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Forms of Business Units - Business Studies Form 2 Notes

Forms of Business Units | Business Studies Notes

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Forms of Business Units

Last Updated: 12-05-2021 | Esoma-KE
A business unit is an organization formed by one or more people with a view of engaging in a profitable activity
Business units are generally classified into private or public sector business units.
Private sector comprises of business organizations owned by private individuals while the public sector comprises business organizations owned by the government.
Different forms of business include; Click on the links above to read more on Other Forms of Business Units)

Sole Proprietorship

This is a business enterprise owned by one person who is called a sole trader or a sole proprietor such as small shops, kiosks.
The formation of a sole proprietorship is very simple. Few legal formalities are required i.e. to start a sole proprietorship, one need only to raise the capital required and then apply for a trading license to operate the business small fee is paid and the trade license issued.

Characteristics of a Sole Proprietorship

  • The business is owned by one person
  • The capital is contributed by the owner and is usually small. The main source is from his savings and other sources can be from friends, bank or getting an inheritance
  • The owner enjoys all the profits alone and also suffers the losses alone
  • The owner is personally responsible for the management of the business and sometimes he is assisted by members of his family or a few employees. He remains responsible for the success or failure of his/her business.
  • The sole proprietor has unlimited liability meaning that incase of failure to meet debts, his creditor can claim his personal property
  • There are very few legal requirements to start the business unit.
  • Sole proprietorship is flexible; it is very easy to change the location or the nature of business.

Sources of Capital

  • Borrowing from friends, banks and other money lending institutions such as industries and commercial Development corporation(ICDC)and Kenya industrial estates
  • Inheritance
  • Personal savings
  • Getting goods on credit
  • Getting goods on hire purchase
  • Leasing or renting out one’s properties
  • Donations from friends and relatives
  • Ploughing back profit.

Advantages of Sole Proprietorship

  • The capital required to start the business is small hence anybody who can spare small amounts of money can start one.
  • Few formal/legal procedures are required to set up this business
  • Decision making and implementation is fast because the proprietor does not have to consult anybody
  • The trader has close and personal contact with customers. This helps them in knowing exactly what the customers need and hence satisfying those needs
  • A sole proprietor is able to assess the credit-worthiness of his or her customers because of close personal relationship. Extending credit to a few carefully selected customers reduce the probability of bad debts.
  • The trader is accountable to him/herself
  • A sole trader is able to keep the top secrets of the business operations
  • He/she enjoys all the profit
  • A sole proprietorship is flexible. One can change the nature or even the location of business as need arises.

Disadvantages of sole proprietorship

  • Has unlimited liability. This means that if the assets available in the business are not enough to pay all the business debts the personal property of the owner such as house will be sold to meet the debts
  • There is insufficient capital for expansion because of scarce resources and lack of access to other sources
  • He/she is overworked and has no time for recreation.
  • There is lack of continuity in the sole proprietorship i.e. the business is affected by sickness or death of the owner.
  • A sole proprietorship may not benefit from advantages realized by large scale enterprises (economies of large scale) such as access to loan facilities and large trade discounts.
  • Lack of specialization in the running of the business may lead to poor performance. This is because one person cannot manage all aspects of the business effectively.
  • Due to the size of the business, sole proprietorships do not attract and retain highly qualified and trained personnel.

Dissolution of Sole Proprietorships

  • Death or insanity of the owner
  • Transfer of the business to another person- this transfers the rights and obligations of the business to the new owner.
  • Bankruptcy of the owner- this means that the owner lacks the financial capability to run the business.
  • The owner voluntarily decides to dissolve the business e.g due to continued loss making.
  • Passing of a law which renders the activities of the business illegal.
  • The expiry of the period during which the business was meant to operate.

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