CHAPTER 1

Forms of Business Units

Introduction
People engage in business activities for various reasons, the main one being
making of profit. Another reason is to provide convenient and efficient
services to the owner(s) or to other people. Business organisations can be
formed by one person, a group of people or even by the government. The
main forms of business ownership are as follows:
(i) Sole proprietor.
(ii) Partnerships.
(iii) Co-operatives.
(iv) Private companies.
(v) Public companies.
(vi) Public corporations.
(vii) Parastatals.

The features of these business organisations are discussed in this chapter

with regard to their ownership, formation, management, sources of capital
and dissolution. The advantages and disadvantages of each are also
discussed.
SOLE PROPRIETORSHIP
Ownership
This is a business enterprise that is owned by one person. This person is
referred to as a sole trader or a sole proprietor. Sole proprietorships are
the most common forms of business units. They are usually found in retail
trade, that is, selling of goods and services to the final consumer. Examples
are itinerant traders, single shopkeepers, roadside sellers and people who
offer direct services like in law, accountancy and medicine. However, there
are some sole traders who engage in wholesale trade.
Formation
The formation of a sole proprietorship is very simple. Few legal formalities
are required. For example, in Kenya a person who intends to start a small
vegetable or fruit kiosk needs only to make an application to his/her local
authority for permission to set up the kiosk and operate his/her specified
business. If the permission is granted, a trading licence is issued to the
trader on payment of trade licence fee.
Management
The management of this kind of a business is under one person. A sole
proprietor may however employ other people or get assistance from family
members to run the business. Some sole proprietorships may be big
business organisations with several departments and quite a number of
employees. However, the sole proprietor remains solely responsible for the
success or failure of the business.
Capital
The amount of capital required to start a sole proprietorship is small
compared to other forms of business organisations. The main source of
capital is owner’s savings. Additional capital may however be raised from
the following:
(a) Borrowing from friends, banks and other money lending institutions
such as Industrial and Commercial Development Corporation.
(I.C.D.C.) and Kenya Industrial Estates (K.I.E.).
The amount of capital to be borrowed depends on:
(i) Whether the lender has the funds to loan out.
(ii) The amount of interest to be paid on the loan.
(iii) The ability of the borrower to repay the loan together with
interest.
(iv) Whether the available loan will be able to meet the purpose for
which it is intended.
(b) Inheritance.
(c) Donations from friends and relatives.
(d) Credit buying.
(e) Ploughing back profits.
(f) Leasing and renting out property.
Advantages of Sole Proprietorship
The following are some of the advantages of a sole proprietorship:
(i) Few legal procedures are required to set up this kind of business.
Formation costs are lower compared to other forms of business units.
(ii) Decision-making and implementation is fast because the proprietor
does not have to consult anybody in matters relating to the business.
(iii) A sole proprietor exercises direct personal control on the business at
all times.
(iv) The trader has close and personal contacts with customers. Customers
are therefore known personally to the trader. The trader is hence in a
better position to cater for their tastes most effectively.
(v) A sole proprietor is able to assess the credit-worthiness of his/her
customers because of close personal relationship. Extending credit to
a few carefully selected customers reduces the probability of bad
debts.
(vi) The trader is accountable to him/herself.
(vii) The sole proprietor is able to maintain top secrets of the business
operations.
(viii) The trader enjoys profits alone.
(ix) The trader can get assistance from family members.
(x) Sole proprietorship is easy to start since the amount of capital
required is small.
(xi) The owner works to his/her best because he/she is accountable to
him/herself.
(xii) The business is flexible.
Disadvantages of Sole Proprietorship
The following are some of the disadvantages of a sole proprietorship:
(i) Has unlimited liability. This means that if the assets available in the
business are not enough to pay all the business debts, personal
property of the owner such as house may be sold to pay the debts.
(ii) Expansion of the business may be limited by scarcity of capital.
(iii) A sole proprietor may work for long hours thereby leaving little time
for recreation.
(iv) If a sole trader falls sick, the business may experience difficulties due
to lack of adequate management.
(v) Lack of consultation may lead to poor decision making hence
affecting the business adversely.
(vi) A sole proprietorship may not benefit from advantages realised by
large scale enterprise (economies of large scale) such as access to loan
facilities and large trade discounts.
(vii) Death of the owner may lead to the collapse or poor performance of
the business arising from poor management by other people who take
over the business.
(viii) Lack of specialisation in the running of the business may lead to poor
performance. This is because one person cannot manage all aspects of
the business effectively. One may be a good salesperson, for example,
but a poor accountant.
(ix) The owner bears all the risks and in case of a loss, he/she suffers
alone.
Dissolution
The term dissolution means bringing a business to an end. The following
are some of the circumstances under which a sole proprietorship may be
dissolved:
(i) If the owner decides to dissolve the business.
(ii) In case of death, insanity or bankruptcy of the owner.
(iii) Where the intended purpose is completed. For example, if the
business was operating on a contract.
(iv) Where the court orders the business to dissolve.
Partners are either active or dormant. An active partner is one who
plays an active role in the day-to-day running of the business while a
dormant partner does not. He/she is also referred to as a sleeping,
passive, or silent partner.
(ii) Liabilities of the Partners for the Business Debts
Partners are either general or limited. Limited partners have limited
liabilities while general partners have unlimited liabilities.
(iii) Ages of Partners
Partners are either minor or major. A minor is somebody who has not
attained the age of 18 years. This is called the age of majority. A minor
takes part in sharing of profit but cannot take part in management until
one attains the majority age. A major is somebody who has attained the
age of majority.
(iv) Capital Contributions
Partners may be real or nominal. A real partner is a person who has
actually contributed capital into the business while a nominal partner is
somebody who allows the partnership to use his/her name as if he/she
were one of the partners for the purpose of influencing customers or for
prestige. A nominal partner can also be a person who was once a
partner and has retired from the partnership but has left his/her capital
in the business in form of a loan. This loan carries interest at an agreed
rate. A nominal partner does not contribute capital and therefore is not
entitled to a share of profit. Another name for a nominal partner is
quasi partner.
Formation
On formation of a partnership, the partners have to agree on how the
proposed business will be run so as to avoid misunderstanding among
themselves. The agreement by the partners is referred to as the partnership
agreement. The partnership agreement can either be oral or written. A
written agreement is referred to as the partnership deed. The contents of
the partnership deed vary from one partnership to another depending largely
on the nature of the business. However, the following items are common in
the partnership agreement:
PARTNERSHIP
Ownership
A partnership is a business unit owned by more than one person. The
owners of such a business are called partners. A partnership is owned by a
minimum of two persons and a maximum of 20, except for partnerships that
provide professional services such as medicine and law, which can have a
maximum of 50 persons. Partnerships may be categorised in either of the
following ways:
(a) According to the type of partners.
(b) According to the period of operation.
When classified according to the type of partners, partnerships may be
either general or limited.

