LILONGWE UNIVERSITY OF AGRICULTURE AND NATURAL

RESOURCES

DEGREE NAME & MODULE NUMBER

Module Name: BUSINESS ORGANISATIONS

COURSE CODE:

MODULE WRITER(S)

JOSEPH L. DZANJA, PHD

 OWNERSHIP

(COPYRIGHTS)

LILONGWE UNIVERSITY OF AGRICULTURE AND NATURAL

RESOURCES

June, 2016

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ACKNOWLEDGEMENTS

To Government of Malawi, World Bank for funding ODL

To key stakeholders for technical and material support

To facilitators for capacity building, facilitation of module development, production,

review and editing of modules

To LUANAR staff for commitment

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 Table of Contents

Unit 1: What is a Business?........................................................................1

1. Introduction........................................................................................1
1.1 Objectives...........................................................................................1
1.2 The Meaning of Business...................................................................1
1.3 Factors of Production.........................................................................2
1.4 The Role of Businesses in Economic Development..........................2

Unit 2: Forms of Business Organizations.................................................6

2.0 Introduction........................................................................................6
2.1 Objectives/Learning outcomes...........................................................6
2.2 Business Organizations......................................................................7
2.2.1 Sole proprietorship.............................................................................7
2.2.2 Partnerships......................................................................................10
2.2.3 Corporation or Company..................................................................16
2.2.4 Trust..................................................................................................21
2.2.5 Co-operative Organization...............................................................23
2.2.6 Franchising.......................................................................................29

Unit Three: Mergers and Acquisitions (M&A)...................................33

3.0 Introduction......................................................................................33
3.1 Unit Objectives.................................................................................33
3.2 The Meaning of Mergers and Acquisitions......................................33
3.2.1 Structures of Securing Control of another company........................35
3.2.2 Challenges Associated with Acquisitions.........................................36
3.2.3 Motivations for M&A ..................................................................... 36
3.2.4 Different Forms of M&A.................................................................38
3.2.5 Brand Considerations.......................................................................38

Unit Four: Choice of Form of Business Organisation...........................40

4.0 Introduction......................................................................................40
4.1 Unit Objectives.................................................................................40
Answers to Unit 1 Activities........................................................................42
References....................................................................................................44

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Module Overview
Introduction

If you walk down any street in the cities and towns, you will notice that many of the
shops display their names for all to see. It may be Chipiku Stores, Food Zone, Tilitonse
Stores, as well as known chain stores such as Shoprite or Game Stores. All there are
businesses, but each with a different status in terms of how it is operated, who the
owner is and how any profit is shared.. But have ever wondered what a business is?
A business is any organisation that makes goods or provides services. These range
from small firms owned and run by just one self employed person, through to large
companies which employ thousands of staff all over the world. Businesses exist to
provide goods or services. Goods are physical products - such as burgers or cars. Ser-
vices are non-physical items - such as hairdressing. After identifying the business in
any field e.g., Insurance, it is necessary then to have a legal entity to be known in the
society. The legal entity can be in any form of a business organization. The various
forms of organization are as follows:

Our experiences of business organisations vary depending on where we are globally,

but we interact with them daily in very personal ways. This module is inspired by the
ways in which these organisations are conceived, function, survive and prosper in these
turbulent times of the twenty-first century. It is a practical module, grounded in your
own experience of business organisations as an employee, customer or stakeholder,
and is designed to develop your personal and professional practice in diverse business
environments.

Module Learning Outcomes

1. Define the word, ‘business’.

2. Identify different forms of business organizations and their main features
3. Explain the formation of various forms of business organisations and their
features
4. Explain the advantages and disadvantages of each type of organization
identified.
5. Examine the factors that should be considered before making a choice on
business organisations

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Module 1 Business Organisations will give you the required skills in setting up a
business of any type. However, it is essential that you understand and complete all parts
of the module before you attempt to establish or help anyone else establish a business.

The module is divided into five units as follows.

Unit 1: What is a business?

This unit defines the word ‘business’ and explores some of the theories behind
enterprise establishment. It also gives an overview of the role of businesses in
economic development.

Unit 2: Forms of Business Organizations

This unit discusses the various business organisations. It explains the characteristics of
each of the business organisations, including their advantages and disadvantages. The
unit discusses sole proprietorships, partnerships, corporations, cooperatives, franchises
and Mergers and Acquisitions.

Unit 3: Mergers and Acquisitions

This unit explains the concept of Mergers and Acquisitions. It discussed the various
forms of M&E and the motivations associated with Mergers and Acquisitions.

Unit 4: Factors Affecting the Choice of Business Organisation

In this unit you will learn the various factors affecting the choice of business
organisations. It provides you with guidelines on how you should choose a proper
business organisation structure.

