Forms of business organization, Zanzibar Tanzania

1. Elements of
Business Admn/
Basic of Business
By Sultan Said

2. 02
LECTURE
Forms of Business Ownership
02

3. LEARNING OBJECTIVES
• By the end of this session, students are
expected to be able to:
• Define business organization/business
ownership
• Describe the factors affecting business
organization/business ownership.
• Describe types of business ownership

4. Form of Business Ownership
• If you’re starting a new business, you have to
decide which legal form of ownership is best for
you and your business.
• Do you want to own the business yourself and
operate as a sole proprietorship?
• Or, do you want to share ownership, operating as
a partnership or a corporation?
• Before we discuss the pros and cons of these
three types of ownership; Sole proprietorship,
Partnership, and Corporation

5. Cont..
• let’s address some of the questions that you’d
probably ask yourself in choosing the
appropriate legal form for your business;
• 1. What are you willing to do to set up and
operate your business? Do you want to
minimize the costs of getting started? Do you
hope to avoid complex government
regulations and reporting requirements?

6. • 2. How much control would you like? Do you
want to own the company yourself, or do you
want to share ownership with other people? Are
you willing to share responsibility for running the
business?
• 3. Do you want to be the sole benefactor of your
efforts or are you willing to share profits with
other people? Do you want to be in charge of
deciding how much of the company’s profits will
be retained in the business?

7. Cont…..
• 4. Do you want to avoid special taxes? Do you
want to avoid paying “business” income taxes on
your business and then paying “personal” income
taxes on profits earned by the business?
• 5. Do you have all the skills needed to run the
business? Do you possess the talent and skills to
run the business yourself, or would the business
benefit from a diverse group of owners? Are you
likely to get along with co-owners over an
extended period of time?

8. Cont…
• 6. Should it be possible for the business to
continue without you? Is it important to you that
the business survive you? Do you want to know
that other owners can take over if you die or
become disabled? Do you want to make it easy
for ownership to change hands?
• 7. What are your financing needs? How do you
plan to finance your company? Will you need a lot
of money to start, operate, and grow your
business? Can you furnish the money yourself, or
will you need

9. Cont..
• 8. How much liability exposure are you willing
to accept? Are you willing to risk your personal
assets—your bank account, your car, maybe
even your home—for your business? Are you
prepared to pay business debts out of your
personal funds? Do you feel uneasy about
accepting personal liability for the actions of
fellow owners?

10. Cont…
• No single form of ownership will give you
everything you desire.
• You’ll have to make some trade-offs.
• Because each option has both advantages and
disadvantages, your job is to decide which one
offers the features that are most important to
you.

11. Criteria for Choosing the Right Form of
Business Ownership
• The following are the most important issue to consider
when they are evaluating the form of ownership:
i. Tax considerations: the amount of net income an
entrepreneur expects the business to generate and the
tax bill the owner must pay are the important factors
when choosing the form of ownership.
ii. Start up and future capital requirements: forms of
ownership differ from their ability to raise start up
capital. Depending on how much capital an
entrepreneur needs and where he or she plans to get.
Some forms are superior to others.

12. Cont..
iii. Control : by choosing certain forms of ownership, an
entrepreneur automatically gives up some control
over the company.
iv. Cost of formation: some forms of business are much
more costly to create. Entrepreneurs must weigh
carefully the benefits and the cost of the particular
form they choose.
v. Managerial ability: entrepreneurs must assess their
ability and skills to manage a business effectively. If
they lack ability or experience in key areas, they
need to choose a form of ownership that allow them
to bring in other owners who can provide necessary
skills for the company to succeed.

13. Sole Proprietorship
• A sole proprietorship; Is a business owned by
only one person.
• It is a form of business that is owned and
operated by one person.
• It is the common form of ownership, it
accounts for about 75.2 percent with legal
status in Tanzania by 2013 whereas in the
United State it accounts only 75 percent as the
most common form of ownership

14. Cont..
It has the following features /characteristics:
• The enterprise has no life apart from its owner.
• The owner has the right to all of the profits and
bears all of the liability for debts and
obligations for the business.
• The establishment procedures for a sole
proprietorship are simple. A person only
needs a business license together with capital
in order to begin operation

15. Cont..
• The individual has unlimited liability,
implying that the business and personal assets
stand behind the operation. If the business
cannot meet its financial obligations the owner
can be forced to sell his personal assets in
order to satisfy the needs of creditors.
• As a Sole proprietor, you put your personal
assets (your bank account, your car, maybe
even your home) at risk for the sake of your
business.

