FORMS OF ORGANIZATIONAL UNITS NOTES-BBM - University Education and Exams

ORGANIZATIONAL FORMS NOTES

In this lecture we shall discuss the various forms of business
organizations including sole proprietorship, partnership, companies,
public corporations, parastatal bodies and co-operative societies.

General Objectives
By the of the course the learner should be able to identify and explain
various legal forms of businesses available in Kenya At the end of this
lecture you should be able to:

Explain the various forms of business organizations
Discuss the advantages and disadvantages of sole proprietorship
Explain the procedure of formation of partnership
Explain the various forms of partnership
Discuss the merits and demerits of partnership
Explain the formation of companies
Discuss the advantages and disadvantages of companies.
Identify types of co-operatives
Discuss the advantages and disadvantages of co-operatives

4.1 Unincorporated Business

These are business which do not have separate entity ( existence
from that of their owners)
According to law such organizations are one and same in the
existence of the owner.
They do not have separate rights and obligations from those of their
owners
They include

sole proprietors
partnership

4.1.1 Sole Proprietorship

Sole means single while proprietorship refers to the owner of a
business owned by one person who takes responsibility on risks of
the business.
He either enjoys the profits or servers the losses of the business
alone.

Formation of Sole Proprietorship
It is simple and easy to form since legally only licensed from the
government is required. If the name of the business is different from
that of the owner the business name should be registered with the registrar.

Management of Sole Proprietor
The owner of the business is the manager of the business

He makes decisions operating the day to day activities the business.
He may employ people to work in the business or be assisted by
family members.

*Sources of Capital *

The term capital is used her to refer to the resource required to start
and operate the business. He may obtain capital from;

his own savings
borrowing from friends and relatives
banks and other financial institutions
credit suppliers
borrowing from government institutions i.e. KIE, ICDC
funding from non-government organizations
hire purchase funds
The business itself from retained profits.

Liability
Liability refers to the extent which the owner of the business can be
called upon to meet the debts of the business. A sole proprietorship is
viewed as being one and the same with the owner hence does not have
separate rights and obligation. Where a sole proprietorship business can
not pay its liabilities all its assets and the business properties are
sold in order to clear the business debts.
The responsibility of the owner of the sole proprietorship business is
thus unlimited. The sole proprietor is therefore said to have unlimited
liability. This means that the liability of the owner is no just
restricted to capital contributed but extends to include its personal
property.

Features of a Sole Proprietorship

Is a business owned by one person
It had no separate legal existence from its owner
It has a limited legal life since its existence depends on the life
of the owner.
The owner has unlimited liability in the business.

Advantages of a Sole Proprietorship

It is easy to start since only a license is required
Quick decision making
Freedom of action at any time
Flexibility in adopting quickly to changes in customers needs
Profits are entirely on the owner’s hands
There is control over business secrets
Easy to use family labor cheaply.

Disadvantages of Sole Proprietorship

Limited life in case of death of the owner
Unlimited liability may cause the owner to loosing personal property.
The sole proprietor serves loses entirely by himself
Limited capital may delay expansion.
working for longer hours may result to fatigue
Lack of essential skills may cause mis-management.

Circumstances under which the Sole Proprietorship ideal
1 When customers show preference to specialized services
2 Where small capital is required to start up a business
3 Where returns are low and may not warrantee existence of a large business.
4 Where the market experiences frequent demand changes
5 Where locations are remote and the population may be small.

Dissolution of a Sole Proprietorship
Dissolution refers to the termination of the legal existence of the
business. This may be caused by;

The death of the owner
The transfer of the business to another person.

Problems the Sole Proprietorship may face.

Lack of continuity in case of death.
Lack of skills may lead to mis-management
Working for longer hours may lead to fatigue
Loses are served by the owner
Limited capital to facilitate expansion functions.
Lack of consultancy may lead to poor decision making
Unlimited liability may cause lose of property.

4.1.2 Partnership
According to the partnership Act. A partnership is referred to as a
relationship which subsists between persons carrying on a business in
common with view of making profits. A partnership is thus an extension
of sole proprietorship and is in fact necessitated by the fact that a
sole trader may for several reasons fail to carry out his business
efficiently and profitability. Partners pull the financial and
managerial skills together in order to make profit.

Formation
According to the partnership Act (934) a partnership business may come
into existence through any of the following ways.

Orally
By actions of persons concerned
By a simple put in written
By a partnership deed

NB the above ways of forming a partnership are allowed by the
partnership Act, However its better to remember that it may be made
illegal under the following circumstances.

Circumstances under which the Partnership is illegal

If the partnership has been formed for an illegal purpose e.g. theft.
If is formed and the partners do not meet the minimum qualifications
e.g. auditing
Where the partnership contains more than 20 members
Where the partnership wants to run their business with the name
which does not disclose the true names of all the partners or the
name had not been registered under the registration of the business
Act under which it is deemed illegal.

Requirements for the Registration of a Business Name.
Under the partnership Act , the partners must furnish the registrar of
business names for the following

The business name
The general nature of the business
The principle place of location of the business
The present Christian and sir names together with their usual
residential address.
The nationality of each partners
Any other occupation of the partners
The date of commencement of their business.

Types of Partners

1. General partners
These are the real partners in new sense of the partners which refers to
those partners who are the most active partners in the partnership. In
most cases the general partner is a reliable of the debts of the
partnership.