In a general partnership, all members have unlimited liability. This means

that in case the partnership is unable to settle all its debts from the available
business assets, the personal properties of individual members will have to
be sold to pay off the debts.
In a limited partnership, members have limited liabilities. This means
that in case the business is unable to settle all its debts from the available
business resources, the partners lose only the amount of capital each has
contributed to the business and not their personal property. However, in a
limited partnership, there must be at least one partner whose liabilities are
not limited. When partnerships are classified according to their period of
operation, partnerships may be either temporary or permanent. Temporary
partnerships are those that are formed to carry out a specific task for a
specific time after which the business automatically dissolves. These
partnerships are also referred to as joint ventures. Permanent partnerships
are formed to operate indefinitely.
Types of Partners
Partners may be classified according to role they play, their liabilities, their
age and capital contribution. Each of these is discussed below:
(i) Role Played by the Partners
(i) Name of the partnership.
(ii) Address of the head office.
(iii) Location and area of operation of the business.
(iv) The term of the partnership — whether temporary or permanent.
(v) The objectives of the business, that is, the activities to be carried out.
(vi) Capital to be contributed by each partner.
(vii) Rate of interest on capital.
(viii) Drawings by partners and rate of interest on the drawings.
(ix) Salaries and commissions to partners.
(x) Rate of interest on loans from partners to the business.
(xi) Procedures of dissolving the partnership.
(xii) Profit and loss sharing ratio.
(xiii) Means of arbitration to be used to finalise matters which cannot be
mutually agreed upon.
(xiv) Methods of valuing goodwill on retirement or admission of a partner.
Once the partnership agreement is ready, the business may be registered
with the Registrar of Companies on payment of a registration fee. Details
about the proposed partnership are filled in a prescribed form which the
Registrar then uses for registration. It is a legal requirement that if the name
of the partnership is different from the surnames of the partners, the
partnership should be registered.
In case a Partnership Deed has not been drawn or is ambiguous, the
provisions of the partnership act of 1963 (Kenya) apply.
The act contains the following rights and duties of a partner:
(i) All partners are entitled to equal contribution of capital.
(ii) No salary is to be allowed to any partner.
(iii) No interest is to be allowed on capital.
(iv) No interest is to be charged on drawings.
(v) All profits and losses are to be shared equally.
(vi) Every partner has the right to inspect the books of accounts.
(vii) Every partner has the right to take part in decision making.
(viii) Interest is to be paid on any loans borrowed by partners. (The
percentage rate varies from one country to another).
(ix) During dissolution, external debts are paid first, then loans from
partners and lastly partner’s capital.
(x) No partner should carry out a competing business.
(xi) Any major change in business such as admission of a new partner
must be through the agreement of all existing partners.
(xii) Any partner who incurs any personal loss when executing the duties
of the business should be compensated.
Management
In a partnership, all the partners share the responsibility of managing the
business. Areas of management are normally assigned to partners according
to their field of speciality or ability. However, the partners can employ
skilled manpower to manage the business on their behalf. This is applicable
if either the partners are ignorant about management or the business is too
large to be managed by the partners alone.
The Partnership Deed may specify the areas of management by the
partners, their duties, salaries or other rewards and also the managerial
procedures.
Partners who can take active part in the management of the business are:
major, real and general. On the other hand, partners who do not take active
part in management are minor, quasi and limited partners. These are
however permitted to have access to the partnership books and can offer
advice to the active partners.
Sources of Capital
The major source of capital for a partnership is contributions by the partners
themselves. However, a partnership can raise additional capital in other
ways, including the following:
(i) Loans from banks and other financial institutions like Kenya
Industrial Estates (K.I.E.) and Industrial and Commercial
Development Corporation (I.C.D.C.).
(ii) Getting items on hire purchase, for example, machinery and vehicles.
In this case, goods are acquired and paid for in instalments. The
ownership is, however, not passed to the partnership until all the
instalments are paid in full.
(iii) Trade credit — A partnership may obtain goods on credit and pay for
them at a later date provided that such a partnership is creditworthy. In
this case, unlike in hire purchase the ownership of the goods passes to
the buyer immediately after entering the contract.
(iv) Ploughing back profit — Part of the profit made by a partnership may
be used to expand and develop the business instead of sharing it out
among the partners.
(v) Leasing and renting: This refers to giving out property to someone
else on payment of money for their use. A lease is usually long term,
that is, more than a year and payment is made in advance while rent is
for short term, usually monthly.
Advantages of Partnerships
The following are some of the advantages of partnerships:
(i) Unlike sole proprietorships, partnerships can raise more capital.
(ii) Work is distributed among the partners. This reduces the workload for
each partner.
(iii) Different talents are combined such that each partner is assigned the
responsibility which he/she can perform best.
(iv) Unlike a sole proprietor who bears losses and liabilities alone, these
are shared among the partners in a partnership.
(v) There are few legal requirements in the formation of a partnership
compared to a limited liability company.
(vi) Consultation and sharing ideas among partners may lead to better
decisions.
Disadvantages of Partnership
The following are some of the disadvantages of a partnership:
(i) A mistake made by one of the partners may result in losses which are
shared by all the partners.
CO-OPERATIVES
Introduction
A co-operative society is a group of people who come together mainly to
provide convenient and efficient services to members. Another reason for
forming a co-operative is to eliminate middlemen so that all the profits go
to the members. Co-operatives are usually formed by people who either
have common problems or common interests.
The idea behind the co-operative movement in the world is that of
pooling together of individuals’ scarce resources to achieve a common goal
more efficiently.
Co-operation has always been practised by people from time
immemorial. People organised themselves (although in an ad hoc manner)
to graze cattle communally, build houses, hunt or farm. There were group