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 Unit 1:
What is a Business?
1. Introduction

If you walk down any street in the cities and towns, you will notice that many of the
shops display their names for all to see. It may be Chipiku Stores, Food Zone, Tilitonse
Stores, as well as known chain stores such as Shoprite or Game Stores. All there are
businesses, but each with a different status in terms of how it is operated, who the
owner is and how any profit is shared.. But have you ever wondered what a business
is? You will learn in this Unit about the meaning of business, and differentiate the three
meanings of business as commerce, occupation and organization and identify the four
main kinds of productive resources. In addition, you will also learn about the role of
business in the socio-economic development of any country.

1.1 Objectives

By the end of this unit, you should be able to:

1. Define the term ‘business’
2. Differentiate the three meanings of business as commerce, occupation,
organization and system
3. Explain the four main kinds of productive resources in business.
4. Evaluate the role of business in the economic development of any country

You will find the following key words or phrases in this unit. Watch for these and make
sure that you understand what they mean and how they are used in the unit.

Key Words

• Business
• Factors of production
• Economic Development

1.2 The Meaning of Business

A business is any organisation that makes goods or provides services. These range
from small firms owned and run by just one self employed person, through to large
companies which employ thousands of staff all over the world. Businesses exist to
provide goods or services. Goods are physical products - such as radios or chocolate.
Services are non-physical items - such as hairdressing.
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Business has three dimensions of a meaning: commerce, an occupation and an
organization. Business as a commerce is the process that people produce, exchange
and trade goods and services. Business as an occupation is the acquired set of
specialized skills and abilities that allows people to create valuable goods and
services. Business as an organization is the system of task and authority relationship that
coordinates and controls the interactions between people so that they work toward a
common goal. Business as a system is a combination of business commerce, occupations, and
organizations that produces and distributes the goods and services that create value for
people in a society.

Our experiences of business organisations vary depending on where we are globally,

but we interact with them daily in very personal ways. This module is inspired by the
ways in which these organisations are conceived, function, survive and prosper in these
turbulent times. It is a practical module, grounded in your own experience of business
organisations as an employee, customer or stakeholder, and is designed to develop your
personal and professional practice in diverse business environments.

1.3 Factors of Production

Regardless of meaning there are four crucial ingredients or productive factors or re-
sources of land, labor, capital and enterprise that are needed to profit from business.
These four productive factors or resources of land, labour, capital and enterprise that
are needed to profit from business and are limited in supply (scarcity). An individual
business person or company must use them efficiently and effectively to produce goods
and services. Together, the cost of acquiring and using these four resources to make and
sell goods and services determines a company’s operating costs.

Owners/managers are the enterprise of the business, while the people are the
labor and the capital buys materials and machinery. The land may provide a specific
location on which business activities such as production and marketing takes place.
These resources allow for the creation of a product and/or service that customer’s value.
The company’s business model not only outlines the plan for these resources but cre-
ates a competitive advantage in the value of its product and generates profitable sales
revenue. By reinvesting the profits the business increases its capital and contributes to
the wealth of the owners. All business activity is self-interested and competitive, and
this competition may benefit people and society when it leads resources to be employed
in their most profitable use.

1.4 The Role of Businesses in Economic Development

As has been pointed out in the previous sections, business is any activity done by
an individual or a group with an aim of making a profit and satisfying human needs.
Business activities have vital roles in an economy. There is a good relationship between
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businesses and the economic development of a country. Economic Development is
mainly concerned with the transformation of an economy as measured by changes in
infrastructure and peoples social wellbeing. As a matter of fact businesses have become
a vital force to drive the global economy.

Globalisation has been hotly debated in the last few decades. Critics point to what
they see as the negative effects of free trade, increased foreign investment and the
movement of capital. Debate has begun to focus ever more on development objectives,
sustainable development and the fight against poverty. More and more people, United
Nations bodies included, have come to recognise and understand the part business has
to play in reaching these goals. At the same time, many people are questioning the roles
of individual businesses and/or companies. What should their involvement be? What
are their responsibilities? What is the role of business to society? What is the role of
business in economic development? This section discusses these issues.

Businesses benefit society by:

• Supplying goods and services that customers cannot, or do not want to produce
themselves
• Creating jobs for customers, suppliers, distributors and co-workers. These
people make money to support themselves and their families, pay taxes and
use their wages to buy goods and services
• Continually developing new goods, services and processes that society needs
• Investing in new technologies and in the skills of employees
• Building up and spreading international standards, e.g. for environmental
practices
• Spreading “good practice” in different areas, such as the environment and
workplace safety
• Paying taxes to governments which help in various development activities such
as constriction of roads, public hospitals, public schools etc.

Business is hugely important in a country’s economy because it is the main economic

engine for any country. Businesses are a very important part of the circular flow of
any market economy. They buy resources from households in the resource market
and sell to households in the product market. This makes them very important to the
economy.

Businesses also allow the economy to work more efficiently. When businesses
compete with one another, they improve their efficiency and help the economy grow.
They also help the economy grow through innovations of various sorts. No market
economy can thrive without businesses.