2. Limited partners
This is a partner whose liabilities are limited to the amount of capital
contributed to the partnership business. This type of partners do not
usually participate in the management of the partnership becus4 if thy
do they loose their limited liability in respect to the
transaction and decisions participated in.

3. Active partner
This is the type of partner who takes the active part in the running of
the business. In most cases such a partner may be employed somewhere or
may be in another business all together. The partner contributes capital
to the partnership business and the profits or losses at lower proportions.

Articles of Partnership/ Partnership Deed.
Although it is not a statutory requirement the partnership can be formed
by a written agreement, it is usual for the partnership business in
particular those involved in huge commitments to write articles of a
partnership also known as a partnership deed. The aim of this document
is to safeguard the interest of each partner and it constitutes a legal
contract among the partners.

Contents of a Partnership Deed

The nature of the business to be carried out
The capital and property of the firm together with the respective
capital contributions of each partner.
The sharing of profits or loses by partners.
The rules as to the case of interest on capital and drawings by partners.
Provision for proper accounts and their audit
The power of each partner.
The drowns for the resolution of the partnership
The method of determining the value of good will on retirement of
drafting in of a new partner.
The method of determining the amount payable to a deceased partner.
No partners may should carry on a competing business
Any changes in partnership composition must be agreed upon by all
partners.

Management of Partnership
Members of a partnership are correctively responsible for the management
of the business. The members may share responsibilities and duties
according to their respective skills and availability in order to ensure
effectiveness in management of the partnership. The partners may decide
to hire skilled or non-skilled labour to assist the management of the
partners.

Features/ characteristics of a Partnership

Mutual agency – each partner is an agent of the partnership and
therefore any action by one partner with transacting the business binds
the rest of the partners provided his actions are within the partners
express or implied authority.
Limited life- since the partnership is a relationship originating
from an agreement between two or more members any changes in their
relationship caused by factors such as- death withdrawal of a partner
e.t.c terminates the partnership or
dissolves it.
Unlimited liability
In a partnership the partners’ liability is not limited to the amount of
capital investment. The partners are separately held liable for the
debts of business and their personal properties may be sold to meet such
debts.
Ownership of interests – the interest of a partner in a partnership
business e.g. right to inspect the accounting records of a firm of a
firm, admission or dismissal of partner transit of interest e.t.c must
have the full consent of the partnership.
Sharing of profits
Each partners share of profits of proportional to his/her investment in
the partnership. And any agreement of non-partner to share the profits
does not make a non-partner a partner.

NB circumstances under which a non-partner may be included in sharing
the partnership profits and losses.

As compensation for services rendered to the partnership
As compensation for the partnership use of his/her property or name.
As payments for loans advanced to the firm
As payment to the next of kin.

Sources of Capital of a Partnership

contributions from partners
Loans from commercial banks and other financial institutions
Stock from hire purchase firms
Credit facilities from suppliers
Loans from government institutions e.g. K.I.E e.t.c.
Plough backs from retained profits

Classification of Partnerships
There are five ways through which partnership are classified.

By trading
A partnership may be classified was

Non-trading partnerships- these partnerships whose activities are to
offer services e.g. legal, medical, accountancy, teaching e.t.c.
Trading partnerships – these are partnerships whose main activities
are manufacturing, purchasing or sales of goods.

By liability

General partnerships – are partnerships in which all partners may
publicity act on behalf of the firm and each partner individually be
held responsible for the debts of the firm. Their properties may be
attached to clear the debts of their
partnership.
Limited partnerships – a partnership whose activities of certain
partners are limited. The personal liabilities of such partners
(limited partners) are limited to a certain amount stated. These
amounts are normally equivalent to the amount of their contributions.

NB the following conditions must be fulfilled for a limited partnership
to be formed.

The partnership should not consist more than 20 partners.
The partnership must consist one or more general partners.
The limited partners are not liable to the partnership debts beyond
his capital contribution.

NB Restrictions of the limited partners.

Is entitled to inspect the books of the firm and examine the
partnership state at any time.
The death, withdrawal bankruptcy of a partner shall not cause
dissolution of a partnership or the partnership can not be dissolved by
a court order because of lunacy of the partner.
A limited partnership is only dissolved by the general partners
unless brought through a court order.
Any differences on partnership matters can only be decided by a
majority of the general partners.
With the consent of the general partners a limited partner may assign
his/her shares in the partnership to another person.
A person may be introduced into the partnership without the consent
of the limited partners.
By time duration

A temporally partnership ( joint venture partnership) – this is a
partnership formed for a specified period of time
Termination of the stated period or accomplishment of the purpose
may cause the partnership to come to an end.
a permanent partnership (partnership at will) – This is a
partnership formed to carry the business indefinitely. It does not
have a fixed life of fulfilling its purpose

By activity

Active partner – this is a partner who is actively involved in the
day to day management of the partnership and may be paid a salary
for these services. And the partner is held liable for the debts of
the firm.
A dormant /sleeping partner – does not take part of the day to day
management of the partnership but contributes capital, shares
profits and is liable for the business debts

By capital contributed

Real partner – a partner who contributes capital into the business
and whose name may be used in relation to transactions of the
business and enjoys the profits of the partnerships.
Nominal partner – is a partner who has not contributed any capital
to the business but allows his or her name to be used in the
business. They are usually influential persons whose names can be used.
He is not fully liable to the partnership debts however is he
presents himself to the public in a manner that portrays him a
general partner he will be held liable.

