Incorporated business organizations are legally separate and distinct from their owners or members. The main forms of incorporated business or joint stock company include;
- Companies
- Co-operative societies
- Public co-operation
These are advanced forms of companies where a group of people pull their savings together and contribute as capital to set up a business enterprises or companies. These companies are governed by Acts of parliament under the Kenya all joint stock companies fall under the Kenya Companies Act = (cap 486) of 1948 The Act lays down the formation and general conduct of joint stock companies.
4.2.1 Companies
A company is a business registered by the registrar of companies Act. The Act of registering a company is known as incorporation.
Incorporation. This is a process that creates an organization separate and distinct from the person forming it (owners) The organization is known as a body corporate and registered company is known as a cooperation
NB companies are business organizations or units formed to carry out a specific activity.
They are organized by processing an existence that is separate and distinct from the persons who own it. Companies have rights and obligations of a natural person.
Rights and Obligations of Companies
1. It can own and dispose off property.
2. It can enter into a contract on its own name
3. It can borrow and lend money in its own capacity
4. It can hire and fire employees
5. It can sue and be sued in its own right
6. It can form subordinate agencies and its authority
7. It can spread information.
Features of a Company
- It is an artificial person created through legal process
- A company has rights and obligations of natural person e.g. holding and disposing property.
- A company has a perpetual life independency of the owners lives i.e. has perpetual succession.
- A company has a separate legal identity from the owner.
- A company is created for a particular purpose
- The owners of a company enjoy limited liability
Types of Companies
There are basically two types of companies. Namely
- Public limited companies
- Private limited companies
1. Public Limited Companies
A public limited company has a minimum number of 7 members with no maximum membership. The maximum membership normally is determined by the number of authorized shares (capital) of the company. In Kenya a public limited company has the term limited at the end.
Characteristics/features of a Public Limited Company.
1. Minimum membership is 7 with no maximum
2. Invites members of the public to subscribe to its shares
3. The shares are easily transferable among shareholders
4. It has a minimum of 3 directors
5. It has authorized minimum capita figure.
NB authorized share capital is to the total shares that have been legally authorized by the government during the company’s registration. A public limited company starts to operate after receiving a certificate of commencement ( trading)
2. A private Limited Company
This is a company with a minimum of 2 persons and a maximum of 50 persons excluding all past and present employees. A private limited company should have name ending with limited.
Characteristics of a Private Limited Company.
1. Has a minimum of 2 members and maximum 50 members
2. It does not invite the members of the public to subscribe its shares.
3. It’s shares are not easily transferable unless with consent with other share holders.
4. Operates with only one director.
5. Its shares don’t have authorized minimum capital figure It can start its operations after receiving its certificate
Limited liability Concept in Companies
This is the fact that the liability of companies of owners is restricted to he amount of investment of a company plus any other amounts that to be undertaken to be contributed towards payment of one companies debt. The word limited indicates that the liability of the owners of members in respect to this amounts (capital contributed) and not their personal property.
A company may be limited by-:
- Shares
- Guarantee.
Companies Limited by Shares
This is a company where member’s liability is limited to the value of shares held. The liability of members is limited to the share contributed.
Company limited by guarantee
This is a company whose members liability is limited to the amount that members have undertaken to contribute to the business debts. These contributions may cover for;-
- Court charges and
- Any other expenses.
Formation of Companies
A company may be formed by any person or persons associating for a legal purpose through registration with a registrar of companies under the companies Act. Although a limited company is a legal person it can only act through human agents who must register it with registrar of companies and for a company to be
MEMORANDUM OF ASSOCIATION
This is document that defines that relationship between the company and outsiders. It informs the outsiders what the company does, the amount that is required. The memorandum of association is the company’s chatter constitution and once the company is registered the memo becomes a legal document that can only be altered by law.
Contents of a Memorandum of Association.
1. Name clause – This states that name of the company ending with the work limited. Any name may be selected to be used by the company as long as it is not prohibited by law. This requirement is meant to protect people who may erroneously enter into a
contract in the company believing it to be another company an also protects companies from possibly mis-use of their names.
