O Level Revision : Commerce - Business Units

Business Units 

1. The sole trader

Features

• Owned and controlled by one person with or without the assistance of employees.
• Owner receives all profits, bears all risks and losses.
• Obtains capital from personal savings, loans from relatives, friends, banks,
• finance houses, leasing and trade credit.
• Has unlimited liability, in the event of a business failure, personal property and the business assets are used to pay the creditors.
• Little capital required and scale of operation is small.
• Registered under the Registration of Business Act

Advantages

• Easy to form, organise, manage and dissolve.
• No need for delays through consultation with others
• Owner alone makes decisions.
• Personal supervision.
• Owner has personal incentive to seek economies of scale, minimise waste and maximise profits.
• Gives personal attention to customers.
• Caters for customers` tastes.
• Offers personal service and advice.
• Owner has complete privacy of business affairs.

Disadvantages

• Has limited capital - this limits expansion.
• Working hours are often very long.
• May lack expertise in business skills.
• Lacks continuity on the death of the owner.

2. Partnership

• It is formed mainly by business people who offer services.
• Doctors, lawyers and accountants often form partnerships in order to offer special services under one organisation.

Features

• Has a written partnership agreement.
• Has unlimited liability for general partners and limited liability for dormant partners.
• Partners usually provide the capital.
• Partners make the decisions.
• Partnership is owned by partners.
• 2 to twenty members may form a partnership except for professional associations.
• The formation of a partnership may be by agreement between partners either verbally or in writing in the form of a Partnership Act or Deed. The Partnership Deed lays the following:

(i)        name of the business

(ii)       location and type of business

(iii)       duration  of  the  agreement    i.e.  termination  due  to  death,  resignation, retirement or bankruptcy

(iv)      partners names and their contributions

(v)       ratios for sharing profits and losses

(vi)      rates of interests on capital and drawings

(vii)     provision for partners salaries

(viii)    powers and limitations of partners in managing the business

Advantages of a partnership

• Easy to form.
• Requires little formality i.e. a written partnership agreement.
• Partners can keep information on trading results, and liabilities to themselves.
• Specialisation and division of work load are possible among the partners.
• Partners contribute capital, different skills and expertise to the business.
• In the event of insolvency the burden rests on all partners.
• Joint consultation reduces the chances of arriving at unwise decisions.

Disadvantages of a partnership

• Absence of continuity on the retirement, bankruptcy or death of a member.
• Ownership is not easily transferable.
• Joint consultation among partners limits swift decision making.
• Partners may enter into contracts and bind other partners.
• Disagreements and quarrels may occur due to conflicting interests.
• All partners, except the limited partners have unlimited liability.
• Limited capital from the partners limits expansion of the business.

Sources of capital

• Partners’ own savings
• Loans from financial institutions
• Overdrafts from commercial banks
• Ploughing back profits

3. Limited companies

• Memorandum  of Association, Articles of Association and Prospectus are the main documents drawn and required to form a limited company.

(i)   Memorandum of Association

• Is sent to the Registrar of Companies.

-     Contains:

• the company’s name
• registered office
• objects
• amount of  capital the directors can raise by issuing shares
• confirmation that the liability of the members is limited
• information about the company to outsiders.
• Governs the  relationship  between the company and the external interest groups.

(ii) Articles of Association

• Sets out the internal rules of the company.

-     Contains:

• procedures at company meeting
• rights of shareholders
• procedures of electing directors
• powers and responsibilities of directors
• the borrowing powers of the company

(iii) Prospectus

• Is an invitation to the public to subscribe for shares.

-     Provides information about the company`s:

• background
• current position
• future prospects

Annual General Meeting (AGM)

• Must be held annually.
• Directors are elected.
•  Financial position of the company is assessed.
• rdinary shareholders attend and vote.

a) Private limited company

Features

• A minimum of one person can form a private limited company.
• No maximum number of shareholders is set but it should be manageable.
• The company must be registered with the Registrar of Companies.
• Shareholders own the company.
• Shareholders have limited liability.
• The company is a separate legal entity.
• The company can sue and be sued in its own name.
• The company exists and operates despite the death of a shareholder
• All the shareholders must approve the transfer of shares.

Advantages of a private limited company

• Raises large capital by increasing the number of shareholders.
• Attracts experienced and skilled human resources.
• Limited liability attracts shareholders to the company.
• Enjoys economies of scale.