Quinsy-partners – a partner who has retired from the partnership but has
left his capital in the partnership business which is treated as a loan,
he earns interest

By age

Majority partner – A partner who has attained the age of 18 years
and above. Such a partner unless stated to the centrally can be held
liable for the partner.
Partner shares only profits and not losses since he didn’t
participate in decision making that may have caused such losses.
The liability of the minor is limited only to the amount of capital
contributed to the business since any liabilities arising may not be
part his decision making.
The minor partners can act on behalf the partnership and such acts
shall be binding on the other partnership
When the minor partner attains the age of majority he/she has up to
six months to decide whether or not to continue with the
partnership. If he/she decides to stay, he has full responsibilities
and rights of a major partner.

Termination/ Dissolution of Partnership
Although the partnership deed or articles of partnership will contain
regulations of terminating the partnership, nevertheless in the absence
of our subject these regulations, a partnership may be dissolved in the
following ways.

When the fixed time if any are stated in the articles of the
partnership expires.
If the partnership was specifically entered into for a given venture,
transactions or undertakings the completion of which or achievement will
automatically dissolve the partnership.
If the partnership is a partnership at will, it can be dissolved by
any partner giving notice of his intention to dissolve the partnership.
By mutual consent of all partners
By bankruptcy or death of one the partners.
By one partner’s shares in the partnership being changed or attached
by a court order for private debts.
If any events occur which will make the partnership business illegal,
the partnership will stand dissolved irrespective of the content of the
partnership deed.
Automatic or compulsory dissolution as it is provided section 39 of
the partnership Act which lay the following grounds under which a
partnership may be dissolved by a court order.

If any one of the partners becomes insane
If any of one partner becomes permanently incase of performing
his/her duties through in capabilities, accidents or disabilities
Where a partner has acted in a manner which is pre-judicial to the
carrying out firm’s business and may bring the name of the business
to its disables.
Where a partner was found guilty of breach the partnership contract.
Where the firm has been operating in losses.

Circumstances under which the Partnership Deed is ideal.

In a business where the amount of capital required is reasonably large.
If professional were pulling together effort for efficiency and
better performance.
If professional areas where the law prohibits a couple of days.

Advantages of Operating a Business under a Partnership

A partnership business benefits from the talents of individual
ensuring almost efficiency and acceptance.
Since a partnership would be owned by a no. of partners it sets a
basis of pulling together saving to raise large capital for investments
Sound decision making through consultative processes
A higher growth rate as a result of combining ambitious from
different partners.
Partnerships have a good will and financial influence enabling it to
raise finance easily.
Collateral or security of loans can be easily be raised.
Formation of partnership business requires minimal government
interventions.

Disadvantages of Operating a Business under a Partnership

Slow decision making due to long discussion processes
Sharing of profits tends to disregard hard working partners.
Partnership business have limited life incase of retirement or dead
of one partner.
Disagreements make partnerships business vulnerable to disputes among
partners.
The partners have unlimited liability which lead to loosing personal
property in the event the partnership business cannot settle its debts.
The agency burden where every partner is an agent of the partnership
and one’s partner’s mistake may affect the rest.
Limited managerial skill may lead to mismanagement of the business.

4.2 Incorporated Business / Joint Stock Companies

Incorporated Business
We have so far looked at unincorporated business and have seen the main
features of such business is that they do not have a separate legal
existence from the owners. We shall now focus on business units that are
legally viewed as separate and distinct units from their owners Such
businesses are called in co-operated or joint stock companies.
Incorporated business organizations are legally separate and distinct
from their owners or members. The main forms of incorporated business or
joint stock company include;

Companies
Co-operative societies
Public co-operation

These are advanced forms of companies where a group of people pull their
savings together and contribute as capital to set up a business
enterprises or companies. These companies are governed by Acts of
parliament under the Kenya all joint stock companies fall under the
Kenya Companies Act = (cap 486) of 1948 The Act lays down the formation
and general conduct of joint stock companies.

4.2.1 Companies
A company is a business registered by the registrar of companies Act.
The Act of registering a company is known as incorporation.
Incorporation. This is a process that creates an organization separate
and distinct from the person forming it (owners) The organization is
known as a body corporate and registered company is known as a cooperation

NB companies are business organizations or units formed to carry out a
specific activity.
They are organized by processing an existence that is separate and
distinct from the persons who own it. Companies have rights and
obligations of a natural person.

Rights and Obligations of Companies

It can own and dispose off property.
It can enter into a contract on its own name
It can borrow and lend money in its own capacity
It can hire and fire employees
It can sue and be sued in its own right
It can form subordinate agencies and its authority
It can spread information.

Features of a Company

It is an artificial person created through legal process
A company has rights and obligations of natural person e.g. holding
and disposing property.
A company has a perpetual life independency of the owners lives i.e.
has perpetual succession.
A company has a separate legal identity from the owner.
A company is created for a particular purpose
The owners of a company enjoy limited liability

Types of Companies
There are basically two types of companies. Namely

Public limited companies
Private limited companies
Public Limited Companies
A public limited company has a minimum number of 7 members with no
maximum membership. The maximum membership normally is determined by the
number of authorized shares (capital) of the company. In Kenya a public
limited company has the term limited at the end.