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Businesses are the growth drivers of the economy of a country. They employ
people, provide income to the working population, buy resources, sell products, bring
innovation, generate foreign capital, fulfill our daily necessities, etc. Businesses can be
multinational, national, regional or domestic scale and employ people of all skill sets (in
full time or part time or contractual positions). This generates employment at all levels
across the country. Businesses also generate indirect employment in terms of people
engaged in raw material production that businesses need and also those involved in
selling these products. Large scale businesses import and export raw materials, products
and services and generate foreign exchange for the economy. In a competitive market,
businesses create innovation and novelty and also provide entrepreneurial opportunity.
All these (and other associated activities) drive the economy of a country.

In addition, businesses play a crucial role in economic development in the sense that
they contribute much in the provision of revenue to the government. Business is a
very big tool as far as revenue collection is concerned since there are a lot of taxes that
government charges on every goods bought or sold on each and every market across
the country. For example, value added tax (VAT) is charged in some countries on
each and every commodity bought. People who own shops, rest houses and other
infrastructural business pay ground tax. Custom duty is also paid on many
goods imported into the country from abroad. These taxes enable the government to
use money collected for development projects such as building hospitals, schools,
construction of road networks and many other projects. In turn, this improves
socio-economic wellbeing.

Activities
Further Readings: Where you can get further information about this unit.

Clarke, P (1973) Small Business. David & Charles Ltd, Wiltshire, USA.
Schiller, B.R. (1980) The economy today, 3rd ed. New York.

Hardwick, P. Lamead, J. and B. Khan (2003) An Introduction to Modern

Economies. Fifth edition, Prentice Hall, USA.

Unit Summary

In this Unit, you have learnt that business is any organisation that makes goods or
provides services. Goods are physical products - such as radios or chocolate. Services
are non-physical items - such as hairdressing. You have also learnt that business has
three dimensions of a meaning: commerce, an occupation and an organization. The
role of business in economic development of any country has also been explained in
this unit. Business is hugely important in a country’s economy because it is the main
economic engine for the country. Businesses are a very important part of the circular
4
flow of any market economy. They buy resources from households in the resource
market and sell to households in the product market. This makes them very important
to the economy.

Activity 1-a
Self -Evaluation-Activity .

In your own words, define the term business in no more than twenty words.

Note that answers to this activity are at the end of this unit.

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 Unit 2:
Forms of Business Organizations
2.0 Introduction

After identifying the business in any field e.g., Grocery Retail Shop, it is necessary then
to have a legal structure to be known in the society. The legal structure can be in any
form of a business organization. The various forms of organization are as follows: Sole
proprietorships, Partnership, Corporation, Cooperative, Association, Franchise, Trust
and Mergers and Acquisitions.

2.1 Objectives/Learning outcomes

On successful completion of the unit you should be able to:

• Define business organisation

• Identify different forms of business organisations
• Explain the characteristics of each of business organisation
• Analyse the advantages and disadvantages of each form of business
organisations

Key terms

Ensure that you understand the key terms or phrases used in this unit as listed below.

• Sole proprietorships
• Partnership,
• Corporation
• Cooperative
• Association
• Franchise
• Trust
• Mergers and Acquisitions.

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2.2 Business Organizations

A business organization is an individual or group of people that collaborate to achieve

certain commercial goals. Some business organizations are formed to earn income for
owners. Other business organizations, called non-profits, are formed for public pur-
poses. These businesses often raise money and utilize other resources to provide or
support public programs.

One of the key decisions you’ll make when starting a business is which legal structure
to use. Because it’s such an important decision, you should get advice from a qualified
independent business, financial or legal advisor. The structure you choose will depend
on the size and type of business, along with your personal circumstances and how
much you want to grow the business. The key is to ensure that whatever structure you
choose is in place before you start the business and that you’re able to comply with the
various legal requirements it carries. In this unit you will learn seven different business
structures and these are: Sole proprietorships, Partnership, Corporation, Cooperative,
Association, Franchise and Trust. Let us now look closely at each one of the business
structures.

2.2.1 Sole proprietorship

The sole proprietorship is a form of business that is owned, managed and controlled
by an individual. He has to arrange capital for the business and he alone is responsible
for its management. He is therefore, entitled to the profits and has to bear the loss of
business; however, he can take the help of his family members and also make use of
the services of others such as a manager and other employees. This type of business
organisation is also called single ownership or single proprietorship or a sole trader. If
the business primarily consists of trade, the organization is a sole trading organization.
Small factories and shops are often found to be sole proprietorship or organisations. It
is the simplest and most easily formed business organization. This is because not much
legal formality is required to establish it. For instance to start a factory the permission
of the local authorities is sufficient. Similarly to start a restaurant, it is only necessary
to get the permission of local health authorities. Or again, to run a grocery store, the
proprietor has only to follow the rules laid down by local administration.

