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Lesson Note

Subject: Economics
Topic: Sole proprietorship and Partnership
Lesson Objectives: At the end of the lesson, learners should be able to;
i. Explain what sole proprietorship is and also give examples of sole proprietorship industries.
ii. State the characteristics of sole proprietorship business
iii. State the sources of capital for starting a sole proprietorship business
iv. List and explain the advantages and disadvantages of a sole proprietorship business
v. Define a partnership business
vi. State the features of a partnership business
vii. State the sources of capital for starting a partnership business
viii. List and explain the types of partnership
ix. List and explain the types of partners involved in a partnership business
x. Explain how a partnership business is formed.
xi. List and explain the advantages and disadvantages of a partnership business.

Lesson Summary

Sole proprietorship may be defined as a form of business enterprise owned, financed and managed by one person with the primary aim of maximising profit. The sole proprietorship, also popularly referred to as one-man business, is the oldest and the most common type of business organisation. It is an unincorporated business unit owned by one person who provides the capital, runs the business and undertakes the risks and profits of the business alone.
Examples of sole proprietorship are found in primary industries like farming, fishing, etc, in the secondary industries like small scale manufacturing, printing, etc and majorly in tertiary (or service) industries like lawyers, doctors, tailors, barbers, hairdressers, musicians, traders etc.

Features or Characteristics of Sole Proprietorship

i. Ownership: The business enterprise is owned by one person.
ii. Objective: The main objective of the one man business is to make profit.
iii. Source of capital: The capital required to set up and run the business is provided by the proprietor.
iv. Liability: The sole proprietor has unlimited liability.
v. Legal entity: It is not a legal entity as the owner is not separated from the business.
vi. Management: The business is controlled and managed by the sole proprietor himself.
vii. Life span: The list span depends on the owner. The enterprise can fold up any time.

Source of Capital of a Sole Proprietorship

The sole proprietor can obtain his capital from the following sources;
i. Personal savings: A sole proprietor can obtain capital from his previous savings; he can use his personal income as initial capital.
ii. Loan from friends: He can also raise capital by borrowing from friends and relatives
iii. Trade credit: They can obtain capital by purchasing goods on credit from the suppliers, producers, or wholesalers.
iv. Loan and overdraft from banks: The sole proprietor can also obtain capital from financial institutions. This can be in the form of loan or an overdraft.
v. Grants/loans from government: Government can release capital to its agencies in support of certain programmes, e.g the Government of Nigeria under its Poverty Alleviation Programme can release some funds in the form of loans to unemployed graduates, among others, to set up small scale businesses. This constitutes a source of capital for a sole proprietor.

Advantages of Sole Proprietorship

i. It involves small capital: The sole proprietorship requires very small capital to set up
ii. It is easy to establish: The one-man business is easy to establish because of the small capital requirement and it may not involve much protocol or procedures when setting up the business.
iii. Taking of quick decisions: Quick decisions are easily taken by the sole proprietor alone without the consent of other workers in the organization.
iv. It is easy to manage: The sole proprietor can easily manage the operations of the enterprise without expert management from outside.
v. It requires small operation: The sole proprietorship serves fragmented markets in West Africa and as such, large operations would not be necessary.
vi. All profits belong to the owner: All the profits derived from the business belong to the owner of the business because the capital outlay or provision came from him.
vii. It can thrive in all business environment: The sole proprietor can thrive in almost all business environment, be it rural or urban environment because of its simplicity in establishment.

Disadvantages of Sole Proprietorship

i. Problem of continuity: In the event of the death of the owner, the business may also die with him, especially when there is no successor to take over from him.
ii. Inadequate capital: The sole proprietor is always faced with inadequate capital because of the small size of his business and his inability to source funds outside his business.
iii. He bears all risks alone: The risk required in operating the business is borne solely by the owner. If the business is successful, he rejoices but when it fails, he suffers it all alone.
iv. It has unlimited liability: In the event of business failure, his assets and properties have to be sold to pay his creditors.
v. It is not a separate legal entity: In law, there is no difference between the owner of sole proprietorship and the business itself. The business cannot sure or be sued in its own right.
vi. He lacks specialisation: The owner is personally involved in every section of the business. He works very hard; he may not take public holidays, and scarcely has rest. In most cases, when he is absent, the business may close down temporarily.
vii. There is limitation in expansion: The sole proprietorship suffers from expansion, both in ideas and business, as a result of inadequate capital.