16. Cont..

17. Cont..
• Accounting Managers need accurate, relevant, timely
financial information, and accountants provide it.
• Accountants measure, summarize, and communicate
financial and managerial information and advise other
managers on financial matters.
• There are two fields of accounting; financial
accountants and managerial accountants
• Financial accountants; prepare financial statements to
help users, both inside and outside the organization,
assess the financial strength of the company.
• Ease of formation. Less formalities and restrictions are
associated with establishing a sole Proprietorship.
• Sole owners of profits.
• Relative freedom from governmental control
• Decision making and control is vested in one owner.
• Freedom from corporate government taxes. Proprietors
are taxed as individual tax payers and not as businesses.
• Management is able to respond quickly to business
needs in the form of day to day management decisions
as governed by various laws and good sense.
Advantages of Sole Proprietorship

18. Cont..
• Managerial accountants; prepare information,
such as reports on the cost of materials used
in the production process, for internal use
only.
 Unlimited liability. The individual Proprietor is personally
responsible for all business debts , hence the liability extends
to all of the Proprietors assets.
 Lack of continuity upon the death/illness of the owner or if the
owner is crippled.
 Less available capital as compared to other forms of businesses
 Relative difficulty in obtaining long term financing
 Relative limited view point and experience. The operation
depends on one person’s ability, training and expertise and this
limits direction and scope.
Disadvantages of sole proprietorship

19. Partnership
• A partnership is an association of two or more
persons acting as co owners of a business for
profit.
• Each partner contributes money, property, labor or
skills and each shares in the profits as well as
losses.
• Normally in a partnership it is recommended that
a written partnership article be prepared without
which in case of disputes the court will assume
equal sharing of profits, losses, assets,
management and other aspects of the business.

21. Advantages of Partnerships
• Synergy; There is clear potential for the enhancement
of value resulting from two or more individuals
combining strengths.
• Partnerships are relatively easy to form, however
considerable thought should be put in consideration.
• Partnerships may be subject to fewer regulations than
corporations.
• They also share the risks of failure.
• Flexibility. A partnership often is able to respond
quickly to business needs in the form of day to day
decisions

22. Disadvantages of Partnership
• Lack of continuity encase one of the partners dies, is
adjudged insane or simply withdraws from the
business
• Relative difficulty of obtaining large sums of capital
especially when dealing with long term financing.
• There is really possibility of disputes or conflicts
between partners which could lead in dissolving the
Partnerships.
• Each partner is an agent of the Partnerships and is
liable for actions of other partners.

23. Cont…
• Unlimited liability of at least one partner for the debts.
• This is the major problem with partnerships, as with
sole proprietorships. Each partner is personally liable
not only for his or her own actions but also for the
ACTIONS of ALL the PARTNERS. In a partnership, it may
work according to the following scenario.
• Say that you’re a partner in a dry cleaning business.
One day, you return
• from lunch to find your establishment on fire. You’re
intercepted by your partner, who tells you that the fire
started because he fell asleep while you were smoking.

24. Cont..
• As you watch your livelihood go up in flames,
your partner tells you something else: because he
forgot to pay the bill, your fire insurance was
canceled. When it’s all over, you estimate the loss
to the building and everything inside at
350,000,000 million.
• And here’s the really bad news: if the business
doesn’t have the cash or other assets to cover
losses, you CAN be PERSONALLY sued for the AMOUNT.
In other words, any party who suffered a loss
because of the fire can go after your personal
assets.