2. Object clause – this clause outline the objectives of the company anything outside this objective will ultra virus.
Importance of the Memorandum of Association
- It defines the limits of company associations.
- It informs subscribers the purpose for which their money will be put.
- It protects subscribers form possible misuse of their money
- It protects outside parties dealing with the company by informing them the extent of its operation.
3. Situation clause- This clause discloses the locations of the legislative office and it contains the following elements.
- Where the company is situated
- Where the letters may be delivered
- Where sermons may be served.
4. Liability clause – This clause states the status of the member’s liability with regard to the debts of the company.
- The clause enables people who may enter into contract with the company to determine the extent of the company’s liability.
- The statement of liability should clearly specify the members liability regard to the company debts.
5. Capital clause
The clause states the total capital of the company is authorized capital into shares and their corresponding value. Incase of a public company, the capital clause will give the minimum amount of capital hat the company must raise before it commences business.
6. Association of substitution clause- This contains a declaration by the promoters (original owners) that they desire to form a company to pursue the objects of the memorandum of association and that they agree to take payments of their shares. The promoters are required to give details of their name addresses, occupation and no. of shares
ARTICLES OF ASSOCIATION
This document contains the rules and regulations pertaining the relationship between the shareholders and the company among the shareholders themselves. These rules regulate the internal relations of the company forming a binding contact between the members and the companies and as well as among the members themselves.
Content of Articles of Association.
1. The right of each member e.g voting rights.
2. The issue, transfer and for future of shares and the alterations of shareholders.
3. procedures of calling and conducting meeting
4. the methods of appointing or electing officials
5. Qualification procedures duties and rights of directors
6. Preparation of books of accounts and the auditor’s report.
NB whereas the memorandum of association is mandatory document of all companies, the articles of association are optional.
Where the company does not draw the articles of association, it can adopt the standard articles of association contained in the company Act. A company may alter or amend its articles of association and such amends shall be valid. The power to alter the articles of association is specified in the memorandum of association.
List of persons who have consented to the directors of a company
- The directors are chosen from the founders of the company referred to as promoters and the list contains details of names addresses, occupations, shares subscribed and a statement of agreement to serve as directors. A statutory declaration of compliant with the requirement of the company’s Act.
- The declaration must be signed by person’s names as directors or the company’s secretary.
- The declaration must be equally by signed by the advocate engaged in the formation of the company and must expressly state that the company is formed by lawful persons.
CERTIFICATE OF INCORPORATION/ REGISTRATION OF A COMPANY.
Once all the required documents are properly filled with the registrar of companies is ratified with what is contained in these documents. The registration brings the company into being and the companies issued with a certificate of registration. The registration gives a company an identity that is separated and distinct from its owners. From the date of incorporation the company becomes a body corporate with the name powers and rights and obligations of an incorporated company. The process of forming a company is formalized when a certificate of incorporation issued has inclusive evidence that all the information has been complied with and that the company is duly registered.
NB – A private company can start its business operations immediately it is issued with a certificate of incorporation, this is because the company does not have to invite the members of the public to buy shares. A public limited company must proceed to issue proposals inviting the members of the public to buy shares. (A prospectus a notice or circular of advertisement inviting the public to purchase the shares of a company). Public limited companies can only be allowed to purchase goods only when the registrar is satisfied that-:
- The company has raised a minimum amount of capital as required by the memo.
- That every director has paid to the company the minimum amount of money on the shares to be taken.
- That there’s a declaration by at least one director that the company shall comply with the regulations stipulated by the law that governs companies.
Once the registrar is satisfied by the above requirements then the public limited company is issued with the certificate of trading which will enable the company to commerce its operations.
Ownership and Management of Companies
1. Ownership
A company is owned by any person who has subscribed and purchased that company’s shares. The owners of a company are known as shareholders and their names are entered into the company’s registrar. Each share holder has a claim in the property of the company proportional to the shares held. The shareholders of a company have unlimited rights to the transfer or sale of their shares in the company.