Characteristics/features of a Public Limited Company.

Minimum membership is 7 with no maximum
Invites members of the public to subscribe to its shares
The shares are easily transferable among shareholders
It has a minimum of 3 directors
It has authorized minimum capita figure.
NB authorized share capital is to the total shares that have been
legally authorized by the government during the company’s registration.
A public limited company starts to operate after receiving a certificate
of commencement ( trading)
A private Limited Company
This is a company with a minimum of 2 persons and a maximum of 50
persons excluding all past and present employees. A private limited
company should have name ending with limited.

Characteristics of a Private Limited Company.

Has a minimum of 2 members and maximum 50 members
It does not invite the members of the public to subscribe its shares.
It’s shares are not easily transferable unless with consent with
other share holders.
Operates with only one director.
Its shares don’t have authorized minimum capital figure It can start
its operations after receiving its certificate

Limited liability Concept in Companies
This is the fact that the liability of companies of owners is restricted
to he amount of investment of a company plus any other amounts that to
be undertaken to be contributed towards payment of one companies debt.
The word limited indicates that the liability of the owners of members
in respect to this amounts (capital contributed) and not their personal
property.
A company may be limited by-:

Shares
Guarantee.

Companies Limited by Shares
This is a company where member’s liability is limited to the value of
shares held. The liability of members is limited to the share contributed.

Company limited by guarantee
This is a company whose members liability is limited to the amount that
members have undertaken to contribute to the business debts. These
contributions may cover for;-

Court charges and
Any other expenses.

Formation of Companies
A company may be formed by any person or persons associating for a legal
purpose through registration with a registrar of companies under the
companies Act. Although a limited company is a legal person it can only
act through human agents who must register it with registrar of
companies and for a company to be

MEMORANDUM OF ASSOCIATION

This is document that defines that relationship between the company and
outsiders. It informs the outsiders what the company does, the amount
that is required. The memorandum of association is the company’s chatter
constitution and once the company is registered the memo becomes a legal
document that can only be altered by law.

Contents of a Memorandum of Association.

Name clause – This states that name of the company ending with the
work limited. Any name may be selected to be used by the company as long
as it is not prohibited by law. This requirement is meant to protect
people who may erroneously enter into a
contract in the company believing it to be another company an also
protects companies from possibly mis-use of their names.
Object clause – this clause outline the objectives of the company
anything outside this objective will ultra virus.

Importance of the Memorandum of Association

It defines the limits of company associations.
It informs subscribers the purpose for which their money will be put.
It protects subscribers form possible misuse of their money
It protects outside parties dealing with the company by informing
them the extent of its operation.

Situation clause- This clause discloses the locations of the
legislative office and it contains the following elements.

Where the company is situated
Where the letters may be delivered
Where sermons may be served.

Liability clause – This clause states the status of the member’s
liability with regard to the debts of the company.

The clause enables people who may enter into contract with the
company to determine the extent of the company’s liability.
The statement of liability should clearly specify the members
liability regard to the company debts.

Capital clause
The clause states the total capital of the company is authorized capital
into shares and their corresponding value. Incase of a public company,
the capital clause will give the minimum amount of capital hat the
company must raise before it commences business.
Association of substitution clause- This contains a declaration by
the promoters (original owners) that they desire to form a company to
pursue the objects of the memorandum of association and that they agree
to take payments of their shares. The promoters are required to give
details of their name addresses, occupation and no. of shares

ARTICLES OF ASSOCIATION
This document contains the rules and regulations pertaining the
relationship between the shareholders and the company among the
shareholders themselves. These rules regulate the internal relations of
the company forming a binding contact between the members and the
companies and as well as among the members themselves.

Content of Articles of Association.

The right of each member e.g voting rights.
The issue, transfer and for future of shares and the alterations of
shareholders.
procedures of calling and conducting meeting
the methods of appointing or electing officials
Qualification procedures duties and rights of directors
Preparation of books of accounts and the auditor’s report.
NB whereas the memorandum of association is mandatory document of all
companies, the articles of association are optional.

Where the company does not draw the articles of association, it can
adopt the standard articles of association contained in the company Act.
A company may alter or amend its articles of association and such amends
shall be valid. The power to alter the articles of association is
specified in the memorandum of association.

List of persons who have consented to the directors of a company

The directors are chosen from the founders of the company referred
to as promoters and the list contains details of names addresses,
occupations, shares subscribed and a statement of agreement to serve
as directors. A statutory declaration of compliant with the
requirement of the company’s Act.
The declaration must be signed by person’s names as directors or the
company’s secretary.
The declaration must be equally by signed by the advocate engaged in
the formation of the company and must expressly state that the
company is formed by lawful persons.

CERTIFICATE OF INCORPORATION/ REGISTRATION OF A COMPANY.

Once all the required documents are properly filled with the registrar
of companies is ratified with what is contained in these documents. The
registration brings the company into being and the companies issued with
a certificate of registration. The registration gives a company an
identity that is separated and distinct from its owners. From the date
of incorporation the company becomes a body corporate with the name
powers and rights and obligations of an incorporated company. The
process of forming a company is formalized when a certificate of
incorporation issued has inclusive evidence that all the information has
been complied with and that the company is duly registered.

