- 20 Marks
BCL – L1 – Q57 – Alternative forms and constitutions of business organisations
Question
(a). Explain the key characteristics of being a sole trader. What advantages and disadvantages do they give?
(bi). Section 3 of Incorporated Private Partnerships Act, 1962 (Act 152) states that ‘Partnership means the association of two or more individuals carrying on business jointly for the purpose of making profits’. Suppose you had set up an unregistered business for buying and selling second-hand vehicles with two friends, and you decided to call it Triad Car Dealers, determine the following:
(i) Whether there can be a valid partnership with your two friends if you own 85% of the total assets of the business?
(ii) Who makes the decisions which affect the nature and running of the business?
(iii) Describe the liability of various partners for partnership debts.
Answer
(a). A sole proprietorship is a business that is run by a single individual who makes all the decisions, although the proprietor may engage employees. The sole proprietor is personally entitled to all of the profits and is responsible for any debts that the company incurs.
Advantages:
- Easy to set up.
- No professional advice/fees for auditors/directors is needed to set it up. You just literally go into business on your own and the law will recognize it as having legal form.
- Simplicity – one person does not need a complex organizational structure.
- Less capital requirement.
- Self-actualization and motivation.
- Unity of ownership, control and management.
- Quick and easy decision making.
- Enjoys 100% benefits/profits.
Disadvantages:
- Not a particularly useful business form for raising capital (money). For most sole traders the capital will be provided by personal savings or a bank loan.
- Unlimited liability – no difference between the sole trading business and the sole trader himself. As a result, he has personal liability for all the debts of the business. If the business collapses owing money (an insolvent liquidation) then those owed monies by the company (its creditors) can go after the personal assets of the sole trader (e.g. his or her car or house) in order to get their money back.
- Takes/bears 100% risk/failure/losses – The profits of the business belong to the sole trader but so do the losses.
(bi). Candidate should state that once two or more individuals carry on business jointly for the purpose of making profit it becomes a partnership no matter the percentage of the assets owned by an individual.
(bii). Candidate shall state that partners make decisions subject to the agreement entered before the partnership.
(biii). All the members of a partnership have unlimited liabilities.
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