2. Management
The management of a company is in the hands of the board of directors. The initial directors stay in the office till the first meeting (AGM) is held at which new directors are elected. The size of the board is usually determined by the size of the company. The board of directors is charged of formulating and overseeing the implementation of company policies. The board is normally supported by a terms of profession employed to the responsible for the day to day management of various departments. For a public limited company, the directors are required by law to present the company’s financial statement at the AGM meetings and filled with the registrar of
companies.
Sources of Capital of a Company
- From the public through the sale of shares
- From commercial banks ad other financial institutions
- government institutions i.e. KIT, ICDC e.t.c
- Suppliers inform of trade credits.
- The business itself inform of retained profits
- Higher purchase traders.
- Rent revenue earnings from any investments.
1. Public limited companies
These are stock joint companies that have sold stock to the general public and thus attracts public money in form of share capital I,e ordinary or preference shares. Such companies are usually quoted at the stock exchange where shares are bought and sold through stock brokers. These companies usually raise large size of money from the public and in order to do so the companies must;
Obtain permission from the development market authority also known as “ New issue committee” this committee assesses the financial soundness of such companies before allowing theme to attract public money.
- The aim is to safeguard the interests of public investors
- The company in need of public money will have to obtain permission from the Nairobi stock exchange council before it can be allowed to have its shares dealt with.
2. Private limited companies
These companies are formed by submitting the necessary requirement to the registrar of companies ( the five documents). Once this has satisfied the registrar of companies such a company will receive a certificate of incorporation. The private limited companies are usually not allowed to advertise their shares to attract public money and as such they sell their shares privately ( private placing
to the interested members of the public. Like public limited companies, private limited companies have limited liability, their shares are not fully transferable as they are not quoted at the stock exchange. Any transfer of shares requires the consent of other share members of the company.
Advantages of a Company
1. More capital can be raised since it has large membership
2. The company offers better collateral for loans to be advanced.
3. Limited liability secures private property incase of inability to pay debts.
4. The companies have continuity i.e. have perpetual life or succession.
5. A company has a liability to hire highly qualified professionals facilitating better management
6. Shares are easily transferable.
7. The companies have legal identity and therefore no conflicts to its members.
Disadvantages of a Company
1. Difficult to form since it is costly and has long legal procedures
2. The company has restricted operations by the memorandum of association
3. Slow decision making due to long approval procedures
4. Limited ownership caused by land of control of the firm
5. The agency burden may cause mismanagement when especially the board is weak.
6. Double taxation especially of the dividends
7. Lack of secrecy since the company has to publish its financial status annually.
Main Features of Joint Stock Companies
As already noted a joint stock company is an association of people who contribute capital to form common stock in order to carry on a business activity for product motive. The company formed comprises- corporate status and is registered under the company’s act. A joint stock company may be public or private company and its main features include;
- Legal personality – the company has identities separates from that of other persons contributing capital and can therefore hold property, contract in its own name sue and be sued.
- The shares are transferable – the share holders can sell their interest in the companies to other persons willing to invest in it (freely for public ltd company but limited to the consent of the rest of the shareholders for private company.
- Common sill – as a separate entity it will be necessary for a joint stock company to sign documents and such signatures are normally embodied in a common sill of a company. The sill is kept under custody of the responsible offices.
- Members/ shareholders can not bind the company by their Acts
- Individual/ members are not entitled to take part in business since it is managed by the board of directors
- Shareholders have a limited liability.
Advantages of Joint Stock Companies
1. The liability of share holders is limited to the capital contributed by shares guarantee.
2. A joint stock company is going concern implying that it has perpetual existence separate from that of the shareholders.
3. A joint stock company is an artificial legal person independent of the shareholders and it can own its assets and liabilities.
4. The shares of a joint stock company in particular public limited company are freely transferable.
5. The shares of a joint stock company can easily be used as security for loans making it easy to obtain loans.
Disadvantages of Joint Stock Companies
- It lacks secrecy and privacy since it requires audited financial statement annually.
- The formation of a joint stock company requires long legal formalities.
- They are difficult to form since they require a heavy capital investment.
- Joint stock companies can not increase their capital investments beyond the legally authorized capital.
- The decision making process of joint stock company is slow and bureaucratic due to consultations.