NB – A private company can start its business operations immediately it
is issued with a certificate of incorporation, this is because the
company does not have to invite the members of the public to buy shares.
A public limited company must proceed to issue proposals inviting the
members of the public to buy shares. (A prospectus a notice or circular
of advertisement inviting the public to purchase the shares of a
company). Public limited companies can only be allowed to purchase goods
only when the registrar is satisfied that-:

The company has raised a minimum amount of capital as required by
the memo.
That every director has paid to the company the minimum amount of
money on the shares to be taken.
That there’s a declaration by at least one director that the company
shall comply with the regulations stipulated by the law that governs
companies.

Once the registrar is satisfied by the above requirements then the
public limited company is issued with the certificate of trading which
will enable the company to commerce its operations.

Ownership and Management of Companies

Ownership
A company is owned by any person who has subscribed and purchased that
company’s shares. The owners of a company are known as shareholders and
their names are entered into the company’s registrar. Each share holder
has a claim in the property of the company proportional to the shares
held. The shareholders of a company have unlimited rights to the
transfer or sale of their shares in the company.
Management
The management of a company is in the hands of the board of directors.
The initial directors stay in the office till the first meeting (AGM) is
held at which new directors are elected. The size of the board is
usually determined by the size of the company. The board of directors is
charged of formulating and overseeing the implementation of company
policies. The board is normally supported by a terms of profession
employed to the responsible for the day to day management of various
departments. For a public limited company, the directors are required by
law to present the company’s financial statement at the AGM meetings and
filled with the registrar of
companies.

Sources of Capital of a Company

From the public through the sale of shares
From commercial banks ad other financial institutions
government institutions i.e. KIT, ICDC e.t.c
Suppliers inform of trade credits.
The business itself inform of retained profits
Higher purchase traders.
Rent revenue earnings from any investments.

Public limited companies
These are stock joint companies that have sold stock to the general
public and thus attracts public money in form of share capital I,e
ordinary or preference shares. Such companies are usually quoted at the
stock exchange where shares are bought and sold through stock brokers.
These companies usually raise large size of money from the public and in
order to do so the companies must;

Obtain permission from the development market authority also known as “
New issue committee” this committee assesses the financial soundness of
such companies before allowing theme to attract public money.

The aim is to safeguard the interests of public investors
The company in need of public money will have to obtain permission
from the Nairobi stock exchange council before it can be allowed to
have its shares dealt with.

Private limited companies
These companies are formed by submitting the necessary requirement to
the registrar of companies ( the five documents). Once this has
satisfied the registrar of companies such a company will receive a
certificate of incorporation. The private limited companies are usually
not allowed to advertise their shares to attract public money and as
such they sell their shares privately ( private placing
to the interested members of the public. Like public limited companies,
private limited companies have limited liability, their shares are not
fully transferable as they are not quoted at the stock exchange. Any
transfer of shares requires the consent of other share members of the
company.

Advantages of a Company

More capital can be raised since it has large membership
The company offers better collateral for loans to be advanced.
Limited liability secures private property incase of inability to pay
debts.
The companies have continuity i.e. have perpetual life or succession.
A company has a liability to hire highly qualified professionals
facilitating better management
Shares are easily transferable.
The companies have legal identity and therefore no conflicts to its
members.

Disadvantages of a Company

Difficult to form since it is costly and has long legal procedures
The company has restricted operations by the memorandum of association
Slow decision making due to long approval procedures
Limited ownership caused by land of control of the firm
The agency burden may cause mismanagement when especially the board
is weak.
Double taxation especially of the dividends
Lack of secrecy since the company has to publish its financial status
annually.

Main Features of Joint Stock Companies
As already noted a joint stock company is an association of people who
contribute capital to form common stock in order to carry on a business
activity for product motive. The company formed comprises- corporate
status and is registered under the company’s act. A joint stock company
may be public or private company and its main features include;

Legal personality – the company has identities separates from that
of other persons contributing capital and can therefore hold
property, contract in its own name sue and be sued.
The shares are transferable – the share holders can sell their
interest in the companies to other persons willing to invest in it
(freely for public ltd company but limited to the consent of the
rest of the shareholders for private company.
Common sill – as a separate entity it will be necessary for a joint
stock company to sign documents and such signatures are normally
embodied in a common sill of a company. The sill is kept under
custody of the responsible offices.
Members/ shareholders can not bind the company by their Acts
Individual/ members are not entitled to take part in business since
it is managed by the board of directors
Shareholders have a limited liability.

Advantages of Joint Stock Companies

The liability of share holders is limited to the capital contributed
by shares guarantee.
A joint stock company is going concern implying that it has perpetual
existence separate from that of the shareholders.
A joint stock company is an artificial legal person independent of
the shareholders and it can own its assets and liabilities.
The shares of a joint stock company in particular public limited
company are freely transferable.
The shares of a joint stock company can easily be used as security
for loans making it easy to obtain loans.

Disadvantages of Joint Stock Companies

It lacks secrecy and privacy since it requires audited financial
statement annually.
The formation of a joint stock company requires long legal formalities.
They are difficult to form since they require a heavy capital
investment.
Joint stock companies can not increase their capital investments
beyond the legally authorized capital.
The decision making process of joint stock company is slow and
bureaucratic due to consultations.
Joint stock companies are not flexible to changes.

