Sole Traders: Business Basics

Sole Traders

• The simplest business form is the sole trader or proprietor, having one owner but may employ personnel.
• Can operate across diverse sectors including primary (farmers, fishermen), secondary (small builders, manufacturers), but mostly in the tertiary sector.
• Common in retail and service industries like web design, tutoring, and taxi services.
• There are no legal setup requirements.
• Sole traders have unlimited liability, potentially losing more than the initial investment due to personal assets being at risk for business debts.

Advantages

• The owner retains all profits.
• Complete independence and control.
• Simple to establish with no legal complexities.
• Flexibility to quickly adapt to market changes.
• Can provide personalized customer service.
• Potential eligibility for government assistance.

Disadvantages

• Unlimited liability.
• Difficulty getting finance due to perceived risk by lenders.
• Can be isolating with too much independence.
• Long working hours and physically demanding work.
• Usually too small to benefit from economies of scale.
• No continuity, the business's existence terminates with the owner.

Partnerships

• Involve 2-20 individuals who own a business collectively.
• Owners share the responsibilities and profits of the business.
• Commonly found in professions like accounting, medicine, and real estate.
• Forming a partnership does not require any legal formalities.
• There is an option to create a deed of partnership, a binding legal document specifying partner rights to resolve disputes.
• The document outlines capital contributions, profit/loss distribution, procedures for dissolving the partnership, individual partner control, and admission of new partners.

Advantages

• Simple to establish and operate without formal legal requirements.
• Partners specialize in different areas of expertise.
• Responsibility of running the business is shared.
• More owners leads to more capital being raised.
• Financial details are kept private.

Disadvantages

• Unlimited liability amongst partners.
• Profits are shared.
• The potential for disagreements and conflicts among partners exists.
• Partners are legally bound by the decisions of any partner.
• Partnerships often remain small.

Limited Partnerships

• Some partners provide capital but do not actively manage the business.
• Liability is limited to the amount of capital contributed.
• Such individuals are referred to as sleeping partners.
• Involves at least one partner with unlimited liability.
• UK law now allows limited liability partnerships where all partners have limited liability, requires businesses to meet certain legal obligations like annual filings.
• A firm of accountants based in Mombasa, Kenya; Kisuli, Okumu and Owino drew up a deed of partnership and each partner contributed KES 2,000,000.

Franchises

• This allows individuals to operate under an established brand.
• Here franchisee pays the franchisor for the rights to use their business model and brand.
• Prominent examples include McDonald's, Subway, and Avis.
• Franchisors provide a license, startup package with equipment and guidance, business operation procedures training, resources, support services, organized marketing, and a protected geographical area.
• Franchisees pay one-off start-up fee, an ongoing fee (typically sales-based), and marketing contributions to the franchisor.

Advantages for Franchisee

• Lower risk due to established brand and proven business model.
• Benefit from backup support systems.
• Predictable set-up costs.
• Organized national marketing efforts.

Disadvantages for Franchisee

• Profit sharing with the franchisor.
• Legal obligations through strict franchising agreements.
• Limited independence through strict operating rules.
• Can be expensive to initiate.

Advantages for Franchisor

• Rapid expansion capabilities.
• Inexpensive expansion method for growth.
• Reduced risk in growth ventures is transferred to franchisees.
• Franchisees are more incentivized, compared to employees.

Disadvantages for Franchisor

• Shared potential profits with franchisees..
• Brand reputation is at risk from poor franchisee management..
• Potential inventory sourcing, equipment, and goods from external vendors rather than franchisor.
• Significant franchisee support costs..

Social Enterprises

• These are businesses aiming to improve social or environmental welfare, rather than profit.
• Social enterprises may be referred to as not-for-profit organizations.
• Have defined social or environmental goals.
• Gain the majority of revenue from sales and donations.
• Reinvest the majority of profits towards their mission.
• Controlled primarily for the social mission.
• Are transparent and accountable.
• Can exist as consumer/retail cooperatives, worker cooperatives, and charities.
• Consumer or retail cooperatives are member-owned and controlled, with members purchasing shares.
• Employees of worker cooperatives share ownership, participate in decision-making, and share profits.
• Charities raise funds for 'good' causes and bring focus to society’s disadvantaged.

Limited Companies

• Have distinct features compared to sole traders and partnerships, particularly in ownership, capital acquisition, and operational structure.
• These are incorporated, giving them a separate legal standing from their ownership.
• Can possess assets, enter contracts, hire personnel and engage in legal action independent of its owners.
• Owners limited liability, meaning those who own it can only lose their starting investment if it gains debt.
• Can't be forced to pay off any of the business's debt through personal assets.
• Sell shares to raise capital which can be used for investments

Multi-National Companies

• Are very efficient because they can utilize huge economies of scale.
• For example, they have the ability to reduce their costs significantly.
• They can buy huge quantities of raw materials more cheaply.
• Control and ownership is focused in the host country and profits are always returned to this country.

Public Corporations

• Business ventures are controlled by the government, instead of private individuals, with diverse objectives.
• Healthcare, transport, and education are examples of these corporations.
• While certain provide public service; others engage commercially for profit.
• The government owned corporation, the Ugandan National Water and Sewerage Corporation (NWSC), is entirely government owned.

State Owned

• The government owns public corporations.
• The government hires the people who run the organizations and often hires a board of directors.
• The government is in charge of the corporations polices.

Public accountability

• They need to produce annual reports, which are given to the government minister in charge of the company.
• Tax payers are accountable to the public for the state owned corporations resources.
• If a public company makes a profit, the money is reinvesting in the business, or is handed over to the government.

Created by law

• Act of parliment creates public companies.
• It very clearly states the corporations duties and powers under the act.

Incorporation

• This means they should not be mixed up when they should be treated separately and be sued
• Public companies are incorporated business corporations.

Privatisation

• Transfer of public sector resources to the private sector (business).
• This can take a couple of forms.
• The sale of public corporations.
• The deregulation involved lifting legal limitations that prevented private sector competition.
• Contracting out: being where contractors bid for services that we previously provided by the public sector.
• The sale of land and property where council owned properties can sold to people that were generous discounts.
• Deregulation has been removing legal boundaries to encourage companies to compete.
• Public companies often suffer owing to government interference and often suffer.