- Joint stock companies are not flexible to changes.
Dissolution of a Joint Stock Company
When a company has started its expected to continue with its operations to the future since it is a form of business with perpetual succession. Termination of the life of a company may be through;
1. Failure to commerce business within one year of its formation – upon this it may be would up by its court order on application.
2. The membership falling below the required minimum and this dissolution may be decided by a court order.
3. Accomplishment of the purpose or expirely of the period of operation.
4. The registration if it fails to comply with statutory cooperation e.g failure to file annual files to the registrar of companies or engaging in illegal activities.
5. A resolution by members to voluntarily wind up the company which may arise through.;
- where the company does not have a future on that line of business
- The members wish to sell it as a going concern in order to share profits.
- Where one company is acquired by another and the members wish to discontinue it so as to terminate its existence a separate legal entity.
6. Through a merger with a larger company
7. Insolvency – the company is not able to meet its obligations.
Holding Companies
The company Act of the laws of Kenya defines a holding company as one which has more than half of equity share capital of another company of which it is a member or controls a bigger percentage of the board of directors of one or more other companies which are called subsidiary companies. A holding company may be public or private depending upon wishes of the promoters or shareholders. In Kenya a good example of a holding company is ICDC.
4.3 Public Corporations
This is the net price to which the government has stakes in The government owns a certain percentage of the enterprises shares. Where a government has a fall ownership of the corporation, the business enterprise is known as a parastatal. Some public corporations are profit seeking while other are not. examples of such public corporations include;
- Kenya pipeline
- Kenya airways
- KCB (Kenya commercial Bank)
- Kenya lighting company (KPLC)
Parastatals are run to provide the essential services such as education, medical etc.
Similarities between public cooperation’s and joint stock companies.
- They are both legal entities
- They are governed by a board of directors appointed
- They are self financing.
Public corporations
1. A cooperation is wholly and partially owned by the government
2. Corporations tend to be monopolists
3. Are operated on public interest not entirely on profit motive.
4. They are paid for by the public from the taxes collected by the government.
Joint stock companies
1. Owned by the public and has shareholders.
2. They are subjected to companies
3. Purely operate on a profit motive.
4. Private funds finance joint stock companies.
Parastatal Bodies
A parastatal body is an organization distinguished from a body government but in which the government is a sole owner. They are established by the government to perform specific functions and their management is in the hands of board of directors. The board of directors is appointed by the government and the parastatals bodies do not sell shares since they are whole financed by the government.
Examples
- Marketing boards
- Coffee board of Kenya e.t.c.
Marketing Boards
These are produce organizations set up to encourage and control of the Agricultural produce. Their objective is to protect producers and consumers and may be formed by both producers coming together or be constituted by the government.
Classification of Marketing Boards
1. commodity marketing boards- these are producer organizations with objectives are restricted to purchasing and selling of commodities e.g coffee, tea, pyrethrum
2. producer marketing boards- this is a produce organization dealing with a wide range of products e,g maize, wheat e.t.c
3. Expert marketing boards- this concentrate on marking one or more products overseas e.g KTDA or coffee board.
Functions of Marketing Boards.
1. To encourage and control the marketing of Agricultural produce through purchasing at fixed prices to facilitate stable incomes
2. To encourage income and price stability through the buffer stock in buffer funding system.
3. To facilitate farmers to obtain loans for farm inputs e.g quality fertilizers, seeds and equipment.
4. To support the government in licensing regulations
5. To provide a wide range of sport e.g transport, grading, packaging of products e.t.c
6. Marketing boards provide advisory advise to farmers
7. They facilitate research on agricultural products and markets.
Formation of a Public Cooperation
They are formed by a specific Act of parliament which define and powers and the overall mandate of there institutions. The law creating corporations also state the minimum capital under which they will operate. The corporations are viewed as separate legal entities and may be wholly or partially owned by the government.
Management of Public Corporations.