Dissolution of a Joint Stock Company
When a company has started its expected to continue with its operations
to the future since it is a form of business with perpetual succession.
Termination of the life of a company may be through;

Failure to commerce business within one year of its formation – upon
this it may be would up by its court order on application.
The membership falling below the required minimum and this
dissolution may be decided by a court order.
Accomplishment of the purpose or expirely of the period of operation.
The registration if it fails to comply with statutory cooperation e.g
failure to file annual files to the registrar of companies or engaging
in illegal activities.
A resolution by members to voluntarily wind up the company which may
arise through.;

where the company does not have a future on that line of business
The members wish to sell it as a going concern in order to share
profits.
Where one company is acquired by another and the members wish to
discontinue it so as to terminate its existence a separate legal entity.

Through a merger with a larger company
Insolvency – the company is not able to meet its obligations.

Holding Companies
The company Act of the laws of Kenya defines a holding company as one
which has more than half of equity share capital of another company of
which it is a member or controls a bigger percentage of the board of
directors of one or more other companies which are called subsidiary
companies. A holding company may be public or private depending upon
wishes of the promoters or shareholders. In Kenya a good example of a
holding company is ICDC.

4.3 Public Corporations
This is the net price to which the government has stakes in The
government owns a certain percentage of the enterprises shares. Where a
government has a fall ownership of the corporation, the business
enterprise is known as a parastatal. Some public corporations are profit
seeking while other are not. examples of such public corporations include;

Kenya pipeline
Kenya airways
KCB (Kenya commercial Bank)
Kenya lighting company (KPLC)

Parastatals are run to provide the essential services such as education,
medical etc.

Similarities between public cooperation’s and joint stock companies.

They are both legal entities
They are governed by a board of directors appointed
They are self financing.

Public corporations

A cooperation is wholly and partially owned by the government
Corporations tend to be monopolists
Are operated on public interest not entirely on profit motive.
They are paid for by the public from the taxes collected by the
government.

Joint stock companies

Owned by the public and has shareholders.
They are subjected to companies
Purely operate on a profit motive.
Private funds finance joint stock companies.

Parastatal Bodies
A parastatal body is an organization distinguished from a body
government but in which the government is a sole owner. They are
established by the government to perform specific functions and their
management is in the hands of board of directors. The board of directors
is appointed by the government and the parastatals bodies do not sell
shares since they are whole financed by the government.

Examples

Marketing boards
Coffee board of Kenya e.t.c.

Marketing Boards
These are produce organizations set up to encourage and control of the
Agricultural produce. Their objective is to protect producers and
consumers and may be formed by both producers coming together or be
constituted by the government.

Classification of Marketing Boards

commodity marketing boards- these are producer organizations with
objectives are restricted to purchasing and selling of commodities e.g
coffee, tea, pyrethrum
producer marketing boards- this is a produce organization dealing
with a wide range of products e,g maize, wheat e.t.c
Expert marketing boards- this concentrate on marking one or more
products overseas e.g KTDA or coffee board.

Functions of Marketing Boards.

To encourage and control the marketing of Agricultural produce
through purchasing at fixed prices to facilitate stable incomes
To encourage income and price stability through the buffer stock in
buffer funding system.
To facilitate farmers to obtain loans for farm inputs e.g quality
fertilizers, seeds and equipment.
To support the government in licensing regulations
To provide a wide range of sport e.g transport, grading, packaging of
products e.t.c
Marketing boards provide advisory advise to farmers
They facilitate research on agricultural products and markets.

Formation of a Public Cooperation
They are formed by a specific Act of parliament which define and powers
and the overall mandate of there institutions. The law creating
corporations also state the minimum capital under which they will
operate. The corporations are viewed as separate legal entities and may
be wholly or partially owned by the government.

Management of Public Corporations.
This is under a board of directors. The directors are appointed by the
government when the government owns wholly the corporation or relevant
joint directors and government appointed directors where the government
owns partially the cooperation. The government influences decisions of
the corporations either directly or indirectly e.g pricing decisions. In
Kenya the board of directors is appointed by the relevant ministries or
by the president. It is this board which is responsible for the
implementation of the policies of the
organization. The board may employ professional managers charged with
the day to day running corporations.

Sources of Share Capital

Public corporations may get their capital from the government through
loans or budgetary provisions.
Where the government own corporations jointly both contributions of
capital and the public will raise capital through issuing shares.
As a body corporate a public corporate has power to borrow money from
financial institutions.

Features of a Public Corporation

A service motive- they provide essential services to the citizens and
may therefore not aim at making profits – entirely.
They are formed by an Act of parliament which states that government
ministries will take charge of such corporations.
They are subsidized by the government to enable them provide
essential goods and services at minimum fees.
The board of directors is wholly appointed by the government or
jointly with other stake holders to influence the policies of the
cooperation.
They are financed by the government but for jointly owned public
corporations.
It has a legal distinct from the government or any other owners
They have limited liability

Advantages of Public Corporations.

Raising initial capital is each since funds comes from the government
Public corporations improve the welfare of the people since basic
goods and services are offered at affordable prices
The company has limited liability
They are used to meet government objectives.

