Commerce · Lesson 5

Sole trader, partnership, companies, co-operatives, public enterprises, combinations, capital and profit

JAMBWAECNECO

What the syllabus asks

JAMB: 7 Business units (forms and features; sole proprietorship, partnership, limited liability companies, public enterprises, co-operative societies; registration of businesses; merits and demerits; factors determining choice; mergers, amalgamations and dissolution); 8 Financing business (capital: types; profit: meaning and calculation; rate of turnover; working capital)

WAEC: Business units (sole trader, partnership, limited liability companies, co-operatives, public enterprises; formation, features, advantages and disadvantages; business combinations: mergers, takeovers, holding companies, cartels, trusts, consortia); capital and profit (types of capital, calculation of capital and profit, working capital, capital employed, turnover)

NECO: Business units (sole trader, partnership, limited liability companies, co-operatives, public enterprises; formation, features, advantages and disadvantages; business combinations: mergers, takeovers, holding companies, cartels, trusts, consortia); capital and profit (types of capital, calculation of capital and profit, working capital, capital employed, turnover)

What you will learn

Classify business units into private and public sector.
Describe the features, advantages and disadvantages of sole proprietorships, partnerships, companies and co-operatives.
State the requirements for registering business units in Nigeria under CAMA 2020.
Distinguish between private and public limited companies.
Explain the reasons for public enterprises and their problems.
Explain the types, causes, advantages and disadvantages of business combinations.
Explain the types of capital and calculate share capital terms, working capital and capital employed.
Calculate gross profit, net profit and profitability ratios.
Explain factors that determine the choice of business unit and causes of dissolution.

Key points

Business units: private sector (sole trader, partnership, companies, co-operatives) and public sector (ministries, corporations, state-owned companies, municipal undertakings).
Registration: CAC under CAMA 2020 (business names, companies, LPs, LLPs); co-operatives register under co-operative law.
Sole proprietorship: easy to form, all profit to owner, quick decisions; but unlimited liability, small capital, no continuity.
Partnership: generally not more than 20 members; more capital and skills; unlimited liability; no deed means equal sharing.
Types of partners: active, dormant, nominal, limited, minor.
LP: at least one general partner with unlimited liability. LLP: body corporate, limited liability, perpetual succession.
Company: separate legal entity, limited liability, perpetual succession, ownership separate from control.
Private company: 1 to 50 members (excluding employees), no public offer, minimum issued capital ₦100,000. Public company: public offer, minimum ₦2,000,000.
Formation documents: memorandum and articles, statement of capital, particulars of directors; certificate of incorporation; prospectus for public offers.
Co-operatives: voluntary, one member one vote, limited interest on capital, surplus by patronage; consumer, producer, marketing, thrift and credit.
Public enterprises provide essential services but suffer inefficiency, political interference and losses.
Combinations: horizontal, vertical (backward/forward), lateral, conglomerate; merger, takeover, holding company, cartel, trust, consortium.
Capital terms: authorised, issued, called-up, paid-up, calls in arrear; working capital = CA − CL; capital employed = fixed assets + working capital.
Gross profit = sales − cost of sales; net profit = gross profit − expenses.
Ratios: GP margin, NP margin, return on capital employed, turnover of capital.

Start here: Business units: meaning and classification

A business unit (business organisation) is a form of ownership under which a business is set up, financed and controlled. Who owns the business, who makes decisions, who takes the profit and who bears losses depend on the form chosen. Figure 1 shows the classification.

Private-sector units

Owned and controlled by private individuals, mainly to make profit:

Sole proprietorship (sole trader).
Partnership, including the limited partnership and the limited liability partnership.
Joint-stock companies: private limited (Ltd) and public limited (Plc); also companies limited by guarantee (not-for-profit) and unlimited companies.
Co-operative societies (owned by members for mutual benefit).

Public-sector units

Owned, financed and controlled by government (federal, state or local), mainly to provide services:

Ministries, departments and agencies.
Public corporations created by statute.
State-owned companies registered under CAMA in which government holds all or most shares.
Municipal (local government) undertakings such as markets and motor parks.

Registration in Nigeria

Businesses are registered with the Corporate Affairs Commission (CAC) under the Companies and Allied Matters Act (CAMA) 2020. A sole proprietor or partnership trading under a name other than the owners’ true names registers a business name; companies, LPs and LLPs are incorporated. Registration is now done online on the CAC portal. Co-operatives register with the state or federal co-operative authority, not the CAC.

Factors determining the choice of business unit

Amount of capital required.
Degree of risk and whether limited liability is wanted.
Size and nature of the business.
Degree of control the owner wants to keep.
Legal requirements and cost of formation.
Continuity desired.
Tax considerations and privacy of affairs.

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Practice questions

1. A sole proprietor has

unlimited liability
limited liability
perpetual succession
shareholders

Show answer

A: unlimited liability
He may lose personal assets to pay business debts.

2. A disadvantage of a sole proprietorship is

quick decisions
personal contact with customers
keeping all profits
limited capital

Show answer

D: limited capital
Capital comes mainly from the owner.

3. A partnership is formed by an agreement called the

certificate of incorporation
prospectus
deed of partnership
memorandum of association

Show answer

C: deed of partnership
It states capital, profit sharing and duties.

4. A partner who lends his name but contributes no capital is a

limited partner
nominal partner
dormant partner
general partner

Show answer

B: nominal partner
He may still be liable to outsiders.

5. A private limited company cannot

invite the public to buy its shares
have limited liability
own property
sue and be sued

Show answer

A: invite the public to buy its shares
Only public companies offer shares to the public.

Key words

Sole proprietorship: A business owned and controlled by one person who takes all profits and bears all losses; also sole trader.
Unlimited liability: The owner’s personal property can be taken to pay the debts of the business.
Limited liability: A shareholder’s loss is limited to the amount unpaid on his shares; personal property is protected.
Partnership: The relationship between persons carrying on business in common with a view to profit.
Deed of partnership: A written agreement setting out the rights and duties of partners.
Dormant (sleeping) partner: A partner who contributes capital but takes no part in management.
Limited partner: A partner whose liability is limited to his capital contribution and who does not manage the firm.
Limited liability partnership: A partnership that is a body corporate, giving partners limited liability, provided for in CAMA 2020.
Company: An association of persons registered under CAMA as a separate legal entity.
Separate legal entity: The company exists in law apart from its members: it can own property, sue and be sued.
Memorandum of association: The document stating the company’s name, type, registered office, objects (if restricted), liability and share capital; under CAMA 2020 it is filed together with the articles.
Articles of association: The internal rules of a company: meetings, directors, shares, dividends.

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