Reasons for the Continued Existence of Small Scale Business Units

i. Small capital requirement: The small scale business requires small capital to set up.
ii. Easy to establish: The small scale business unit are easy to set up or establish since no formalities are required.
iii. Provision of incentive for hard work: There is always incentive for hard work since ownership instills pride and drive for success.
iv. They enjoy customer’s loyalty: Small scale business units always enjoy customers loyalty and good relationship which ensure continued patronage.
v. Ability to change policies: The policies of the business can be easily and quickly changed to meet with the changing needs of the customers.
vi. Low level of risks: The small scale business outfit usually involves low level of risks.
vii. Low overhead cost: The overhead cost involved in small scale business is usually very low.
viii. Availability of goods in remote areas: The small scale business also ensures that goods are distributed to remote areas.

The Partnership

A partnership may be defined as a type of business organisation in which two to twenty persons agree legally to set up and manage a business outfit with the sole aim of making profit.
Partnership is usually formed by an association of two to twenty persons, who by an agreement (usually legal) decide to pool their resources (capital) or skill or both together and establish a business enterprise. The people involved in partnership agreement are called partners and they share the profit, losses and risk of the business. When partners are involved in banking enterprise, the number required by law is between two and ten. Some examples of partnership in Nigeria are Gani Fawehinmi and Co. (Law chamber), Diya Fatimilehin and Co. (Estate firm).

Features or Characteristics of Partnership

i. Ownership: The partnership is owned by two to twenty persons but inn a banking enterprise it is between two and ten.
ii. Objective: The main objective of the partnership is to make profit.
iii. Source of capital: The capital required to set up the business is provided by the partners based on legal agreement.
iv. Liability: The partners have unlimited liability.
v. Life span: The life span of the partnership depends on the agreement signed by the partners involved.
vi. Legal entity: It is not a legal entity as the partners are not separated from the business.
vii. Management: The business is controlled and managed by the partners.

Sources of Capital for Partnership

i. Personal contributions from partners: The partners can jointly agree to contribute their money either equally or pro rata as major sources of capital.
ii. Loans and overdraft: Partnership can easily obtain loans and overdraft from the banks since they are jointly liable.
iii. Trade credit: Money can be obtained from middlemen in advance in order to facilitate production of goods.
iv. Undistributed profit: Retained profit can be pumped back to the business to aid its expansion.
v. Admission of new partners: Upon the admission of new partners, more capital will be brought into the business.

Types of Partnership

(a) Limited Partnership
Limited partnership is a type of partnership which is formed and registered under the Limited Partnership Act. In a limited partnership, there must be one general partner with unlimited liability and one limited partnership whose liability is limited to the amount invested. The partners cannot take equal part in management and administration of the business. The limited partner can have access to the account of the partnership.

The main features of limited partnership are:
i. A limited partner cannot participate in the management of the business.
ii. Liability is limited but there must be a partner with unlimited liability.
iii. It must be registered.

(b) General or ordinary partnership
In general partnership, partners have equal responsibility and risk in the business. All partners are agents of the firm and they all share the responsibility of running the business. Hence, they are liable to the full extent of the debts of the firm. The liability of members is unlimited, they all take active part in the administration and management of the business.

The main features of general partnership are:
i. All the partners have unlimited liability.
ii. Partners are agents of the enterprise.
iii. They have equal responsibility in management.
iv. They have equal power in binding the contract.