norms which had to be adhered to by each individual. If one broke such
norms, one could not be assisted if one sought the group’s assistance. The
practice is still alive today, particularly in the rural communities.
Principles of Co-operatives
Modern co-operation as a practice was started by the Rochdale pioneers in
Britain in 1844 and its principles are followed worldwide. These principles
are:
(i) Voluntary and open membership.
(ii) Democratic administration.
(iii) Limited interest on share capital.
(iv) Co-operation with other co-operatives.
(v) Promotion of education to members.
(vi) Provision of dividends to members.
The Kenya Government views the co-operatives movement as a very
important vehicle for economic and social advancement of the citizens. It
has hence continued to take deliberate measures to ensure that the country’s
wealth is effectively earned through viable and efficient co-operatives in all
sectors.
(ii) The liability of some of the partners is unlimited. This means that if
the assets of a partnership are not sufficient to meet all the liabilities
incurred by the business, the excess liability is recovered from the
partner’s personal assets.
(iii) Continued disagreement among the partners can lead to termination
of the partnership.
(iv) Decision-making may be slow as all partners have to be consulted.
(v) Actions taken by one partner in good faith on behalf of the business
are binding on all partners.
(vi) A partnership that relies heavily on one partner may be adversely
affected in case of retirement or death of the partner.
(vii) A partnership has limited access to sources of capital compared to
limited companies hence it may be unable to finance major
developments.
(viii) A partnership may have limited access to a variety of managerial
skills especially where the partners manage the business themselves.
(ix) A hard working partner may not be rewarded in proportion to his/ her
effort because the profits are shared among all the partners.
Dissolution of Partnership
The following are some of the circumstances under which a partnership
may be dissolved:
(i) If the partners mutually agree to dissolve the business.
(ii) In case of death, insanity or bankruptcy of a partner.
(iii) In case of completion of the intended purpose or end of the agreed
time.
(iv) A court orders the business to dissolve.
(v) Where a partner requests for dissolution in writing.
(vi) If the business engages in unlawful practices. It should be noted that a
change in law may render business activities unlawful.
(vii) In case of retirement or admission of a new partner. This may lead to
a permanent or temporary dissolution.
(viii) In case of continued disagreements among the partners.
The Ministry of Co-operative Development recognises the fact that co-
operative movements are some of the most effective means of channeling
funds to groups and individuals who require such funds. In addition, it
encourages the establishment of financially strong savings and credit
societies for salaried workers who get loans out of the savings made over
time.
The ministry is also engaged in educating members and the co-operative
employees on how best to run their movements for the benefit of all.
Ownership
Co-operative societies are owned by at least ten adults who register as
members on payment of a non-refundable membership fee. A member is
also expected to buy shares in the society. One share should not be less than
shs 20. No single member is allowed to own more than 5% (five per cent)
of the total share capital of the society. This means that the society cannot
be dominated by one member through his/her financial, social or political
status.
Membership in a co-operative is open and voluntary. This means that one
can join or leave the society at will. The members also have a limited
liability.
Formation
Co-operative societies can be formed by people who are over eighteen years
(adults) regardless of their economic, political or social background.
However, the number of members should not be less than ten. These people
draft rules and regulations to govern the operations of the proposed society.
These rules and regulations are referred to as by-laws. The by-laws are
submitted to the commissioner of co-operatives for approval. If the
commissioner is satisfied with the by-laws, he/she registers the society and
hence issues a certificate of registration. It is then that the society can start
operating.
In cases where members are unable to draw up their own by-laws, the
Co-operative Societies Act of 1966 can be adopted in part or whole.
Management
A co-operative society is run by a committee, usually of nine members,
elected by the members in a general meeting. The management committee
may elect the chairman, secretary and the treasurer as the executive
committee members. The committee acts on behalf of all the members and
can enter into contracts, borrow money, institute and defend suits and other
legal proceedings for the society. Is also looks after the welfare of members
by providing education through seminars and general information. The
committee therefore holds regular meetings to transact business. Societies
can however hire professional staff to run the affairs of the society
efficiently.
Where the committee is not able to perform as expected, or if they betray
the interests of the members, they can be voted out in an annual general
meting. The commissioner of co-operatives also has the powers to dismiss
them.
The management committee does not receive monthly salaries but are
allowed a sitting allowance and honoraria in accordance with the
Commissioner of Co-operatives’ guidelines.
Sources of Capital
The following are some of the ways through which a co-operative society
can raise its capital:
(i) Membership Contribution
As mentioned earlier, before a person becomes a member of a co-
operative society, he/she has to contribute money for registration and
also a minimum amount of money towards his/her share capital.
Members’ contributions form the largest source of capital for a co-
operative society.
(ii) Retained Profit
A co-operative society may retain a portion of the profit made from its
trading activities. This portion of retained profit is normally called a
reserve. It is used for acquiring assets such as constructing a new store
or purchasing a new lorry.
(iii) Income From Credit Facilities
(vi) Providing farm inputs on credit to members.
(vii) Educating members on better methods of production through
seminars, field trips, films and demonstrations.
In most cases, producer co-operatives especially for agricultural
products involve members in the initial processing of their produce
because of inadequate capital to employ enough personnel for the
factory activities.
Members are paid according to the quantity of the produce they
deliver to the society. The more one delivers, the more one earns.
Producer co-operatives are very well established in Kenya and the
government has made good use of them to extend development to rural
areas where they are commonly found.
Examples of producer co-operatives in Kenya are the Kenya Planters
Co-operative Union (K.P.C.U.) illustrated in figure 1.1, Kenya Grain
Growers Cooperative Union (K.G.G.C.U.) and all factories serving
coffee farmers. Manufacturers can also form producer co-operatives.