This is under a board of directors. The directors are appointed by the government when the government owns wholly the corporation or relevant joint directors and government appointed directors where the government owns partially the cooperation. The government influences decisions of the corporations either directly or indirectly e.g pricing decisions. In Kenya the board of directors is appointed by the relevant ministries or by the president. It is this board which is responsible for the implementation of the policies of the
organization. The board may employ professional managers charged with the day to day running corporations.
Sources of Share Capital
1. Public corporations may get their capital from the government through loans or budgetary provisions.
2. Where the government own corporations jointly both contributions of capital and the public will raise capital through issuing shares.
3. As a body corporate a public corporate has power to borrow money from financial institutions.
Features of a Public Corporation
1. A service motive- they provide essential services to the citizens and may therefore not aim at making profits – entirely.
2. They are formed by an Act of parliament which states that government ministries will take charge of such corporations.
3. They are subsidized by the government to enable them provide essential goods and services at minimum fees.
4. The board of directors is wholly appointed by the government or jointly with other stake holders to influence the policies of the cooperation.
5. They are financed by the government but for jointly owned public corporations.
6. It has a legal distinct from the government or any other owners
7. They have limited liability
Advantages of Public Corporations.
1. Raising initial capital is each since funds comes from the government
2. Public corporations improve the welfare of the people since basic goods and services are offered at affordable prices
3. The company has limited liability
4. They are used to meet government objectives.
Disadvantages of Public Corporations
1. Political influence may lead to a week management
2. Public corporations may not respond to consumer needs since some operate as monopolist.
3. Public corporations have a public interest making them difficult to achieve their objectives.
4. The job insecurity of senior managers e,g C.O.S , may lead to dishonest management
5. Slow decision making because of the size of same public corporations
6. most corporations are loss making
Dissolution of Public Corporations.
Since formation of a public corporation is by an Act of parliament it follows therefore, that in order to dissolve such an organization onc would have to repeal the Act of parliament under which they are allowed. The following reasons may lead to repealing the Act of parliament under which they are formed.
1. Perpetual operations of the corporation of a loss
2. Outright insolvency.
3. Mismanagement which mat adversely affect the performance of the corporation
4.4 Co-operative Societies
This refers to a co-operative. The term co-operative is derived from cooperation. It is a body of people or a body of persons who have agreed to come together to achieve a certain goal. The members of the public get together to voluntarily contributes capital to he
corporative society sharing the risks of investments in order to achieve and enjoy the benefits.
Reasons for Promoting Cooperative Societies in Kenya.
- They facilitate members to manage their own society and distribute themselves the benefit generated.
- In order to increase bargaining power in selling the members produce or gaining maximum satisfaction.
- In order to enhance participation by members in economic activities minimizing the middlemen.
- In order to reduce market cost of produce especially in transportation and storage.
- In order to promote and improve quality production
- In order to facilitate stable income earning
- In order to put together capital resources of expensive investment e.g transport, refrigeration e.t.c.
Formation of Co-operative Societies
They are formed by a minimum number of 10 members who pursue to undertake some objectives. The members work out a defined plan of what the co-operative society is supposed to do. For the co-operative society to be formed they have to submit their constitution to the commissions of co-operative societies with the following detail.
- The objectives of the society
- By-laws of the society
- The areas of corporation of the society.
- The nature of the business to be undertaken
- The location of the head office.
- The application of registration is to be submitted to the commissioner through the local co-operatives.
- Upon satisfying the commissioner, a certificate of registration is issued .
- The co-operation then recruits members who pay registration fees and buy their specified shares in the society.
- No member is allowed to buy more than 5% of the share capital .
- The registration of the co-operative society makes it a body separate meaning it becomes a separated entity distinct from its owners and with perpetual succession.
Ownership and Management of a Co-operative Societies.
- It is owned by its owners and its ownership and membership is opened and voluntarily
- The members in a co-operative society have a limited liability to the amount contributed.
- The supreme authority of the registered co-operative society is in the AGM (Annual general meeting).
- During the AGM the managing director is elected on one person one vote basis irrespective of the shares owned by each member.
- The outcome is determined by a simple majority and such elections are supervised by the district corporation officer.
- The managing director serves for a period of time after which elections are held by a vote.