Types of Partners

1. Limited partner: A limited partner is the one who has agreed to contribute a certain sum to a partnership business and is prevented by later from taking any active part in the management and administration of the business. He is liable for debts and obligations of the partnership only up to the amount of capital he has contributed. A limited partner has limited liability.
2. General partner: A general partner has full power of participating in the conduct and management of the partnership business. He is entitled to take full share in the management of the firm. This kind of partner is liable to the full extent of his estate for the partnership debts, i.e he has unlimited liability.
3. Active partner: An active partner takes active part in the management and administration of a partnership business. He contributes to the financing and formation of the business, takes active role in the day-to-day running of the enterprise and is being paid a certain sum as salary.
4. Nominal or quasi-partner: A nominal partner contributes only his name to the formation of the business. He neither contributes capital nor takes part in the management of the firm.
A nominal partner must be a distinguished personality within the society as his name must surely increase the reputation and possibly the goodwill of the partnership business. This partner will share in the profit or debts of the firm as specified in the Partnership Act of 1980. He might be a politician or a successful business man.
5. Sleeping or dormant partner: A dormant partner takes no part in the conduct and management of the partnership business. He will contribute capital and share from the profit but will not engage in the day-to-day running of the enterprise, i.e no active participation in the firm. A sleeping partner receives no salary but is liable for the debts of the firm. The mere fact that a partner is a dormant one does not exonerate him from liability in the event of wrong decision by the active partners.

Rights of Partners

i. The partners are entitled to share from the profits of the partnership business.
ii. A partner making advance beyond the amount of capital which he has agreed to subscribe is entitled to interest of 5%.
iii. A partner had the right to act as the agent of the business.
iv. Every general partner can take part in the management of the partnership.
v. Every partner must have access to the partnership books of accounts.
vi. They must be indemnified by the firm in respect of payment made and personal liability incurred by them in the conduct of the business.

Formation of Partnership

A partnership business may be established without any formality although the partners have certain unavoidable obligations to third parties, they may make such agreement between themselves in respect of the internal management of the firm. It is accordingly usual for people entering into partnership to express their intention in a partnership agreement known as deed of partnership. Deed of partnership may be defined as agreements, rules and regulations guiding the members of a partnership.

The agreement contains the following rules and regulations:
i. The names of the partners
ii. The name of the firm
iii. The nature of the business formed
iv. The rights and duties of each partner.
v. The proportion in which capital is to be provided and whether interest should be paid on capital.
vi. The signatories on the cheques
vii. The sharing of profits and provision for drawings
viii. Duration of the partnership
ix. The circumstances which shall dissolve the partnership
x. The payment of partners’ salaries
xi. The method of admission of new parts
xii. The objective of the firm.

Advantages of Partnership

i. Sufficient capital: Partnership has more financial resources than a sole proprietorship because more people are involved, hence more capital can be raised through partner’s contributions.
ii. Increase in production: There is increase in production as a result of increase in capital and management.
iii. Joint decision making: Better results are derived when two or more partners put their heads together and take joint decisions for the enterprise.
iv. There is privacy: In this kind of business unit, there is privacy because partners are not legally compelled to publish the annual accounts for public consumption.
v. Better management: By combining skills and abilities, partnership businesses are usually better managed than one-man business.
vi. Sharing of risks and liabilities: The partners share risks and liabilities among themselves and this will reduce individual burden.
vii. Increased efficiency: The bringing together of special skills and talent help to increase efficiency in production.
viii. Greater possibility of expansion: There is the possibility of expansion, by making use of additional capital derived from in-coming partners.

Disadvantages of Partnership

i. Unlimited liability: The partners are liable for the debts of the partnership business up to the full extent of their estate.
ii. Business is not a legal entity: Partnership business is not a separate and distinct personality. It cannot sue or be sued in its own name.
iii. Disagreement between partners can end the business: There is the possibility that a disagreement between partners can put the business to an end.
iv. Risk of dissolution: Death, insanity and bankruptcy of a partner will bring the business to an abrupt end.
v. False records: Some of the partners especially the active partners, can use false records to gain advantage over others.
vi. Action of one partner is binding to others: There is an inherent danger that one partner, through his recklessness, can put others into problem and this may destroy the business. All the partners will be held responsible for the action of one of the partners in the course of running the firm’s business.
vii. Difficulty in management: Since every partner will want to contribute his own quota, decision making may be slow and long.
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Take a quick test for this lesson
i. Define a sole proprietorship business
ii. Discuss the features of sole proprietorship
iii. State four sources of capital to a sole proprietor
iv. List and explain 5 advantages and disadvantages each of sole proprietorship
v. Define a partnership
vi. List five features of partnership
vii. List and explain 5 types of partners
viii. Explain how a partnership is formed
Ix. State 5 advantages and disadvantages each of Partnership.

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