Sources of capital

• Issue shares
• Issue debentures
• Can apply for grants and overdrafts from commercial banks.
• Lease equipment e.g. vehicles
• Through factoring

b) Public limited company

Features

• Private and public companies have similar features.

Features distinct to Public Companies only are:

• A minimum of 7 shareholders.
• Shares are easily transferrable through brokers at the Stock Exchange.
• The company can advertise shares to the public.
• The public can subscribe for the shares.
• Their accounts are published.
•  Is registered under the Companies` Act with Ltd inscribed after its name

Advantages

• Shareholders enjoy limited liability.
• Shareholders elect a board of directors.
• Shareholders vote and replace the directors at annual general meetings.
• The board of directors controls the business.
• Salaried managers are employed to run the business.
• A company tax of  20% to 40%  is raised on profits earned.

Differences between private limited and public limited companies

4. Public corporations

• Statutory bodies or parastatals include Zimbabwe Electricity Supply Authority (ZESA) , National Railways of Zimbabwe (NR) and Air Zimbabwe.

Features

• Are owned by the state on behalf of the public .
• Are controlled by the government through a government department.
• Are run by a board appointed by the government.
• Their accounts are published annually.
• Their business affairs are debated annually in parliament.
• Raise capital by reinvesting their profits and selling stocks or bonds to the public.
• Receive grants from the government annually.

Why they are established

• To provide essential goods or services cheaply e.g. electricity.
• Keep essential industries functional even if they are not profitable.
• Reduce massive unemployment by sustaining uneconomic outlays e.g. railways.
• -Huge economies of scale are available and these result in lower prices for consumer.

Challenges of public corporations

• Meet little competition and therefore tend to be inefficient.
• Often subsidised by the state.
• The salaries of their personnel are not competitive and therefore fail to attract the most dynamic management.
• Government influence and interference in its affairs.

Privatisation

• Sell or transfer of assets to the private sector.
• Free market to  provide  goods and services.
• Transfer corporations to private ownership.
• Allow State business to compete with private firms.
• Contract out provision of goods and services to private firms.
• Provide goods and services for a fee.

Why privatise

• Reduce burden on public funds.
• Avoid recurrent deficit.
• Free from detailed political control.
• Pursue pricing and long term investment.
• Reap reward for success.
• Bear consequences of failures.
• Compete and improve efficiency.
• Reduce resistance to trade union power.
• Reduce subsidies.
• Create property owning democracy. 

Problems of privatisation

• Job losses due to restructuring.
• Huge capital required for retrenchments.
• Creation and increase of unemployment.
• Prices of goods and services increase.
• Big firms swallow small ones.
• -Monopolies are created.

5. Co-operatives

A co-operative is a business owned and controlled by its members.  All members depend on the co-operative for their livelihood.

Features

-     Only members work in the cooperative.

-     A member has one vote.

-     Members contribute equal capital.

-     Individuals vote for a management committee.

-     The committee administer the cooperative.

-     Committee plans what to do, how to do it and allocates tasks.

-     The co-operative members own the tools and the land.

-     All co-operatives are governed by the Co-operatives Societies Act.

-     The Act requires all cooperative to register with a government department.

Challenges of co-operatives

-     Lack expertise

-     Lack finance

-     Poor administration

-     Members often lack the necessary dedication

6. Multinational Corporations (MNC)

-     Giant business unit with branches in other countries.

-     Are private enterprises with a profit motive.

-     Have limited liability.

-     Have headquarters in one country, a well-developed one.

-      Have huge capital and human resources; business knowledge; experience; and expertise base.

-     Local boards of directors control the local affairs of the company.

-      Barclays  Bank,  Old  Mutual,  Econet  Wireless  and  Shell  are  some  of  the multinational corporations.

Why welcome MNCs

-     Increase investment

-     Get a variety of goods

-     Increase net export earnings

-     Earn revenue for the government

-     Enable mass production of  standard and quality products at low prices

-     Transfer technology

-     Break tariff barriers

Advantages of MNC

-     Secure raw materials for their manufacturing entities.

-     Have markets or outlets for their finished goods.

-      Nearness to outlets reduces transport costs and enables them to sell their goods at low prices.

-     Set up branches in areas whose labour costs are low.

-     Transfer surplus funds or other resources to needy areas.

-     Create employment in host areas.

-     Bring modern forms of technology to host areas.

-     Bring large capital outlay to host areas.

-     Send locals for training and education abroad.

-     Generate foreign currency.

Disadvantages

-     May dwarf the growth of local companies.

-     May interfere in the local political set up.