A sole proprietorship is the simplest form of business structure and relatively easy
and inexpensive to start and maintain. Many sole traders choose to trade under their
own name - for example, Samson Banda - while others opt to register a business name
which must be done with the Registrar of Companies.

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Features of Sole Proprietorship:

The important features of a sole-proprietary organization include the following:

(i) Individual Initiative: One person is the owner in a sole proprietary form of
organisation.

(ii) Risk Bearing: The proprietor is the sole beneficiary of profits in this form
organisation. If there is a loss he alone has to bear it. Thus the risks of business
are borne by the proprietor himself.

(iii) Management and control: Management and control of this type of organisation
is the responsibility of the sole proprietor. He may, however, employ a manager
or other people for the purpose.

(iv) Minimum government regulations: The government does not interfere with the
working of the sole proprietorship organisation. However, they have to comply
with the general laws and rules laid down by government.

(v) Unlimited liability: The sole proprietor has to bear the losses and is responsible
for the liabilities of the business. If the business assets are not sufficient to meet
the liabilities, he may also have to sell his personal property for that purpose.

(vi) Secrecy: All important decision taken by the owner himself. He keeps all the
business secrets only to himself.

Merits of Sole Proprietorship:

A sole proprietary organisation has the following advantages:

(i) Easy formation: A sole proprietorship business is easy to form where no legal
formality involved in setting up this type of organization. It is not governed by
any specific law. It is simply required that the business activity should be lawful
and should comply with the rules and regulations laid down b y local
authorities.

(ii) Better Control: In sole proprietary organisation, all the decisions relating to
business operations are taken by one person, which makes functioning of
business simple and easy. The sole proprietor can also bring about changes in
the size and nature of activity. This gives better control to business.

(iii) Sole beneficiary of profits: The sole proprietor is the only person to whom the
profits belong. There is a direct relation between effort and reward. This
8
 motivates him to work hard and bear the risks of business.

(iv) Benefits of small-scale operations: The sole proprietorship is generally organized

for small-scale business. This helps the proprietor’s family members to be
employed in business. At the same time such a business is also entitled to
certain concessions from the government. For example, small industrial
organisations can get electricity and water supply at concessional rates on
a priority basis.

(v) Inexpensive Management: The sole proprietor does not appoint any specialists
for various functions. He personally supervises various activities and can avoid
wastage in the business.

Limitations of Sole Proprietorship:

A sole proprietor generally suffers from the following limitations:

(i) Limitation of management skills: A sole proprietor may not be able to

manage the business efficiently as he is not likely to have necessary skills
regarding all aspects of the business. This poses difficulties in the growth of
business also.

(ii) Limitation of Resources: The sole proprietor of a business is generally at a

disadvantage in raising sufficient capital. His own capital may be limited and
his personal assets may also be insufficient for raising loans against their
security. This reduces the scope of business growth.

(iii) Unlimited liability: The sole proprietor is personally liable for all business
obligations. For payment of business debts, his personal property can also be
used if the business assets are insufficient.

(iv) Lack of continuity: A sole proprietary organisation suffers from lack of

continuity. If the proprietor is ill this may cause temporary closure of business.
And if he dies the business may be permanently closed.

From the above account of the merits and limitations it becomes clear that it is only
personal services like repair work, tailoring etc. small factories, retail shops and
professional activities which can be set up as sole proprietary organisations. In
Malawi, this form of organisation is quite popular and accounts for the largest number of
business units.

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2.2.2 Partnerships

Partnership is an association of persons who agree to combine their financial resources

and managerial abilities to run a business and share profits in an agreed ratio. Since
the resources of a sole proprietor to finance, and his capacity to manage a growing
business is limited, he feels the need for a partnership firm. Partnership business, therefore,
usually grows out of the need for expansion of business with more capital, better
supervision and control, division of work and spreading of risks. The persons who
have agreed to join in partnership are individually called “Partners” and collectively a
‘firm’.

Features of Partnership:

The features of partnership are as follows:

i. Existence of an agreement: Partnership is formed on the basis of an agreement

between two or more persons to carry on business. It does not arise out of the
operation of law as in the case of joint Hindu family business. The terms and
conditions of partnership are laid down in a document known as Partnership
Deed.

ii. Engagement in business: A partnership can be formed only on the basis of a

business activity. Its business may include any trade, industry or profession.
Thus, a partnership can engage in any occupation – production and/or
distribution of goods and services with a view to earning profits.

iii. Sharing of profits and losses: In a partnership firm, partners are entitled to share
in the profits and are also to bear the losses, if any.

iv. Agency relationship: The partnership business may be carried on by all or any
of the partners acting for all. Thus, each partner is a principal and so can act in
his own right. At the same time he can act on behalf of other partners as their
agent. Thus, every partner can bind the firm by his acts.