Disadvantages of Public Corporations

Political influence may lead to a week management
Public corporations may not respond to consumer needs since some
operate as monopolist.
Public corporations have a public interest making them difficult to
achieve their objectives.
The job insecurity of senior managers e,g C.O.S , may lead to
dishonest management
Slow decision making because of the size of same public corporations
most corporations are loss making

Dissolution of Public Corporations.
Since formation of a public corporation is by an Act of parliament it
follows therefore, that in order to dissolve such an organization onc
would have to repeal the Act of parliament under which they are allowed.
The following reasons may lead to repealing the Act of parliament under
which they are formed.

Perpetual operations of the corporation of a loss
Outright insolvency.
Mismanagement which mat adversely affect the performance of the
corporation

4.4 Co-operative Societies
This refers to a co-operative. The term co-operative is derived from
cooperation. It is a body of people or a body of persons who have agreed
to come together to achieve a certain goal. The members of the public
get together to voluntarily contributes capital to he
corporative society sharing the risks of investments in order to achieve
and enjoy the benefits.

Reasons for Promoting Cooperative Societies in Kenya.

They facilitate members to manage their own society and distribute
themselves the benefit generated.
In order to increase bargaining power in selling the members produce
or gaining maximum satisfaction.
In order to enhance participation by members in economic activities
minimizing the middlemen.
In order to reduce market cost of produce especially in
transportation and storage.
In order to promote and improve quality production
In order to facilitate stable income earning
In order to put together capital resources of expensive investment
e.g transport, refrigeration e.t.c.

Formation of Co-operative Societies
They are formed by a minimum number of 10 members who pursue to
undertake some objectives. The members work out a defined plan of what
the co-operative society is supposed to do. For the co-operative society
to be formed they have to submit their constitution to the commissions
of co-operative societies with the following detail.

The objectives of the society
By-laws of the society
The areas of corporation of the society.
The nature of the business to be undertaken
The location of the head office.
The application of registration is to be submitted to the
commissioner through the local co-operatives.
Upon satisfying the commissioner, a certificate of registration is
issued .
The co-operation then recruits members who pay registration fees and
buy their specified shares in the society.
No member is allowed to buy more than 5% of the share capital .
The registration of the co-operative society makes it a body
separate meaning it becomes a separated entity distinct from its
owners and with perpetual succession.

Ownership and Management of a Co-operative Societies.

It is owned by its owners and its ownership and membership is opened
and voluntarily
The members in a co-operative society have a limited liability to
the amount contributed.
The supreme authority of the registered co-operative society is in
the AGM (Annual general meeting).
During the AGM the managing director is elected on one person one
vote basis irrespective of the shares owned by each member.
The outcome is determined by a simple majority and such elections
are supervised by the district corporation officer.
The managing director serves for a period of time after which
elections are held by a vote.
The elected members hold constant meetings to discuss operations and
the concerned of the cooperative.
The committee may employ professional staff to charge of various
parts in the society.
A number of sub-committees may be formed from the elected officers
to take to take various responsibilities of various societies.

Examples of Committees in a Co-operative society

Executive Committee-The committee is charged with the day to day
running of the society and its membership is made up of the following

Chairman
V-chairman
Honorable secretary
Treasurer
Secretary

Education committee- It is charged with educating members of the
society and it is made up of 3-members answerable to the executive.
Credit committee- It is normally common in saving and credit
societies. It is made up of 3-members answerable to the executive and it
is charged with the following:

Processing loan applied and making recommendations.
Loan recovery
Credit recommendations and approval

Supervisory committee-It is charged with overseeing the overall
management of the society’s finances. The Relationship between the
Cooperative Society and its Business with its Members. A cooperative
society should usually transact its business with its
members. This business relationship relates the following relations.

The customer relations- The members can be customers of the
cooperative society by purchasing its goods and services
The supplier relations-The members can supply to the society by the
seeling to the cooperative society marketing their produce.
The employee relations- The members can be employees who work for
the cooperative society which they jointly own.

Sources of Capital for Cooperative Societies.

Members contributions through

Registration fee
Amount contributed by members to purchase shares
The fee charged from the proceeds or sales of the members produce.
Interest earned on money loaned out or firm inputs advanced to members.

The loans from financial institutions.
Plough backs or financing through retained profits.

Features of the Cooperative Society

Separate entity- Registration of a cooperative society makes it
separate from its owners and the cooperative society has rights and
obligations that are separate distinct from those of its owners.
Liability-The liability of its members is restricted to the amounts
they have contributed in terms of capital.
The minimum membership of a cooperative society is 10 persons and the
maximum number is specified since it depends on the share capital of the
society.
Continuity-The cooperative society has a perpetual life.
Cooperative societies are governed using by-laws contained in the
constitution of the cooperatives.
The share capital is divided into units both persons who want to
become members of the society.
The cooperative society is run by management committee elected
The distribution of profits to the members is according to the level
of activity carried out among members-High volume of activity command
high portions of profits.

Essentials for the Success of a Cooperative Society.

Adequate volumes to secure the benefits of large scale production.
Adequate finance to fund operations construction purchasing of
equipments.
A sound management team with effective entrepreneur skills.
Existence of a definite objective

Principles of Cooperatives

Open Membership
Membership is open and voluntary without artificial restriction imposed
on membership
Democratic administration.
The affairs of the cooperative society are managed in a democratic
manner and elections are on a one person
Service to members-The primary purpose of a cooperative society is to
render services to members.
Distribution of profits or surplus- Distribution of profits or
surplus is based on a specified rate.
Limited interest on capital- This is because the aim of cooperative
society is to help its members and not make profit.
Cooperation with officer cooperative society so as to achieve a
common purpose and a common objective.
Education to its members.

