Business Units

Business units refer to the various structures through which a business can be owned and operated. The two primary types of business units are private enterprises and public enterprises.

Private Enterprise

Private enterprises are businesses owned and controlled by private individuals, with no government involvement. This category includes various forms of business ownership, such as sole traders, partnerships, private limited companies, public limited companies, multinational companies, clubs, and cooperatives.

Sole Trading

Sole trading is a form of business ownership characterized by a single individual operating the business. This type of enterprise is relatively straightforward to establish, requiring minimal formalities and documentation. One of its most notable features is that it can be set up with little capital, making it accessible to many aspiring entrepreneurs.

Features of Sole Trading

Sole trading has several key characteristics:

• It is easy to set up, requiring minimal formalities and paperwork.
• The capital requirement is relatively low, allowing individuals to start a business without significant investment.
• Sole traders enjoy flexibility, as they can easily change business types if one proves unprofitable.
• The process involves less documentation, making it more accessible compared to larger business structures.
• This model is suitable for various businesses, such as retail or services.
• Independent decision-making is a hallmark of sole trading, enabling the owner to make quick choices without needing consensus.
• Profits generated from the business are retained entirely by the owner, as they are not shared with anyone.
• Business affairs remain confidential, allowing the owner to maintain privacy regarding their operations.
• There is often a personal touch in customer interactions, fostering strong relationships.
• Overall, it is easy to manage, given its straightforward structure.

Advantages of Sole Trading

The advantages of operating as a sole trader include:

• The ease of establishment, making it quick to start.
• Full control over business decisions, allowing the owner to steer the direction of the business.
• The minimal capital needed to initiate operations, making it accessible to many.
• The ability to make quick decisions, as the owner is not required to consult others.
• Opportunities for direct customer engagement, which enhances relationships.
• Complete retention of profits, as all earnings belong to the owner.
• Confidentiality regarding business affairs, which is often important for many entrepreneurs.
• Reduced documentation requirements, simplifying the operational process.
• The flexibility to adapt to changing market conditions, allowing for a responsive business model.

Disadvantages of Sole Trading

However, there are also disadvantages associated with sole trading:

• The model features unlimited liability, meaning the owner is personally liable for all business debts.
• It lacks continuity, as the business may cease to exist upon the owner's death.
• There is no separate legal status; the owner and business are considered the same entity.
• Limited capital availability can hinder business expansion efforts.
• Difficulty in securing loans due to the perceived risk of operating as a sole trader.

Partnership

A partnership is an association of two or more individuals who agree to run a business together with the intention of making a profit. To form a partnership, a minimum of two and a maximum of twenty individuals is required, depending on local regulations. Legal formalities, such as a Partnership Deed, are necessary to outline the roles, responsibilities, and profit-sharing arrangements among the partners.

The Partnership Deed

The Partnership Deed typically includes essential information such as the name of the partnership, the amount of capital each partner contributes, the sharing ratio of profits and losses, specific roles of each partner, salaries, and guidelines for financial record-keeping. If a Partnership Deed is not established, the rules set forth in the Partnership Act of 1890 will apply, which stipulates that profits and losses are shared equally, all partners must contribute equal capital, and no partner can take more than his share.

Types of Partnership

Partnerships can be classified into two main types:

Ordinary Partnership

All partners have unlimited liability and actively participate in managing the business, making them responsible for its debts.

Limited Partnership

Some partners have limited liability and do not actively participate in business operations, known as dormant or sleeping partners.

Advantages of Partnership

The advantages of a partnership include:

• The ease of establishment, which is less complex compared to forming a corporation.
• The ability to pool more capital, as multiple partners contribute financially.
• Business continuity, as the partnership can persist even if one partner becomes ill or passes away.
• Consultative decision-making, which can improve the quality of decisions due to shared input.
• Privacy in financial matters, as records do not need to be publicly disclosed.
• A division of labor that allows partners to specialize in different areas of the business.

Disadvantages of Partnership

Partnerships also come with certain drawbacks:

• Partners typically have unlimited liability, exposing their personal assets to business debts.
• Lack of continuity can arise, as the death of a partner may lead to the dissolution of the partnership.
• No separate legal status means that partners are personally liable for the business's obligations.
• Potential for conflicts and disagreements among partners, which can disrupt operations.
• Disputes over profit sharing may occur if there is no pre-agreed sharing ratio.