- The elected members hold constant meetings to discuss operations and the concerned of the cooperative.
- The committee may employ professional staff to charge of various parts in the society.
- A number of sub-committees may be formed from the elected officers to take to take various responsibilities of various societies.
Examples of Committees in a Co-operative society
1. Executive Committee-The committee is charged with the day to day running of the society and its membership is made up of the following
- Chairman
- V-chairman
- Honorable secretary
- Treasurer
- Secretary
2. Education committee- It is charged with educating members of the society and it is made up of 3-members answerable to the executive.
3. Credit committee- It is normally common in saving and credit societies. It is made up of 3-members answerable to the executive and it is charged with the following:
- Processing loan applied and making recommendations.
- Loan recovery
- Credit recommendations and approval
4. Supervisory committee-It is charged with overseeing the overall management of the society’s finances. The Relationship between the Cooperative Society and its Business with its Members. A cooperative society should usually transact its business with its
members. This business relationship relates the following relations.
- The customer relations- The members can be customers of the cooperative society by purchasing its goods and services
- The supplier relations-The members can supply to the society by the seeling to the cooperative society marketing their produce.
- The employee relations- The members can be employees who work for the cooperative society which they jointly own.
Sources of Capital for Cooperative Societies.
1. Members contributions through
- Registration fee
- Amount contributed by members to purchase shares
- The fee charged from the proceeds or sales of the members produce.
- Interest earned on money loaned out or firm inputs advanced to members.
2. The loans from financial institutions.
3. Plough backs or financing through retained profits.
Features of the Cooperative Society
1. Separate entity- Registration of a cooperative society makes it separate from its owners and the cooperative society has rights and obligations that are separate distinct from those of its owners.
2. Liability-The liability of its members is restricted to the amounts they have contributed in terms of capital.
3. The minimum membership of a cooperative society is 10 persons and the maximum number is specified since it depends on the share capital of the society.
4. Continuity-The cooperative society has a perpetual life.
5. Cooperative societies are governed using by-laws contained in the constitution of the cooperatives.
6. The share capital is divided into units both persons who want to become members of the society.
7. The cooperative society is run by management committee elected
8. The distribution of profits to the members is according to the level of activity carried out among members-High volume of activity command high portions of profits.
Essentials for the Success of a Cooperative Society.
1. Adequate volumes to secure the benefits of large scale production.
2. Adequate finance to fund operations construction purchasing of equipments.
3. A sound management team with effective entrepreneur skills.
4. Existence of a definite objective
Principles of Cooperatives
1. Open Membership
Membership is open and voluntary without artificial restriction imposed on membership
2. Democratic administration.
The affairs of the cooperative society are managed in a democratic manner and elections are on a one person
3. Service to members-The primary purpose of a cooperative society is to render services to members.
4. Distribution of profits or surplus- Distribution of profits or surplus is based on a specified rate.
5. Limited interest on capital- This is because the aim of cooperative society is to help its members and not make profit.
6. Cooperation with officer cooperative society so as to achieve a common purpose and a common objective.
7. Education to its members.
Types of Cooperative Societies.
A cooperative is a voluntary association of persons who come together to promote their social economic interest.
The types include:-
1. Producer cooperatives
A producer cooperative is an association of producers such as societies which collect, process, market and distribute the members produce.
Functions of Producer Cooperatives
- Getting better prizes for members produce.
- Providing better transport facilities for moving the produce from the source to the market.
- Providing better storage facilities for members for members produce.
- Proving grading, packing and processing services to the members.
- Extending credit facilities to its members.
- Educating members on better methods of production through seminars, demonstrations etc.
- Facilitating use of quality seeds, fertilizers and farm inputs
2. Consumers Cooperatives
A consumer cooperative is an association of borers who have the same consumer needs. The consumers buy bulky and sells to the consumers at lower/fair prices. This reduces the cost of products by eliminating the middle men. The main function of these cooperative societies is to purchase and distribute quality goods to members at reasonable prices.
Benefits of the Consumer Cooperatives
- They make goods easy available to members.
- They buy goods in bulky and sell to members at lower prices.