(vi) Unlimited Liability: The liability of partners is unlimited as in the case of sole
proprietorship. In case some obligation arises then not only the partnership
assets but also the private property of the partners can be taken for the payment
of liabilities of the firm.

(vii) Common Management: Every partner has a right to take part in the running of
the business. It is not necessary for all partners to participate in the day-to-day
activities of the business but they are entitled to participate. Even if partnership
business is run by some partners, the consent of all other partners is necessary
10
 for taking important decisions.

(viii) Restriction on transferability of share: No partner can transfer his share in

partnership to any other person. He may, however, do so with the consent of all
other partners.

(ix) Registration: To form a partnership firm, it is not compulsory to register it.

However, if the partners so decide, it may be registered with the Registrar
of Firms. There are advantages of registration, which are discussed later.

(ix) Duration: The partnership firm continues at the pleasure of the partners.
Legally a partnership comes to an end if any partner dies, retires or becomes
insolvent. However, if the remaining partners agree to work together under the
original firm’s name, the firm will not be dissolved and will continue its
business after settling the claim of the outgoing partner.

Formation and Registration of Partnerships

Partnership Deed

Since partnership rests on an agreement among persons, its formation does not
involve any special legal problems. Generally, the partnership agreement is reduced to
writing and a Partnership Deed is prepared. Partnership Deed lays down the terms and
conditions of partnership and the rights, duties and obligations of partners. The
following points are generally covered in the Deed:

(i) The nature of business.

(ii) Name of the firm and the place where its business will be carried on.
(iii) Amount of capital to be contributed by each partner.
(iv) Duties, powers and obligations of all the partners.
(v) Method of preparing accounts and arrangement for audit.
(vi) Whether loans will be accepted from a partner over and above the capital also,
if so, at what rate of interest.
(vii) The amount to be allowed as private drawings by each partner and the interest
to be charged thereon.
(viii) The ratio in which profits are to be shared.
(ix) Whether a partner can be expelled and, if so, the procedure for the same.
(x) Method for the settlement of disputes.
(xi) Circumstances under which the partnership will stand dissolved, and in case of
dissolution, under whose custody the books of accounts will remain.

The Deed has to be stamped and each partner should have a copy of it.
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Registration of a Partnership Firm

Registration of a partnership firm is not compulsory under Malawian Partnership Act.

In other countries, like the UK – England registration is compulsory. In India, there
are certain privileges which are allowed to those firms, which are registered. But an
unregistered firm suffers from certain disabilities. These disabilities make it virtually
compulsory for a firm to get registered. A partnership firm may be registered at any
time. That is, at the time of formation or at any time during its existence. A partnership
firm desiring registration applies to the Registrar of Companies in prescribed form
along with the registration fee. The application should state the following:

(i) Name of the firm.

(ii) The principal place of business of the firm.
(iii) The name of any other place where the firm is to carry on business:
(iv) Date of admission of the partners in the firm.
(v) Names and permanent addresses of the partners.
(vi) Duration of the firm.

The application shall be signed and verified by each partner. Changes in the above
particulars have to be communicated to the Registrar. The Certificate of registration is
reliable evidence and a conclusive proof of the existence of the firm.

Consequences of Non-Registration

An unregistered firm suffers from the following serious disabilities:

(i) A partner of an unregistered firm cannot file a suit against the firm or any other
partner for enforcing his right arising out of the contract;
(ii) An unregistered firm cannot file suit against any third party for the recovery of
the claims;
(iii) Such a firm also cannot file a suit against any partner.

According to the nature of agreement among partners, there can be three types of
partnership as follows:

(i) Partnership at-will: Such a partnership exists on the will of the partners. That
is, it can be brought to an end whenever any partner gives notice of his intention
to do so.
(ii) Particular partnership: A particular partnership is formed for undertaking a
particular venture. It comes to an end automatically with completion of the
venture.
(iii) Partnership for a fixed duration: Such partnership is for a fixed period of time
say 2 years, 5 years or any other duration.
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Types of Partners

The various types of partner found in partnership firms are as follows:

(i) Active Partners: Partners who take active part in the conduct of day-to-day
business of the firm are called active partners. These partners carry on business
on behalf of the other partners.
(ii) Sleeping or dormant partners: Sleeping or dormant partners are those who do
not take active part in the management of the business. Such partners only
contribute capital in the firm and are bound by the activities of other partners.
However, they share in the profits and losses of the business.
(i) Others: Active and sleeping partners are, as a matter of fact, the full-fledged
partners i.e. they share in profits and losses of the business and are liable
for its dues. However, there are other types of partners also who may be
associated with partnership directly or indirectly. They are not full-fledged
partners, such partners may include the following:

(ii) Nominal Partners: Nominal partners are those who do not have interest in the
business but lend their name to the firm. They do not make any capital
contribution, and are not entitled to take part in management, but are liable,
like other partners, to third parties. Such partners generally have a pecuniary
interest (like a share in the profits) in lending their name to a firm. However
in certain cases they may not have any pecuniary interest in doing so. For
example, a reputed industrialist may, without any profit motive lend his name
to a firm run by his family members.