Fig. 1.1: The K.P.C.U. building in Nairobi

Members of co-operative societies enjoy credit facilities from the
society in form of cash loans, or inputs such as fertilisers and
herbicides. They repay the loans or the value of the inputs with interest.
This interest is the income to the society and hence a source of capital.
(iv) Income From Investment
A co-operative society may own property such as buildings which they
rent out to other people. The rent received from such property is a
source of capital.
(v) Acquiring Property on Credit or on Hire Purchase
Assets such as machines and vehicles can be bought on credit or on
hire purchase. These assets can be used for productive purposes before
they are fully paid for. Sometimes the asset can even generate income
which would be used to pay for the asset itself.
Types of Co-operative Societies in Kenya
In Kenya, co-operatives may be grouped according to the nature of their
activities or according to their levels of operation. When grouped according
to the nature of their activities, co-operatives may be producer co-
operatives, consumer co-operatives or savings and credit co-operatives. On
the other hand, co-operatives may be classified as either primary co-
operatives or secondary co-operatives. Each of these classifications is
discussed below:
(a) Producer Co-operatives
A producer co-operative is an association of producers who have come
together to improve the production and marketing of their products.
Such a co-operative serves the following purposes:
(i) Obtaining better prices for their members’ products.
(ii) Providing better storage facilities for the products.
(iii) Providing better and reliable transport means for moving the
products from the sources to the market and building feeder
roads.
(iv) Providing loans to the members.
(v) Providing services of grading, packing and processing of
produce to the members.
(b) Consumer Co-operatives
These are formed by a group of consumers who come together and start
up shops from where they can buy goods of better quality much more
conveniently. These societies buy goods directly from the producers
thereby eliminating the wholesalers and also the retailers.
Most of the consumer co-operatives deal in goods of general
consumption such as groceries, milk and clothes. Members of the
public are allowed to buy from the society at normal prices thereby
enabling the society to make more profit. The profit realised is shared
among the members in proportion to their purchases. This means that
the more a member buys; the higher is his/her share of profit.
Examples of consumer co-operatives are Nairobi Consumer Co-
operative Union, Beehive Consumer Co-operative Society, Railways
Consumer Co-operative Society and City Chicken Consumer Co-
operative Society.
Advantages of Consumer Co-operatives
The following are some of the advantages of Consumer Co-operatives:
(i) Sell goods of high quality.
(ii) Sell goods to members at fair prices.
(iii) Sell goods to other people at normal prices thereby making
more profit.
(iv) Buy goods directly from the producers thereby eliminating
middlemen. They are therefore able to make more profit.
(v) Can give credit facilities to the members.
(vi) Can pay interest on capital to the members.
(vii) Sell a variety of goods to the members at a place where they can
easily get them.
Disadvantages of Consumer Co-operatives
Consumer co-operatives are not popular in Kenya. Some of the reasons
for this are as follows:
(i) Face stiff competition from large scale retailers such as
supermarkets and multiple shops which buy goods directly from
the producer and sell them to the consumer at low prices.
(ii) May not afford to employ qualified staff.
(iii) Majority of their members have low incomes, so raising of
capital is a problem.
(iv) Kenya, being an agricultural country, produces enough
subsistence goods for itself. It therefore does not require
consumer co-operatives.
(v) Reluctance of non-members to buy from these shops lowers the
turn-over.
(vi) Consumer shops may be mismanaged.
(c) Savings and Credit Co-operatives Societies (SACCOs)
Savings and Credit Co-operatives are the most recent in Kenya. They
were started immediately after independence by groups that came
together to save money and provide loans to members as the need
arose. However, the early SACCOs did not last because the members,
who were either a communal or a church group, did not have steady
incomes to maintain the SACCOs. Majority of these co-operatives
became dormant and were liquidated (dissolved).
Today there are SACCOs whose attachment (common bond) is the
employer. The employer deducts a part of a member’s earnings on a
monthly basis and remits it to a society. These societies have grown
and continue to grow, in both membership and savings. The steady
monthly deductions (check-off) from a member’s salary ensures that a
society receives the contribution before one gets the salary. Thus, the
check-off system is seen as the secret behind SACCO’s success in
Kenya.
SACCOs may be found in government ministries, parastatals and in
most private companies. They assist the members in buying plots,
developing shambas, paying school fees and meeting other financial
obligations. Profits earned by the co-operative society may be shared
among the members in form of dividends. SACCOs are therefore
viewed as co-operatives which contribute substantially to people’s
development and also as a tool for the country’s domestic savings and
investment.
Most SACCOs have insured the members’ savings and loans with
Co-operative Insurance Agency (CIA). This means that if a member
dies, his/her beneficiaries are neither called upon to repay the loan nor
do they lose the shares. SACCOs provide loan facilities to most people
who do not qualify for loans from commercial banks and other money
lending institutions. The requirements for a member to qualify for a
(v) Members are able to obtain different categories of loans, e.g.,
normal loan, refinancing, school fee and emergency.
(vi) In case of death, the beneficiaries may be refunded twice the
amount of share contribution.
(vii) Easy to obtain loans as only a few formalities are required.
(viii) Offer education to members.
(ix) May offer banking facilities through their front office services.
Disadvantages of SACCOs
Some of the disadvantages of SACCOs are:
(i) May not have enough finances to cater for members’ financial
needs.
(ii) Continual default by loanees may cripple the SACCOs
financially.
(iii) Faces stiff competition from well established financial
institutions.
(iv) Mismanagement of SACCOS is common.
(v) Corruption and misappropriation of funds may lead the
SACCOs to financial problems.
(d) Primary Co-operative Societies
These are co-operative societies composed of individuals who are
either actual producers, consumers or people who join up together to
save and obtain credit conveniently. Primary co-operative societies
engage in activities such as the production of sugar-cane, milk, coffee
and cashewnuts. It is important to note that consumers co-operative
societies and most SACCOs discussed above are primary co-operative
societies because they are composed of individuals. Of late, people
have come up with co-operative societies meant to enable them solve a
certain problem or acquire certain property or standards most
effectively. An example of this is the land acquisition and building co-
operative societies. These societies build and provide their members
with good housing at low cost.
Most primary co-operative societies operate at the village level,
others at district level and a few at national level.
(e) Secondary Co-operative Societies
SACCO loan, are: membership, member’s savings, member’s salary
and guarantee from fellow members.
The easy credit terms make SACCOs popular not only to the lowly
paid workers but also to high income earners. Figure 1.2 is an example
of a SACCO.

Fig. 1.2 : Elimu SACCO building

Advantages of SACCOs
The following are some of the advantages of SACCOs:
(i) Profits realised by SACCOs are distributed to members in form
of dividends.
(ii) Enables members to save.
(iii) Members can obtain loans at low interest rates.
(iv) In case of death, the outstanding loans are written off.
Secondary co-operative societies, usually referred to as unions, are
generally composed of primary co-operative societies as their
members. Secondary co-operative societies are either found at district
level or at national level.
All co-operative societies are affiliated to a national apex body
called the Kenya National Federation of Co-operatives. The
K.N.F.C. represents co-operatives in Kenya at the International Co-
operative Alliance.
Figure 1.3 shows a simple structure of co-operatives in Kenya.