- They distribute the realized profits to members at lower prices
Why consumer cooperatives are not popular in Kenya.
- Fears competition between the local traders which push prices down and provide quality goods hence no need for cooperatives.
- Many people supply enough subsequent food for themselves.
- Most people cannot afford large amount of capital required to start.
- Most population in Kenya lives in the rural setup and may not accept the cooperative rule.
- No proper attention to such cooperatives by the government. Savings and Credit Cooperative Society (SACCOS)
- These societies are formed by persons who come together to save their money in a common pull with a view of getting loans to improve their welfare.
- The members of a SACCO are usually under one employer and members contributions are deducted from their salaries but the employer to the cooperative society through a check of system at regular intervals usually monthly.
- At the members savings earn interest and get loans at reasonable interest rates normally 1% per month. Members savings serves as a security for a loan, three guarantors and a pay slip.
Why SACCOS are Popular among Employees
- It is easy to save with the SACCO since deductions are done through a check of system.
- Easy to get loans from SACCOS due to fewer simple requirements.
- Interest charge on loans is low compared to commercial banks.
- Loans do not require collateral except far members’ salary slip and guarantors.
- Members savings are save since they are insured.
- Incase of death the beneficiaries do not lose their savings in cooperatives nor they are called upon to repay.
- SACCOS are flexible since they give different types of loans e.g. normal, emergency, school fees loans, medical etc.
Main Reasons of Forming a Cooperative Union
- To strengthen the buying capacity especially of farm inputs or transport facilities.
- To negotiate for loans for members cooperatives from the cooperative banks.
- To market the produce of members cooperatives.
- To help members cooperatives with the processing of their produce.
- To help member’s cooperatives with storage, administrative services, accounting etc.
- To educate, advice, train, the staff of members cooperatives.
National Union.
- This is the union of various cooperative unions.
- The national cooperatives form umbrella bodies of cooperatives formed.
- The membership of such a cooperative comprises cooperative societies or operating in a particular production line.
Examples:-
The Kenya Planters Cooperative Union.
The Kenya Union of Savings and Credit.
Apex Cooperatives.
These are the overall cooperative bodies to which all other cooperatives i.e primary, cooperative unions and national union are carried. An example in Kenya is is the Kenya National Federation of Cooperatives Union. They are formed to promote cooperative
performance with the aim of:-
- Providing information about the activities of cooperative in Kenya.
- Providing education and training for member cooperative for efficient and
- Represent Kenya cooperatives both regionally and internationally.
Another example is the Kenya cooperative bank.
International cooperatives: Are composed of national cooperatives from various countries e.g. The Kenya Federation of Cooperatives
Problems Facing Cooperative Societies.
Mismanagement by cooperative officials who take advantage of their knowledge and position to benefit themselves. Unskilled management elected without any knowledge whatsoever with management skills. Lack of adequate capital due to small contributors and difficult to get bank loans. Capital interference and self interests. Most cooperatives are agro based facing price fluctuations climatic problems, low prices etc. Little government input to rejuvenate the cooperative societies.
Advantages of Cooperative Societies.
- Low cost services to members.
- Improved welfare of members enhancing their participation in economic activities.
- Encourage savings enabling members to accumulate their capital.
- Extended credits to members at low interest rates improving their welfare.
- Limited liability protecting personal property.
- Flexibility in membership for entity and exit.
- Equality of the members in terms of rights irrespective of the number of shares held.
- Large capital base due to high membership.
Disadvantages of Cooperative Society
- Poor management caused by the system of choosing the managers I.e. AGM elections.
- Constant political interference causing unrest and mismanagement.
- Withdrawals are easy which may cause instability and discontinuity.
- Slow decision making due to over consultation.
- Lack of secrecy since all activities must be approved by all members.
- Large membership may cause management problems.
Dissolution of a Cooperative Society
- Disagreement among members or an agreement of members may lead to application of registration.
- Insolvency- Where the cooperative is unable to meet its debts.
- By a court order upon application by one or more members.
- An order of dissolution by the apparent ministry in the interest of its members.
- Withdrawal of members leaving membership to less than the minimum required.