Similarities and Differences Between Sole Trader and Partnership

Both sole traders and partnerships share similarities, including unlimited liability, lack of a separate legal status, and the absence of guaranteed continuity after the death of an owner or partner. Furthermore, both types of business keep their affairs and accounts private.

However, there are significant differences:

• Sole traders operate as a single individual, whereas partnerships consist of two to twenty members.
• Profits in sole trading are not shared, while partnerships involve shared profits among partners.
• Capital requirements in sole trading tend to be less than in partnerships, where more capital is contributed collectively.
• Sole traders do not benefit from a division of labor, whereas partnerships allow for the distribution of responsibilities among partners.

Companies

The formation and registration of companies involve several key steps and important concepts, primarily initiated by promoters. These individuals are responsible for overseeing the registration process and ensuring compliance with legal requirements.

Formation and Registration of Companies

To start the formation of a company, promoters of both private and public limited companies begin by drafting the Articles of Association. This document outlines the internal rules governing the conduct of the company's affairs. Once the Articles of Association are prepared, they are submitted to the Registrar of Companies for approval.

Articles of Association

The Articles of Association serve as the internal constitution of the company. They define the framework for how the company will operate and include critical elements such as:

• Voting rights of shareholders
• Powers and duties of the board of directors
• Procedures for share transfers and payment of dividends
• Conduct of annual general meetings (AGMs)
• Methods for maintaining financial records
• Processes for electing directors
• Borrowing capacity of the company
• Processes for amending the amount of capital
• Distribution of profits and auditing procedures

Once the Registrar is satisfied with the Articles of Association, a Certificate of Incorporation is issued.

Certificate of Incorporation

The Certificate of Incorporation is a legal document issued by the Registrar of Companies after verifying that the Articles of Association comply with the Companies Act. This certificate signifies that the company is registered and incorporated as a separate legal entity, distinct from its founders. This means the company can enter contracts, sue, and be sued in its own name.

For private limited companies, trading can commence immediately upon receiving the Certificate of Incorporation, while public limited companies must await a Certificate of Trading before commencing operations.

Prospectus

A prospectus is a formal invitation to the public to purchase shares in the company, aiding in the capital-raising process. Issued by the promoters, it contains vital information such as:

• The type, number, and price of shares available for sale
• Historical performance and future prospects of the company
• Other pertinent details to attract potential investors

Board of Directors

A limited company is governed by a Board of Directors, elected by shareholders at the AGM. This board is responsible for establishing company policies and is led by a chairperson. The powers and limitations of the board are delineated in the Articles of Association. The day-to-day operations of the company are managed by a managing director or general managers.

Annual General Meeting (AGM)

The Companies Act mandates that limited companies hold an annual general meeting each year, which is attended by all shareholders. The key purposes of the AGM include:

• Approving audited accounts presented by the managing director
• Electing the Board of Directors (with voting restricted to ordinary shareholders)
• Reviewing the directors' report
• Discussing business affairs
• Addressing issues unresolved by the board

Private Limited Company

Features and Characteristics

A private limited company possesses several distinctive features:

• Membership comprises a minimum of 2 shareholders with no maximum limit.
• Shareholders enjoy limited liability.
• The company is registered with the Registrar of Companies.
• Capital is raised through share sales.
• AGMs are held regularly.
• Governance is by a Board of Directors elected by shareholders.
• Continuity of existence is maintained even after the death of key shareholders.
• The company has a separate legal status.
• "Ltd" (Limited) is appended to the company name.
• Shares are not available for trading on stock exchanges and are non-transferable.
• Financial records are kept confidential and not filed with the Registrar.
• Trading can begin immediately upon incorporation.

Formation of a Private Limited Company

Forming a private limited company involves several key steps:

• Choose a unique name for the company, including "Ltd" or "Limited."
• Draft the Memorandum and Articles of Association.
• Register the company with the Registrar of Companies, along with necessary documentation.
• Pay the required registration fees.
• Obtain a Certificate of Incorporation from the Registrar.