Advantages and Disadvantages of Co-operative Societies

The following are some of the advantages and disadvantages of Co-
operative Societies:
Advantages
(i) The interests of the members are served more effectively
through co-ownership because the properties of the co-
operatives are owned collectively.
(ii) Because of economics of scale, co-operatives are able to
provide services to members at minimum possible costs.
(iii) Besides the cash that members get from selling the products to
the co-operative, they share in the profit earned by the co-
operative after a given trading period. This would not be the
case if the producer sold his/her products individually to
middlemen.
(iv) Members have equal chances of being elected to the
management committee.
(v) Co-operative societies have assisted members to increase their
incomes and consequently improve their standards of living. For
example, through loans, members are able to acquire property
and to educate their children.
(vi) Co-operative societies have greatly educated their members
through educational seminars. Through these, members
understand their rights and obligations and have opportunities to
know how well or badly their society is being managed.
(vii) Co-operative societies offer credit facilities. In case of a
producer co-operative, credit facilities are extended to producers
in the form of farm inputs. Savings and credit societies give
financial loans to their members. Such loans are given regardless
of whether a member has tangible securities or not.
(viii) Membership is open and voluntary.
(ix) Members have limited liabilities.
(x) Co-operatives eliminate the exploitation of members by
middlemen.
(xi) When co-operatives are in financial and managerial problems,
the Government may step in to assist them solve the problems.
(xii) The loans given to members carry interest at low rates.
(xiii) Co-operative societies are run on a democratic basis, that is, one
person one vote.
Disadvantages
(i) Majority of the societies cannot take advantage of economies of
scale because of their low capital base.
(ii) Poor management because of lack of qualified personnel.
(iii) Members have a right to withdraw their membership from a co-
operative. When a member withdraws, his/her capital
contribution is refunded and this may create financial problems
for the society.
(iv) May suffer from political interference. Sometimes, the election
of the management committee is interfered with by some people
with personal interests in certain candidates. Hence, the best
Formation
The people who come up with the idea of forming a company are referred
to as the promoters. On formation of a company, the promoters are
expected to come up with the following documents:
(a) Memorandum of Association
This document defines the relationship between the company and
outsiders. The information contained in the memorandum of
association is divided into sub-sections called clauses. These include:
(i) Name clause — The name of the proposed company must be
stated in the Memorandum of Association and should end with
the word “Limited” (Ltd). This indicates that the liability of the
company is limited. It should be noted that some companies end
their names with the initials “PLC”. This stand for “Public
Limited Company”. This informs the public that apart from it
being a limited liability company, it is also a public company and
not a private company. The differences between the two types of
companies are discussed later in the chapter.
(ii) The objects clause — The objects clause sets out the activities
that the company should engage in. The activities listed in this
clause serve as a warning to outsiders that the company is
authorised to engage in these activities only.
(iii) Situation clause — Every company must have a registered
office where official notices and other communication can be
received and sent.
(iv) Liability clause — This clause warns members of the public
that the liabilities of the members are limited.
(v) Capital clause — The clause discloses the amount of capital
which the business can raise and the division of this capital into
units of equal value called shares. That is, authorised share
capital also called registered or nominal share capital. It also
specifies the types of shares and the value of each share.
(vi) Declaration clause — This is a declaration signed by the
promoters stating that they wish to form the company and
undertake to buy shares in the proposed firm. The declaration is
persons may not be elected to run the affairs of the society. This
may lead to poor management and inefficiency.
(v) Corruption and embezzlement of funds are perpetual problems
for some co-operative societies.
(vi) Members may not take keen interest in the affairs of a co-
operative society because their capital contribution is small.
Dissolution of Co-operative Societies
The following are some of the circumstances under which a co-operative
society may be dissolved:
(i) In case of an order from the commissioner of co-operatives.
(ii) If members voluntarily decide to dissolve the society.
(iii) In case of withdrawal of members from the society leaving less than
ten members.
(iv) If the society is declared bankrupt.
(v) In case of a court order.
LIMITED LIABILITY COMPANIES
Introduction
A company is an association of persons who contribute capital in order to
carry out business together with a view to making profit. A company is
viewed by law as a legal entity separate from the members who form it.
Thus, death, insanity, retirement or bankruptcy of a member does not affect
its continuity. The owners (members) of a company are referred to as
shareholders.
A company is an artificial person and has the same rights as a natural
person like me and you. It can therefore sue and be sued in a court of law,
own property and enter into contracts in its own name. However, unlike an
individual, a company can only do those things that it is authorised by its
terms of registration to do (acting intra-vires). For example, if a company
has been formed to provide transportation services, it cannot engage in
banking services. If a company engage in activities other than the ones it
was formed to do, it is said to act against the law (ultra-vires).
signed by a minimum of seven promoters for a public company
and a minimum of two for a private company.
The Memorandum of Association also contains the names of
the promoters. The promoters sign against the Memorandum
showing details of their names, addresses, occupations and shares
they intend to buy. Each signatory should agree to take at least
one share.
(b) Articles of Association
The Articles of Association is a document that governs the internal
operations of the company. It also contains rules and regulations
affecting the shareholders in relation to the company and in relation to
the shareholders themselves.
The Articles of Association contains the following, among others:
(i) Rights of each type of shareholders, for example, voting rights.
(ii) Methods of calling meetings, for example, a company must give
notice to each shareholder before holding any meeting.
(iii) Rules governing election of officials such as chairman of the
company, directors and auditors.
(iv) Rules regarding preparation and auditing of accounts.
(v) Powers, duties and rights of directors.
(vi) A list of directors with details of their names, addresses,
occupations, shares subscribed and statements of agreement to
serve as directors.
(vii) Declaration that registration requirements as laid down by law
have been met. The declaration must be signed by the secretary
or a director or a lawyer.
(viii) A statement signed by the directors stating that they have agreed
to act as directors.
Once the above documents are ready, they are submitted by the
promoters to the Registrar of Companies. On approval by the Registrar
and on payment of a registration fee, a certificate of incorporation
(certificate of registration) is issued. The certificate of incorporation
gives the company a separate legal entity from its owners. Figure 1.4
shows shareholders in a general meeting.
Fig. 1.4: Shareholders in a general meeting

Sources of Capital
Companies, just like sole proprietorships and partnerships, require finances
with which to start and carry out business activities. The various sources of
capital for companies are discussed below:
1. Shares
The main source of capital for any company is the sale of shares. A
share is a unit of capital in a company. For example, a company may
state that its capital is Ksh 10,000,000 divided into equal shares of Ksh
10 each. Such a company has therefore 1,000,000 shares that it can
issue. A person becomes a shareholder after buying shares in a
company. He/she expects to get returns from the company in form of
dividends (share of profit).
Each share is given a number. However, when all shares in a given
class have been issued and fully paid for, the company may group them
into stocks which do not require numbering. Companies that operate
with stocks are hence referred to as joint stock companies.
Shares are mainly of two types; ordinary shares and preference
shares.
the same way as shares. Debentures may be classified into various
categories. Some of these are discussed below:

(a) Redeemable Debentures — These debentures are the ones that

can be bought back by the company within a specified future
period.

(b) Irredeemable Debentures — These are the debentures that

cannot be redeemed unless the company is being liquidated
(dissolved).

(c) Mortgage Debentures — To mortgage means to attach property

as security. Mortgage debentures are therefore the ones to which
company property is attached (pledged) as security.

(d) Naked (Unsecured) Debentures — These are debentures where

no security is attached. These debentures are ranked among
creditors in the event of the company winding up.
3. Loans From Banks and Other Financial Institutions
A company can borrow long term or short term loans from banks and
other money lending institutions such as Development Finance
Company of Kenya (D.F.C.K.) and Industrial and Commercial
Development Corporation (I.C.D.C.). These loans are repayable with
interest at the agreed rates.
4. Profit Ploughed Back
A company may decide to set aside part of the profit made to be used
for specified general purposes instead of sharing out all the profits as
dividends. The part of profit set aside is referred to as a reserve.
5. Bank Overdraft
A customer to a bank may make arrangements with the bank to be
allowed to withdraw more money than he/she has in the account. Like
individuals, companies can also arrange for overdrafts.
6. Leasing and renting of property.
7. Goods bought on credit.
(a) Preference Shares
Preference shares have the following characteristics:
(i) Have a fixed rate of sharing profits (dividends).
(ii) Have a prior claim to dividends over the ordinary shares.
(iii) Have no voting rights.
(iv) Can be redeemable or irredeemable. To redeem means to buy
back. Therefore, redeemable shares are the ones that can be
bought back by the company at a future date, while
irredeemable shares are the ones that cannot be bought back
by the company.
(v) Can be cumulative or non-cumulative. To cumulate means to
increase through adding. Cumulative shares are, therefore, the
ones whose dividends keep on accumulating until they are
paid. This means that if the company makes a loss or a profit
that is not enough to pay dividends in a certain year, the
dividends to cumulative shares are carried forward to the next
year(s) when enough profits are made. Non-cumulative shares
are the ones whose dividends are not carried forward to the
following year(s). Thus those shares are entitled to dividends
only for the year when the dividends are declared.