Types of Cooperative Societies.
A cooperative is a voluntary association of persons who come together to
promote their social economic interest.
The types include:-

Producer cooperatives
A producer cooperative is an association of producers such as societies
which collect, process, market and distribute the members produce.

Functions of Producer Cooperatives

Getting better prizes for members produce.
Providing better transport facilities for moving the produce from
the source to the market.
Providing better storage facilities for members for members produce.
Proving grading, packing and processing services to the members.
Extending credit facilities to its members.
Educating members on better methods of production through seminars,
demonstrations etc.
Facilitating use of quality seeds, fertilizers and farm inputs
Consumers Cooperatives
A consumer cooperative is an association of borers who have the same
consumer needs. The consumers buy bulky and sells to the consumers at
lower/fair prices. This reduces the cost of products by eliminating the
middle men. The main function of these cooperative societies is to
purchase and distribute quality goods to members at reasonable prices.

Benefits of the Consumer Cooperatives

They make goods easy available to members.
They buy goods in bulky and sell to members at lower prices.
They distribute the realized profits to members at lower prices

Why consumer cooperatives are not popular in Kenya.

Fears competition between the local traders which push prices down
and provide quality goods hence no need for cooperatives.
Many people supply enough subsequent food for themselves.
Most people cannot afford large amount of capital required to start.
Most population in Kenya lives in the rural setup and may not accept
the cooperative rule.
No proper attention to such cooperatives by the government. Savings
and Credit Cooperative Society (SACCOS)
These societies are formed by persons who come together to save
their money in a common pull with a view of getting loans to improve
their welfare.
The members of a SACCO are usually under one employer and members
contributions are deducted from their salaries but the employer to
the cooperative society through a check of system at regular
intervals usually monthly.
At the members savings earn interest and get loans at reasonable
interest rates normally 1% per month. Members savings serves as a
security for a loan, three guarantors and a pay slip.

Why SACCOS are Popular among Employees

It is easy to save with the SACCO since deductions are done through
a check of system.
Easy to get loans from SACCOS due to fewer simple requirements.
Interest charge on loans is low compared to commercial banks.
Loans do not require collateral except far members’ salary slip and
guarantors.
Members savings are save since they are insured.
Incase of death the beneficiaries do not lose their savings in
cooperatives nor they are called upon to repay.
SACCOS are flexible since they give different types of loans e.g.
normal, emergency, school fees loans, medical etc.

Main Reasons of Forming a Cooperative Union

To strengthen the buying capacity especially of farm inputs or
transport facilities.
To negotiate for loans for members cooperatives from the cooperative
banks.
To market the produce of members cooperatives.
To help members cooperatives with the processing of their produce.
To help member’s cooperatives with storage, administrative services,
accounting etc.
To educate, advice, train, the staff of members cooperatives.

National Union.

This is the union of various cooperative unions.
The national cooperatives form umbrella bodies of cooperatives formed.
The membership of such a cooperative comprises cooperative societies
or operating in a particular production line.
Examples:-
The Kenya Planters Cooperative Union.
The Kenya Union of Savings and Credit.

Apex Cooperatives.
These are the overall cooperative bodies to which all other cooperatives
i.e primary, cooperative unions and national union are carried. An
example in Kenya is is the Kenya National Federation of Cooperatives
Union. They are formed to promote cooperative
performance with the aim of:-

Providing information about the activities of cooperative in Kenya.
Providing education and training for member cooperative for
efficient and
Represent Kenya cooperatives both regionally and internationally.

Another example is the Kenya cooperative bank.
International cooperatives: Are composed of national cooperatives from
various countries e.g. The Kenya Federation of Cooperatives

Problems Facing Cooperative Societies.
Mismanagement by cooperative officials who take advantage of their
knowledge and position to benefit themselves. Unskilled management
elected without any knowledge whatsoever with management skills. Lack of
adequate capital due to small contributors and difficult to get bank
loans. Capital interference and self interests. Most cooperatives are
agro based facing price fluctuations climatic problems, low prices etc.
Little government input to rejuvenate the cooperative societies.

Advantages of Cooperative Societies.

Low cost services to members.
Improved welfare of members enhancing their participation in
economic activities.
Encourage savings enabling members to accumulate their capital.
Extended credits to members at low interest rates improving their
welfare.
Limited liability protecting personal property.
Flexibility in membership for entity and exit.
Equality of the members in terms of rights irrespective of the
number of shares held.
Large capital base due to high membership.

Disadvantages of Cooperative Society

Poor management caused by the system of choosing the managers I.e.
AGM elections.
Constant political interference causing unrest and mismanagement.
Withdrawals are easy which may cause instability and discontinuity.
Slow decision making due to over consultation.
Lack of secrecy since all activities must be approved by all members.
Large membership may cause management problems.

Dissolution of a Cooperative Society

Disagreement among members or an agreement of members may lead to
application of registration.
Insolvency- Where the cooperative is unable to meet its debts.
By a court order upon application by one or more members.
An order of dissolution by the apparent ministry in the interest of
its members.
Withdrawal of members leaving membership to less than the minimum
required.