Public Limited Company

Features and Characteristics

A public limited company has the following characteristics:

• Membership can include a minimum of 2 shareholders and has no upper limit.
• Shareholders enjoy limited liability.
• The company is registered with the Registrar of Companies.
• Capital is raised through public share sales and may be listed on a stock exchange.
• AGMs are held regularly.
• Governance is managed by a Board of Directors elected by shareholders.
• Continuity of existence is maintained, ensuring the company operates even after shareholder changes.
• The company possesses a separate legal status.
• "PLC" (Public Limited Company) is appended to the company name.
• Shares are publicly traded and can be transferred easily.
• Financial records must be submitted to the Registrar and are made available to the public.
• Trading can only commence once a Certificate of Trading is issued.

Formation of a Public Limited Company

Establishing a public limited company involves these key steps:

• Choose a unique name for the company, including "PLC" or "Public Limited Company."
• Draft the Memorandum and Articles of Association.
• Register the company with the Registrar of Companies and submit required documentation.
• Pay the necessary registration fees.
• Issue a prospectus to invite the public to subscribe to shares.
• Obtain a Certificate of Incorporation and subsequently a Certificate of Trading.

Similarities Between Public and Private Limited Companies

Both public and private limited companies share several common traits:

• Both must register with the Registrar of Companies.
• Both can be formed by a minimum of two individuals with no maximum limit.
• Shareholders in both have limited liability.
• Each has a separate legal status.
• Governance is through a Board of Directors.
• Capital is raised via share sales.
• Both are legally required to hold AGMs.
• Both require a Memorandum of Association and Articles of Association prior to registration.
• Ownership is held by shareholders with limited liabilities, ensuring continuity of existence.

Private Limited Company vs. Public Limited Company

Multinational Companies

Definition

Companies based in one country but operate factories and sales offices in other countries (e.g., BP, Total, Shoprite).

Advantages

• Worldwide contacts boost export sales.
• Contribute to government revenue through taxes.
• Create jobs globally.
• Bring knowledge, skills, and technology.
• Generate foreign exchange by selling goods abroad.
• Provide quality goods/services.

Disadvantages

• Exploit undeveloped economies by lowering prices below local traders.
• Dominate markets, pushing local businesses out.
• Prefer foreign experts over local training.
• Attract skilled locals with better salaries, harming local industries.
• Profits repatriated, draining foreign reserves.
• Central control disregards local conditions.

Public Enterprises and Public Corporations

Public Enterprises

Businesses owned and controlled by the central government (e.g., ZESCO, ZSIC).

Features of Public Corporations

• Owned by the government for public benefit.
• Funded by government grants.
• Governed by a board appointed by the minister.
• Profits used for public infrastructure and improvements.

Advantages

• Profits used for national development (e.g., roads, schools).
• Secure employment for citizens.
• Services provided in remote areas.
• Large-scale production due to government funding.
• Helps implement government policies (e.g., maintaining low prices).
• Source of income to the government, reducing taxes like PAYE.

Disadvantages

• Bureaucracy and red tape in decision-making.
• Taxpayers bear losses.
• Worker apathy leads to inefficiency.
• Political interference affects performance.
• High operational costs.

Differences Between Public Limited Companies and Public Corporations

Types of Capital

1. Share Capital:

• Nominal/Authorized: Maximum shares a company can issue.
• Issued/Allotted: Shares issued to shareholders.
• Paid-up: Amount paid by shareholders.

2. Classes of Shares:

• Preference Shares: Priority in dividends and capital repayment.
  • Cumulative: Accumulate unpaid dividends.
  • Non-cumulative: No claim on unpaid dividends.
  • Participating: Share surplus profits.
  • Redeemable: Repaid after a set period.
• Ordinary Shares: No preferential rights; dividends based on profit.
• Deferred Shares: Issued to promoters for services.

Characteristics of Debentures

• Loans to companies; debenture holders are creditors.
• Fixed interest paid before dividends to shareholders.
• Repaid on specified dates.
• Debenture holders do not participate in management or voting.
• Quoted on stock exchange.

Types of Debentures:

• Secured Debentures: Backed by company assets (fixed or floating charge).
• Unsecured Debentures: Not backed by assets; treated as ordinary creditors.

Differences Between Shares and Debentures