(b) Ordinary Shares

Ordinary shares are those with the following rights:
(i) Have voting rights—they are hence called equity shares.
(ii) Have no fixed rate of dividends. The dividends on them vary
according to the amounts of profits made.
(iii) They have a claim to dividends after the preference shares.
(iv) If the company is being liquidated, they are paid last after the
preference shares.
2. Debentures
Debentures refer to loans from the public to a company. The word is
also used to refer to acknowledgement of a debt by a company. Since
debentures are loans, they carry interest at a fixed rate which is payable
whether profits are made or not. Debentures are issued to the public in
8. Acquiring property through hire purchase.
TYPES OF COMPANIES
Limited liability companies can be classified into two; private limited
company and public limited company.
Private Limited Company
A private limited company is a company whose characteristics include the
following:
(i) Can be formed by between 2 (two) and 50 (fifty) shareholders,
excluding the employees.
(ii) Does not advertise its shares to the public, but sells them privately to
specific people.
(iii) Restricts the transfer of shares. This means that a shareholder cannot
sell his/her shares freely without the consent of other shareholders.
(iv) Can be managed by one or two directors. A big private company may,
however, require a board of directors.
(iv) Can start business immediately after receiving the certificate of
incorporation (certificate of registration) without necessarily having to
wait for a certificate of trading.
Advantages of a Private Limited Company
The following are some of the advantages of a private limited company:
(i) Easy to form: The procedures and cost involved in formation of a
private limited company is less than in public limited company.
(ii) Separate legal entity: A private company is a separate legal entity
from its owners. Like a person, it can own property, sue, be sued and
enter into contracts in its own name.
(iii) Limited liability: The liability of the shareholders is limited. The
shareholders are not liable to the company’s debts beyond the amount
due on the shares they hold. Therefore, if a shareholder has fully paid
for his/her shares, he/she has no further liability to the company. This
advantage makes private companies more attractive than sole
proprietorships or partnerships.
(iv) Wide source of capital: A private company has access to a large pool
of capital than a sole proprietorship or a partnership. A private
company can borrow money more easily from financial institutions
because it owns assets which can be pledged as security.
(v) Professional management: A private company has access to a large
pool of professional managers than a sole proprietorship or a
partnership. Professional managers who are hired and paid for their
services bring in professional skills in their areas which are of great
advantage to a private company.
(vi) Ease in starting trading activities: Unlike a public company, a
private company can commence trading immediately it is
incorporated.
(vii) Continuity: Unlike in a sole proprietorship or a partnership, the
death of a shareholder in a private company does not affect the
company.
Disadvantages of a Private Company
Disadvantages of a private limited company include the following:
(i) Required to make returns: A private limited company, unlike a sole
proprietorship or a partnership, must submit annual returns on
prescribed forms to the registrar of companies immediately after the
annual general meeting.
(ii) Cannot sell shares to the public: A private company cannot invite
the public to subscribe to its shares like a public limited company. A
private company has, therefore, limited access to a wide source of
capital.
(iii) Restricts share transfer: The law requires that a private company
restricts the transfer of shares to its members.
(iv) Lack of flexibility: Unlike a sole proprietorship or a partnership, a
private limited company can only carry out the activities spelt out in
the objects clause of the memorandum of association.
It may also get favourable terms when borrowing money from
financial institutions. This is because it borrows in large amounts and
has good security to offer to the lenders.
(ii) Limited liability — Like private companies, the liability of the
shareholders is limited. This means that shareholders are not liable for
the company’s debts beyond the shareholders’ capital contribution.
(iii) Specialised management — Its vast resources, for example,
financial strength, enables it to hire qualified and experienced
professional staff.
(iv) Wide choice of business opportunities — Due to large amount of
capital a public company may be suitable for any type of investment.
(v) Easy transfer of shares — The process of transferring shares is easy.
The shares are freely transferable from one person to another. The sale
of shares by a member therefore, affects neither the company’s capital
nor its continuity.
(vi) Continuity — A public company has a continuous life as it is not
affected by the shareholders’ death, insanity, bankruptcy or transfer of
shares.
(vii) Economies of scale — Its large size enables it to enjoy economies of
large scale operations. This, therefore, leads to reduced costs of
production which raises the levels of profit.
(viii) Employees motivation — A company may have share purchase
schemes for its employees. These schemes enable employees to be
part owners of the company. This in turn may encourage them to work
harder in anticipation of higher dividends and growth in the value of
the company’s shares.
Disadvantages of Public Limited Companies
Disadvantages of public limited companies include the following:
(i) High costs of formation — The process of registering a public
limited company is expensive and lengthy. Some of the costs of
formation are legal costs, registration fees and taxes.
(ii) Legal restrictions — A public company must comply with many
legal requirements making its operations inflexible and rigid.
(v) Alienation of shareholders: The shareholders do not have direct
control over the business as management is left in the hands of
directors.
(vi) Slow decision making: Major decisions may require the sanctions of
shareholders who may take time before they meet.
Public Limited Company
A public limited company is a company whose characteristics include the
following:
(i) Can be formed by a minimum of 7 (seven) shareholders and not set
maximum.
(ii) Cannot start business before it is issued with a certificate of trading.
This is issued after the certificate of incorporation and after the
company has raised a minimum amount of capital.
(iii) It is managed by a board of directors.
(iv) Its shares and debentures are freely transferable from one person to
another. This may be done through a stock exchange market for those
companies that are members of the stock exchange (quoted
companies).
(v) It advertises and invites the public to subscribe for its shares and
debentures. This may be done through a prospectus. A prospectus is a
booklet that invites members of the public to apply for the shares or
debentures they wish to buy. It gives details of the type, amount and
value of the shares or debentures offered. It also gives enough
information about the company to enable the prospective shareholder
to make a decision on whether to subscribe for the shares and
debentures or not. The purpose of the prospectus is therefore to
advertise and invite the public to subscribe for the shares or
debentures.
Advantages of a Public Limited Company
The following are some of the advantages of a public limited company:
(i) Wide range of sources of capital — It has access to a wide range of
sources of capital especially though the sale of shares and debentures.
(iii) Alienation of owners — Owners of public limited companies do not
participate in the management of their companies. The shareholders
do not have direct control over the running of the business as the
management is left in the hands of a board of directors.
(iv) Lack of secrecy — The requirements by law for public companies to
submit annual returns and accounts to the registrar of companies deny
the company the benefit of keeping its affairs secret. Accounts of
public companies can also be made available to any person by the
registrar of companies on payment of a small fee. In addition, public
companies are required to publish their end of year financial
statements.
(v) Conflict of interests — Directors may have personal interests that
may conflict with those of the company. This may lead to
mismanagement.
(vi) Delay in Decision making — Important company decisions are made
by the directors and the shareholders. The directors and shareholders
meet after long periods, which sometimes makes decision-making
slow and expensive.
(vii) Diseconomies of scale — The large size and nature of business
operations of a public company may result in high running costs and
inefficiency.
(viii) Double taxation — The profit made by a company is taxed and the
dividends distributed to the shareholders are also taxed. This results in
double taxation.
Management
The management of a private company is often determined by its size. A
small private company may be managed by one person who is known as the
managing director. However, in a big private company, it is appropriate to
appoint a board of directors who are responsible for determining the general
policies of the company.
A small public company may be managed by only two directors as
required by law. One of the two directors must be the managing director. In
most cases, however, public companies are large and are managed by a big
team of directors and other professional staff. The directors of the public
company are responsible for laying down the overall company policy. The
professional management staff are responsible for the day-to-day operations
of the company and ensure that the directors’ policies are implemented.
Below the directors, there are professional managers; for example, the
general manager, the marketing manager, the personnel manager and the
finance manager who are responsible for their own departments but who are
at the same time collectively responsible for implementing the company’s
plans of operations. Figure 1.5 is a structure of a company.