(iii) (b) Partners by holding out: If a person by his words or conduct holds out to
another that he is a partner, he will be prevented from denying that he is not
a partner. The person who thus becomes liable to third parties to pay the debts
of the firm is known as a partner by holding out.

Limited Liability Partnership

A limited liability partnership (LLP) is a special form of partnership in which some or

all partners (depending on the jurisdiction) have limited liabilities. It therefore exhibits
elements of partnerships and corporations. In an LLP, one partner is not responsible or
liable for another partner’s misconduct or negligence. LLP combines the advantages of
ease of running a Partnership and separate legal entity status and limited liability aspect
of a Company.

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Main features of a LLP

(i) LLP is a separate legal entity separate from its partners,

(ii) Can own assets in its name, sue and be sued.
(iii) Unlike corporate shareholders, the partners have the right to manage the
business directly
(iv) One partner is not responsible or liable for another partner’s misconduct or
negligence.
(v) Minimum of 2 partners and no maximum.
(vi) Should be ‘for profit’ business.
(vii) Perpetual succession.
(viii) The rights and duties of partners in LLP, will be governed by the agreement
between partners and the partners have the flexibility to devise the agreement
as per their choice.
(ix) The duties and obligations of Designated Partners shall be as provided in
the laws.
(x) Liability of the partners is limited to the extent of his contribution in the LLP.
(xi) No exposure of personal assets of the partner, except in cases of fraud.

Merits

a. Lower cost of formation.

b. Lesser compliance requirements.
c. Easy to manage and run.
d. Easy to wind-up and dissolve.
e. No requirement of minimum capital contributions.
f. Partners are not liable for the acts of the other partners.
g. In most cases there is no minimum alternate tax.

Demerits

a. LLP cannot raise money from the public.

b. Financial Institution may not lend the large amount the LLP.

Process for incorporating a LLP

The Registrar of Companies (ROC) is the authority having jurisdiction over the
incorporation.

a. Decide on the Partners and the Designated Partners.

b. Decide on the name of the LLP and check whether it is available.
c. Draft the LLP agreement

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d. File the LLP Agreement, incorporation documents and obtain the Certificate of
Incorporation.

Merits of Partnership

A partnership form of organisation offers the following advantages:

(i) Ease in formation: A partnership is very easy to form. All that is required is
an agreement among the partners. Even the expenses to be incurred for
registration are-not much.
(ii) Pooling of financial resources: A partnership commands more financial
resources compared to sole proprietorship. This helps in expanding business
and earning more profits. As and when a firm requires more money, more
partners can be admitted.
(iii) Pooling of managerial stalls: A partnership facilitates pooling of managerial
skills of all its partners. This leads to greater efficiency in business operations.

For instance,
in a big partnership firm, one partner can handle production function, another partner
can look after all marketing activity, still another can attend to legal and personnel
problems, and so on.

(iv) Balanced business decisions: In a partnership firm, decisions are taken

unanimously after considering all the major aspects of a problem. This ensures
not only balanced business decisions but also removes difficulties in the smooth
implementation of those decisions.
(v) Sharing of risks: Unlike sole proprietary organisation, the risks of partnership
business are shared by partners on a predetermined basis. This encourages
partners to undertake risky but profitable business activities.

Limitations of Partnership

A partnership form of organisation suffers from the following major limitations:

(i) Uncertainty of existence: The existence of a partnership firm is very uncertain.

The retirement, death, bankruptcy or lunacy of any partner can put an end to
the partnership. Further, the partnership business can come to a close if any
partner demands it.
(ii) Risks of implied authority: It is true that like the sole proprietor each partner
has unlimited liability. But his liability may arise not only from his own acts
but also from the acts and mistakes of co-partners over whom he has no
control.

15
This discourages many persons with money and ability, to join a partnership firm as
partner.

(iii) Risks of disharmony: In partnership, since decisions are taken unanimously,

it is essential that all partners reconcile their views for the common good
of the organisation. But there may arise situations when some partners may
adopt rigid attitudes and make it impossible to arrive at a commonly agreed
decision. Lack of harmony may paralyse the business and cause conflict and
mutual bickering.

(iv) Difficulty in withdrawal from the firm: Investment in a partnership can be easily
made but cannot be easily withdrawn. This is so because the withdrawal of a
partner’sshare requires the consent of all other partners.

(v) Lack of institutional confidence: A partnership business does not enjoy much
confidence of banks and financial institutions. It is because the nature of its
activities is not disclosed at public and the agreement among partners is not
regulated by any law. As a result large financial resources cannot be raised by
partnership and growth of business cannot be ensured.