-     May produce mainly for export market at the expense of the local market.

-     Own the means of production at the expense of nationals.

-      Create wide salary gaps within a country, as they pay internationally pegged salaries.

The Stock Exchange

-       The Stock Exchange is a market for the purchase and sale of second-hand stocks, shares and securities.

Functions of a Stock Exchange

-     Establishes prices for shares through the supply and demand mechanism.

-     Provides a market for purchase and sale of stocks, shares and other securities.

-      Sets a code of conduct for the members and therefore protects investors from unfair dealing.

-     Provides investors with names of reputable companies.

-     Makes investments marketable and therefore liquid.

-     Provides the government with a ready market for its gilt-edged securities.

Stock brokers

-      Act as agents for people who wish to sell or buy shares.

-      Arrange for transfer of shares, registration of the change of ownership of shares and

obtain the share certificates for the client.

-      Advise clients on future trends by sending circulars, price lists and prospectuses.

-      Seek highest prices for the clients.

-      Advise companies at which prices to set their new shares.

-      Provide means by which investors may sell securities whenever necessary.

1. a) Jobbers

-     Principal buyers and sellers of securities.

-     Trade in shares.

-     Buy at lower price and sell at higher price.

-     Receive a turn or a profit.

1. b) Bulls

-     Speculators who buy stocks or shares.

-     Sell at a profit.

-     A bullish market occurs when share prices are generally rising.

1. c) Bears

-     Sell shares at high market prices hoping that share prices will fall.

-      Eventually buy the shares at lower market prices.

-     Hand the shares to brokers on settlement day.

-     May or may not own the shares.

-      Earn profit - high selling price, low buying price.

-      A bearish market occurs when share prices are falling sharply.

1. d) Stags

-     Buy new issues of shares which the public is usually invited to apply for.

-      Anticipate that the issuing houses set price may rise once the shares are traded on the Stock Exchange when the prices rise.

-     Earn profit by selling the shares at the highest price.

-     May not pay fully for the new shares, but can sell all the new shares.

-     May pass the liability for further payments to the buyer of the shares.

Types of shares

1. a) Ordinary shares

-     Ordinary shareholders have voting rights.

-     Rights allow shareholders to make key decisions in the business.

-     Shareholders are equity investors.

-     Shareholders own the business.

-     The shares are risky.

-     Shareholders are paid dividends last, after all claims are paid.

-     Dividends are variable and depend on profits from period to period.

-     Are traded on the Stock Exchange.

-     Their prices depend on the performance of the company and the economy.

1. b) Preference shares

-     Receive a fixed percentage dividend before ordinary shareholders.

-     Are a safe investment and less risky.

-     Shareholders are not entitled to vote at a shareholders’ meeting.

1. c) Participating preference shares

-      Shareholders receive a fixed dividend and are paid an additional dividend when profit is large.

1. d) Cumulative shares

-     The  shareholder  receives  a  fixed  percentage  dividend  before  ordinary

shareholders.

-     The dividends may be carried forward to the following year if the company is

unable to pay the fixed percentage.

-     The shareholders have no voting rights at the Annual General Meeting.

Changes in  share prices

-      The prices of shares change daily because:

• of the changes in demand and supply of the shares
• a company’s annual results are optimistic or pessimistic
• the availability of a large pool of money for investment
• of political changes cause

Debentures

-      Debentures are loans to the company.

-      Banks, financial institutions or private investors can be debenture holders.

-      Debentures receive a fixed rate of interest.

-      They carry a low risk.

-      The capital sum is repaid on the due date.

-      If the company goes bankrupt, specific property must be sold off and proceeds used

to pay off the debenture holders.

-      Debentures are mortgaged, naked and redeemable.

-       Naked Debentures: are without security; capital and expected interest irredeemable if company fails to pay

-       Mortgaged Debentures: have security; have power to take over and sell the business in order to recover their money

-       Redeemable Debentures: investors or owners may lose interest agreed upon; capital can be returned to owners if the owners claim it at any time

Distinction between shares and debentures

Task 1

A, B, C and D are four shops at a growth point. Each shop operates as a sole trader. The

four compete fiercely among themselves and against a nearby big supermarket.

1. a) Suggest a business organisation which the four might form to compete favourably with the supermarket.
2. b) Explain the advantages they will enjoy.
3. c) Briefly explain how local consumers might benefit from the business organisation

formed.

Task 2

When 25 men and nine women in Honde Valley formed a coffee growing  co-operative in 1986, sceptics dismissed the venture as zealous ambition and predicted that it was not to last long.