Fig.1.5: Organisational structure of a company

Role of the stock exchange as a market for securities

As was pointed out earlier, stocks refer to groups of shares in a public
limited company. A company forms stocks when all the shares (authorised
shares) in a particular category have been issued and fully paid for. The
stock exchange market is therefore the market where shares of quoted
companies are exchanged through buying and selling. A quoted company is
(v) Assist companies to raise capital — The stock exchange market
assist companies to raise capital by creating an environment through
which such companies issue new shares to members of the public
(I.P.O.).
(vi) Creation of employment: stock exchange market has assisted in the
creation of employment opportunities, for those who facilitate the
buying and selling of securities. Such people include the brokers and
their agents. Figure 1.6 shows stock brokers at work.

Fig. 1.6: A stock exchange market

(vii) Raising revenue for the government: the government earns revenue
by collecting fees and other dues from activities carried out in the
stock exchange market. Examples are taxes, licence fees, and rent and
rates.
(viii) Availing a variety of securities: The stock exchange market avails a
variety of securities from which investors can choose. The market
therefore satisfies needs of different investors. For example, an
investor who wishes to buy shares from different companies can do so
in the market.
a company that has been registered (listed) as a member of the stock
exchange market. Companies that are not quoted cannot have their shares
traded in a stock exchange market. We have only one stock exchange
market in Kenya, that is, the Nairobi Stock Exchange market.
In addition to the shares discussed above, the stock exchange market may
also deal in government securities and stocks of local authorities. The term
securities simply means shares. It may also be used to refer to documents
used in support of share ownership.
A person or organisation wishing to acquire shares may do so either at
initial public offer (I.P.O.) or in the secondary market. Initial public offer
refers to situations in which a company has floated new shares for public
subscription. That is, a company has advertised new shares and has invited
members of the public to buy them. New shares are issued in the primary
market. The secondary market, on the other hand, is a market that deals in
second hand shares. That is, transfer of shares from one person or
organisation to another. The stock exchange market facilitates both primary
and secondary share deals. Investors cannot however buy or sell shares
directly in the stock exchange market. They can only do so through stock
brokers.
As can be seen from the foregoing, the stock exchange market plays a
major role in the dealings pertaining to securities. Some of these roles are as
follows:
(i) Facilitates buying of shares — The stock exchange market provides
a conducive environment to investors wanting to buy shares in various
companies.
(ii) Facilitates selling of shares — Creates a ready market for those who
wish to sell their securities.
(iii) Safeguarding investors’ interests — This is achieved by requiring
the companies that want to be quoted to attain certain standards of
performance. The stock exchange market also monitors the
performance of the already quoted companies and those found not
meeting the expectations are struck off from the register.
(iv) Provides useful information — Stock exchange market provides
timely, accurate and reliable information to investors which enables
them to make decisions on the investments to make. The information
may be passed on through mass media and stockbrokers.
(ix) Fixing of prices — In most cases the prices of goods and services are
determined by forces of demand and supply. The stock exchange
market is in a position to determine the equilibrium price (true market
value) of the securities. This is of great importance to both the buyers
and the sellers.
(x) Measure of a country’s economic progress — The performance of
securities in the stock exchange market may be an indicator of a
country’s economic progress. For example, a constant rise in prices ad
volumes of securities traded in within a given period would indicate
that the country’s economy was positively growing during that period.
(xi) Promotes the culture of saving — Stock exchange market provides
investors with opportunities to channel their excess funds. Such
people may act as role models to other members of the society who
may emulate them thereby promoting a savings culture.
Dissolution of Limited Liability Companies
Dissolution of a limited liability company is also referred to as liquidation
or winding up. The following are some of the circumstances under which a
limited liability company may be dissolved:
(i) Insolvency — When a company is not able to pay its debts, it can be
declared insolvent and therefore may be wound up. In the process of
winding up, the company may be placed in the hands of an official
receiver. The company is then said to be under receivership.
(ii) Ultra-vires — When a company acts contrary to the provisions of the
objective clause of its memorandum of association, it is said to act
ultra-vires and can therefore be wound up. The law requires a
company to always act intra-vires (within its objectives).
(iii) Amalgamation — Two or more companies may join together to form
one company completely different from the original companies.
(iv) Court order — The court of law can order a company to wind up
especially following complaints from creditors.
(v) Decision by shareholders — The shareholders may decide to
dissolve the business in a general meeting. Figure 1.7 illustrates how a
receiver protects an insolvent company from its creditors.
Fig 1.7: Official receiver protecting a company under receivership