(vi) Difficulties of expansion: It is difficult for a partnership firm to undertake

modernization of expansion of its operations. This is because of its inability
to raise adequate funds for the purpose. Limited membership (restricted to 20)
and their limited personal resources do not permit large amounts of capital
to be raised by the partners. Therefore, large-scale business cannot generally
be organised by partnerships. It is quite obvious from the discussions that
the partnership form of organisation is excellent when the size of business
is medium, i.e. neither too small not too large, and when the partners can
work in full co-operation with one another,

2.2.3 Corporation or Company

A company is a separate legal entity capable of holding assets in its own name.
Shareholders own the company while directors run it. The company form of organisa-
tion is considered to be most suitable for organising business activities on a large scale
as it does not suffer from the limitations of capital and management of other forms of
organisation. The sole proprietorship, partnership and Co-operative organisation are
not capable of undertaking large scale activity due to lack of adequate capital and lim-
ited managerial abilities. In a company organisation those problems can be easily over-
come. It has the advantage of attracting huge capital from the public due to the limited
liability of members. With adequate capital it can also employ trained and experienced
managers to run the business activities efficiently.

16
Meaning

A company is defined as a voluntary association of persons having separate legal

existence, perpetual succession and a common seal. As per the definition, there must
be a group of persons who voluntarily agree to form a company. Once formed the com-
pany becomes a separate legal entity with a distinct name of its own. Its existence is
not affected by change of members. It must have a seal to be imprinted on documents
whenever required. The capital of a company consists of transferable shares, and mem-
bers have limited liability.

Features of a Company

The following are the chief characteristics of the company form of organisation:

(i) Registered body: A company comes into existence only after its registration.
For that purpose, necessary legal formalities have to be completed as prescribed
under the Companies Act.
(ii) Distinct legal entity: A company is regarded as a legal entity separate from its
members. Thus a company can carry on business in its own name, enter into
contracts, sue, and be sued.
(iii) Artificial person: A company is the creation of law and has a distinct entity. It is
therefore, regarded as an artificial person. The business is run in the name
of the company. But because it is an artificial person, its functions are
performed by the elected representatives of members, known as directors.
(iv) Perpetual succession: A company has continuous existence independent of
its members. Death, insolvency, or change of members has no effect on the life
of a company. The common saying in this regard is that members may come,
members may go, but the company goes on forever. The life of the company
can come to an end only through the prescribed legal procedure.
(v) Common seal: Since a company is an artificial person, it has no physical
existence. The activities of the company are carried through a group of natural
persons elected by its members (called directors). Every company must
therefore, have a common seal with its name engraved on it. Anyone acting
on behalf of the company must use the common seal to bind the company.
(vii) Limited liability: The liability of the members of a company is limited. It is
limited to the extent of capital agreed to be contributed. Beyond that amount,
the members cannot be personally held liable for payment of the company’s
debts.
(viii) Transferability of shares: The capital of a company is divided into parts
called shares. Normally the shares of a company are freely transferable by
its members. However, transferability is restricted in the case of private
company.

17
Merits of Company

The most important advantages of a company organisation may be stated as follows:

(i) Collection of huge financial resources: The biggest advantage of a company

organisation is that it has the ability to collect large amounts of funds. This is
because a company can raise capital by issuing shares to a large number of
persons. Shares of small value can be subscribed even by people with small
savings. In addition, company can also raise loans from the public as well as
different lending institutions. Availability of necessary funds makes it possible
for a company to undertake business activities on a large scale.
(i) Limited liability: Another advantage of the company form of organisation
is the limited liability of members. With the liability of members limited to the
value of their shares, company is able to attract many people to invest in
its shares. It is thus in a position to undertake business ventures involving
risks.
(ii) Free transferability of shares: A company permits its members to transfer their
shares. Free transferability of shares provides liquidity of the member’s
investment. Thus, if a member needs cash he can sell his shares. Or, he can use
the same amount to buy shares of another more profitable company. It enables
profitable companies also to attract funds away from the less profitable ones.
(iii) Durability and stability: A company is the only form of organisation which
enjoys continuous existence and stability. The funds invested in a company by
shareholders are not withdrawal until it is wound up. Also any change in the
company’s membership does not affect its life. As a result of this, a company
can undertake projects of long duration and attract people to invest in the
business of the company.
(iv) Growth and expansion: With the large resources at its command a company
can organize business on a large scale. Once the business is started on a large
scale it gives the company strength to grow and expand. This is because of high
profits, which accrue from the economies of large-scale organisation and
production.
(v) Efficient management: Since a company undertakes large-scale activities, it
requires the services of expert professional managers. Competent managers can
be easily hired by a company because it commands large financial resources.
Thus, efficient management is ensured in a company organisation.
(vi) Public confidence: A company enjoys great confidence and trust of the general
people. Companies have to disclose the results of their activities and financial
position in the annual reports. The reports are available to the public. It is on
the basis of the annual reports and other information that investment is made in
companies.
(vii) Social benefits: Apart from the benefits mentioned above, a company
organisation also offers the following social benefits:
18
(a) Democratisation of management: In the company form of organisation,
management of business is entrusted to the elected representative of
shareholders; that is the directors. As a result of democratic management
the business of company is run in the best interest of the majority
shareholders.
(b) Dispersal of ownership: Since a large number of persons are associated with
a company as members, its ownership is widely held. Thus the benefits of
the company’s operations are distributed among a large section of people.
(c) Assumption of social responsibilities: Large companies often undertake
and contribute to social welfare activities by making donations to schools
and colleges, developing rural areas, running health-care institutions, and
so on.