Their predictions were proved wrong in 1987 when the co-operative was registered with the Ministry of Community and Co-operative Development as a viable collective enterprise. Maybe the pessimists were justified in expressing their fears because Honde Valley Coffee Growers Co-operative Society was the first such co-operative of peasants to venture into coffee growing. Situated in the plush, evergreen rolling valleys about 100 kilometres north of Mutare in the eastern districts of Zimbabwe, the co-operative has grown from its original 34 members to the present 1870 co-operators.

Annual turnover at the end of 1989 was over $320 000 supporting not only the members but nearly 10 000 of their dependents.

1. a) Do you know of any co-operative near your school or home?
2. b) Does the above quotation represent a typical example of a co-operative? Support your answer.
3. c) Tell your friend about a co-operative near your school or home or any that you know.
4. d) What are the major problems faced by co-operatives?

Multiple choice questions

2. Which business unit can sell shares on the Stock Exchange?
3. Parastatal  B.   Partnership
4. Private limited company  D.   Public limited company
5. A public company has limited liability. What does limited liability mean?
6. The number of shareholders is limited.
7. All shareholders have the same liability for the debts of the company.
8. The shareholders are only liable for the debts of the company to the extent of the unpaid value of shares.
9. Only ordinary shareholders enjoy limited liability.
10. Into how many sectors are business units divided?
11. 2  B.   3
12. 4  D.   5
13. Which business unit is in the public sector?
14. Multinational corporation  B.   Partnership
15. Public company  D.   Public corporation
16. A partnership

(i)   issues a prospectus

(ii) has unlimited liability.

(iii) ceases on the death of a partner.

1. (i) and (ii)  B.   (i) and iii
2. (ii) and (iii)  D.   (i), (ii) and (iii)
3. A sole trader
4. owns and controls the business.
5. gets capital through the Stock Exchange.
6. has limited liability.
7. shares profits and losses.
8. A partnership may dissolve due to

(i)   bankruptcy.

(ii) death of a member.

(iii) resignation of a member.

1. (i) and (ii)                     B.   (i) and (iii)
2. (ii) and (iii)  D.   (i), (ii) and (iii)
3. What is the similarity between public and private limited companies?
4. Directors are shareholders
5. Less formation formalities required

1. Publicise their balance sheets
2. Are registered under the Companies Act
3. What is authorised share capital?
4. Capital paid to the company
5. Maximum amount of shares  a accompany is allowed to issue
6. Issued capital, called up for payment
7. Share capital offered to the public for subscription
8. 1 A debenture holder earns
9. dividends.  B.   interest.
10. profit.  D.   capital.
11. Which are the advantages of co-operatives? (i)  Enjoy limited liability

(ii)  Have equal say in decisions and operations

(iii) Members share profits proportionally to their purchases

1. (i) and (ii)  B.   (i) and (iii)
2. (ii) and (iii)  D.   (i), (ii) and (iii)

Essay questions

1. Explain the advantages and disadvantages of a sole trader.
2. State the features of partnerships.
3. Explain the importance of:
4. a) Memorandum of Association b)   Articles of Association
5. c) Deeds of Partnership.
6. Mr Musoni and Mr Moyo would like to start a manufacturing business. Please advise them to form a private company.
7. Explain the features of public limited companies.
8. How do public companies raise capital?
9. How does a public company differ from a private company?
10. Distinguish between ordinary shares and debentures.
11. A company`s capital, fully paid up, was made up of:

80 000 000 ordinary shares of $1 each

1 000 000     5% preference shares of $1 each

10 000       7% debentures of $100 each

Its profit was $2 000 000. It placed $280 000 to reserves. How much percent did

ordinary shareholders receive?  Comment on the gearing ratio.

10. Explain the features and advantages of multinational corporations.
11. 1 a)  What are the functions of the Stock Exchange?
12. b) Explain the functions of:

(i)   bears                     (ii)  bulls                 (iii)  stags

12. a)  Explain the features of a public corporation. b)   Why are they at times privatised?
13. An investor in a firm owned:

1 000    7%   $4    preference shares;

5 000    6%  $1   ordinary  shares; and

20    8%  $100  debentures.

The firm paid a dividend of  20%  on the ordinary shares. Calculate the investors`

income for the year.

100

Gearing was low. $120 000 paid to owners of debentures and preference shares was far less than  one-third; over two-thirds of the capital was on ordinary shares.