PUBLIC CORPORATIONS
Introduction
Public corporations also called state corporations and are organisations
formed and/or controlled by the government. Controlling means that the
government owns more than 50% shares in the corporation. Public
corporations perform specific roles in a country. In Kenya, their activities
are found in such areas as transport, communication, production, marketing,
financial and management services.
Public corporations are formed to provide essential services that are
generally in the public interest. The following examples of public
corporations provide important services which the private sector may not
provide:
(i) Telkom Kenya provides telecommunication services.
(ii) Postal Corporation of Kenya provides postal services.
(iii) Industrial and Commercial Development Corporation (I.C.D.C.)
provides financial and management services.
(iv) Mumias and Chemilil Sugar Companies produce sugar.
(v) The appointment of top executives.
(vi) The powers of the Board of Directors.
(vii) The ministry under which it will operate.
Management
The chairman and the members of the Board of Directors are appointed by
the President or the relevant minister. The Chairman and the Board of
Directors are responsible for the implementation of aims and objectives of
the corporation. The Board of Directors is drawn from the Government and
prominent persons from the private sector.
The Chairman of the Board of Directors reports to the government
through the minister. The Managing Director who is usually the secretary to
the Board of Directors is the Chief Executive Officer of the corporation.
Source of Finance
The initial finance usually comes from the government as a vote of
expenditure for the ministry concerned. Thereafter, the government may
expect the corporation to run its affairs on its own without further
government assistance. Since corporations are separate legal entities, they
may own property, sue and be sued, and borrow money from financial
institutions to finance their operations.
Advantages of Public Corporations
The following are some of the advantages of public corporations:
(i) Initial capital is readily available because it is provided by the
government.
(ii) A corporation can afford to provide goods and services at low prices
which would otherwise be very expensive if they were left to the
private sector. This has the effect of protecting the public from
exploitation.
(iii) Most of these organisations produce goods and services in large
quantities, thereby reaping the benefits of large scale production.
(iv) Some corporations are monopolies. They hence enjoy the benefit of
being a monopoly, for example, they do not have to incur costs in
advertising since there is no competition.
(v) Coffee Board of Kenya is responsible for the marketing of coffee in
the country.
Kenyatta National hospital illustrated in figure 1.8 below is an example
of a public corporation.

Fig. 1.8: Public corporation

Formation
Most Public Corporations in Kenya are formed by an Act of Parliament
while others are formed under the existing laws. For example, public
schools are established through the existing education act. When a
corporation is formed by an act of parliament, the act defines its status,
obligations and area of operation. The act outlines the following:
(i) Proposed name of corporation.
(ii) Aims and objectives.
(iii) Goods or services to be produced and provided.
(iv) Location (area of operation).
(v) They can be bailed out by the government when in financial
problems.
Disadvantages of Public Corporations
Some of the disadvantages of public corporations are:
(i) The government is obliged to provide goods and services to all
citizens regardless of their geographical location. Sometimes it
becomes uneconomical to provide some goods and services to some
areas. The costs of providing them may surpass the returns.
(ii) Diseconomies of large scale operations apply in these business units
because they are usually very large organisations.
(iii) Decision making may take long because of the large number of
people involved.
(iv) The performance of public corporations can be poor due to lack of
accountability on the part of the employees. The employees are not
directly answerable to the real owners of the business. Managerial
work is also carried out by political appointees who in many cases do
not have the managerial skills required to run such organisations.
(v) Corporations have the disadvantages of a monopoly. For example,
insensitivity to customer feelings.
Dissolution of Public Corporations
Public corporations can only be dissolved by the government. Some of the
circumstances under which this may happen are:
(i) Persistent loss making.
(ii) Bankruptcy.
Parastatals
A parastatal is a state corporation which is fully owned by the government.
The formation, management, sources of capital and dissolution are as
discussed above.
The following table shows the characteristics of each of the business units:
Table 1.1: Summary of different forms of business units
Trends in Forms of Business Units
The following are some of the current trends in forms of business
organisations:
(i) Holding Companies — A holding company is one that acquires 51
per cent or more shares in one or more other companies. This means
that the various companies entering into such a combination are
brought under a single control. The companies are called subsidiaries
of the holding company. However, subsidiary companies are allowed
to retain their original names and status.
(ii) Cartels — A cartel is a group of related companies that agree to
work together in order to control output, prices and markets of their
goods and services. An example of a cartel is the Organisation of
Petroleum Exporting Countries (O.P.E.C.)
(iii) Privatisation — Privatisation is the changing of state owned
corporations to public limited companies. This is done through the
government selling their shareholding to the public. The government
can also reduce its control in a particular corporation in which it holds
more than 50% of the share capital by selling these shares to the
public so that it is left with none or with less than 50%. This has been
the case especially with public corporations that have been
performing poorly.
(iv) Absorptions (take-overs) — Absorption refers to a business taking
over another business by buying all the assets of the latter business
which then ceases to exist. For example, the Kenya Breweries took
over the Castle Breweries in Kenya.
(v) Mergers (Amalgamation) — This is where two or more business
organisations combine and form one new business organisation. The
merging companies cease to exist altogether.
(vi) Check-off system — These days, the SACCOs are doing so well due
to the introduction of the check-off system of remitting money in
addition to other benefits. In this system, money is deducted at source
(by employer) and submitted to the SACCOs on behalf of the
employee who is a member of the SACCO.
(vii) Burial benevolent funds (B.B.F.) — Some SACCOs have started
systems to assist their members financially in burials through creation
of BBF.
(viii) Front office savings account (FOSA) — SACCOs have expanded
their services to members by introducing front office savings account
(FOSA). The account enables members to conveniently deposit and
withdraw money. A member may also be provided with an A.T.M.
card which he/she may use to withdraw money at various Pesa Points.
(ix) Franchising — This is where one business grants another the rights
to manufacture distribute or provide its branded products using the
name of the business that has granted the right. For example, general
motors have been granted franchise to deal in Toyota, Isuzu and
Nissan vehicles.
(x) Trusts — This is where a group of companies work together to
reduce competition. Trusts may also be formed where a company
buys more than 50% of shares in a competing company so as to
reduce competition.
(xi) Globalisation — Business organisations are able to conduct business
activities in any part of the world through the use of technology. For
example, through e-commerce. Other businesses, referred to as
multinationals have branches in many parts of the world which
enables them to conduct business activities globally.
(xii) Performance contract — In the attempt to improve performance of
state corporations, employees are expected to sign performance
contracts.
Learning Activities
1. Visit a local shopping centre and find out whether each of the following
business enterprises exist — a sole proprietorship, a partnership, a
private company and a public company. Inquire from the owners how
each was formed, how it is managed and how capital was obtained.
2. Visit a co-operative society in your area and find out the services it
renders to its members.
Exercise 1A
1. Highlight the advantages of sole proprietorship.
2. Outline the sources of capital for a sole proprietorship.
3. State the type of partner described in each of the following statements:
(a) Under eighteen years of age.
(b) Does not take active part in running of the business.
(c) Allows his/her name to be used as if he/she is a partner.
(d) Has unlimited liability.
4. Outline the circumstances under which a partnership may be dissolved.