25. Corporations
• Corporations are artificial beings, invisible,
intangible and existing only in contemplation of
the law.
• A corporation is a separate legal entity apart from
the individuals who own it.
• A corporation is created by the authority of state
laws and is usually formed when a transfer of
money or property by prospective shareholders
(owners) takes place in exchange for capital stock
(ownership certificates) in the corporation.

26. Characteristics of Corporations
1. Corporations have limited liability in the
sense that the stockholder’s liability is limited
to the individual investment.
2. A corporation is a separate legal entity apart
from the individual’s who own it.
3. A corporation is created by the authority of
state law .

27. Revenue Percentage

28. Advantages of Corporations
 Limited liability. The stockholders liability is
limited to the individual’s investment.
 Ownership of stock can be transferred through the
sale of stock to interested buyers.
 The company has a life separate and distinct
from that of its owners and can continue for the
foreseeable future.
 Relative ease of securing capital in large amount.

29. Cont…
• Increased ability and expertise. The corporation
is able to draw on the expertise and skills of a
number of individuals, ranging from the major
stockholders to the professional managers who
are brought on board.
• Ease of transferring ownership by selling stock.

30. Disadvantages of Corporations
 Activity restrictions. Corporate activities are
limited by the charter and by various laws.
 Lack of representation. Minority shareholders are
sometimes outvoted by the majority who force
their will on the others.
 Extensive government regulations and reports
required may be cumbersome, bureaucratic and
paper consuming.

31. Cont…
 A multitude of expenses are involved in
forming a corporation.
 Double taxation; Income taxes are levied both
on corporate profits and on individual salaries
and dividends.
• Higher organizational and operational costs.

32. KEY TAKEAWAYS
• A sole proprietorship is a business owned by only one person.
• It’s the most common form of ownership and accounts for about 75.2 percent of
all Tanzania businesses.
– Advantages of a sole proprietorship include the following:
• Easy and inexpensive to form; few government regulations
• Complete control over your business
• Get all the profits earned by the business
• Don’t have to pay any special income taxes
– Disadvantages of a sole proprietorship include the following:
• Have to supply all the different talents needed to make the business a
success
• If you die, the business dissolves
• Have to rely on your own resources for financing
• If the company incurs a debt or suffers a catastrophe, you are personally
liable (you have unlimited liability)

33. – A general partnership is a business owned jointly by two or more
people.
– About 10.2 percent of Tanzania businesses are partnerships by 2013 .
• A partnership has several advantages over a sole proprietorship:
– It’s relatively inexpensive to set up and subject to few government
regulations.
– Partners pay personal income taxes on their share of profits; the
partnership doesn’t pay any special taxes.
– It brings a diverse group of people together to share managerial
responsibilities.
– Partners can agree legally to allow the partnership to survive if one or
more partners die.
– It makes financing easier because the partnership can draw on resources
from a number of partners.
• A partnership has several disadvantages over a sole proprietorship:
– Shared decision making can result in disagreements.
– Profits must be shared.
– Each partner is personally liable not only for his or her own actions but
also for those of all partners—a principle called unlimited liability.
KEY TAKEAWAYS

34. KEY TAKEAWAYS
– A corporation (sometimes called a REGULAR or C-corporation) is a legal entity that’s
separate from the parties who own it.
– Corporations are owned by shareholders who invest money in them by buying shares
of stock.
– They elect a board of directors that’s legally responsible for governing the corporation.
• A corporation has several advantages over a sole proprietorship and partnership:
– An important advantage of incorporation is limited liability: Owners are not
responsible for the obligations of the corporation and can lose no more than
the amount that they have personally invested in the company.
– Incorporation also makes it easier to access financing.
– Because the corporation is a separate legal entity, it exists beyond the lives of
its owners.
– Corporations are generally able to attract skilled and talented employees.
• A corporation has several disadvantages over a sole proprietorship and partnership:
– The goals of corporate managers, who don’t necessarily own stock, and
shareholders, who don’t necessarily work for the company, can differ.
– It’s costly to set up and subject to burdensome regulations and government
oversight.
– It’s subject to “double taxation.” Corporations are taxed on their earnings.
When these earnings are distributed as dividends, the shareholders pay taxes
on these dividends.