Limitations of Company Organisation

A company organisation suffers from the following limitations:

(i) Lengthy and expensive legal procedure: The registration of a company is

a long-drawn process. A number of documents are to be prepared and filled.
For preparing documents experts are to be hired who charge heavy fees.
Besides, registration fees have also to be paid to the Registrar of Companies.
(ii) Excessive government regulations: A company is subject to government
regulations at every stage of its working. A company has to file regular
returns and statements of its activities with the Registrar. There is a penalty
for noncompliance of the legal requirements. Filing returns and reports
involving considerable time and money is the responsibility of a company.
All this reduces flexibility in operations.
(iii) Lack of incentive: The company is not managed by shareholders but by
directors and other paid officials. Officials do not have investment in the
company and also do not bear the risks. As such, they may not be as much
motivated to safeguard the interests of the company as the shareholders.
(iv) Delay in decision-making and action: In large companies, decision making
and its implementation happen to be a time consuming process. This is
obviously because individual managers are unable to take decisions on
their own. They may have to consult others which may take a lot of time. Similarly,
fter decisions are taken, they have to be communicated to people working at
various levels of the organisation. It also delays the implementation of
already delayed decisions.
(vi) Conflict of interest: A company is generally characterised by a large
organisation with many groups operating in it. So long as the interests of these
groups do not clash with each other they work for the good of the
organisation. But sometimes, individual and group interests become difficult
to reconcile. For instance, the sales manager may be interested in the quality
19
 of products to satisfy customers and increase sales, but the production
manager may be more concerned with maximum production without regard
to the product quality. In such a situation, the business is bound to suffer
in course of time unless there is a reconciliation of the conflicting view
points of the two managers.
(vii) Oligarchic management: The company management may seem to be
fully democratic, but in actual practice, it is the worst form of oligarchy i.e.
control by a small group of persons. People who are once elected as directors
of a company adopt various means to get themselves re-elected over and again.
Such individuals often exploit the company for personal interests instead
of working in the interest of shareholders.
(viii) Speculation: In speculation, profit is fought to be made by manipulating
prices of shares without actually holding shares. A company organisation
provides scope for speculation in shares by the directors. Because directors
have knowledge of all information about the functioning of Company, they
can use it to their personal advantage. For example, directors may sell or
buy shares knowing that prices will decline or go up because of low or
high profits. As a result of this, innocent shareholders may suffer loss.
(viii) Growth of monopolistic tendencies: A company because of its large size has the
tendency to grow into a monopoly so as to eliminate competition, control
the market and charge unreasonable prices to maximise profits. .
(ix) Influencing government decisions: Big companies are generally in a position
to influence government officials to make decision in their favour. This is
because such companies have large financial resources and are in a position
to bribe even high officials. From the preceding discussion it is clear that
the company form of organisation is best suited to those lines of business
activity which are to be organised on a large scale, require heavy investment
of capital with limited liability of members. That is why enterprises producing
steel, automobiles, computers and high technology products are generally
organised as companies.

Registration of a Corporation

Registration of a company is done by the Registrar of Companies. To register as a

corporation you need to produce two very important documents namely:

a) Memorandum of association – you should specify the details of the company

name, address and its objectives in trading. It is a legal document and can
only be done by people in the law.
b) Articles of Association – details out the internal arrangements of a company
including frequency of shareholder meetings and sharing of profits, how
the corporation is to be run, what would happen if one shareholder decides
to pull out of the business.
20
You take the two documents to the Registrar of Companies office for approval. You
are required to pay a certain fee (incorporation fee). The Registrar then gives you a
Certificate of Incorporation

2.2.4 Trust

Unlike a company, a trust is not a separate legal entity. Trusts are often used in con-
nection with running a business for the benefit of others. Trusts are often used in con-
nection with running a business for the benefit of others. A trust is a structure where a
trustee (an individual or company) carries out the business on behalf of the members
(or beneficiaries) of the trust. Family businesses are often set up as a trust so that each
family member can be made a beneficiary without having any involvement in how the
business is run.

Types of trusts

A trust is set up through a trust deed and there are two main types:

Discretionary Trusts

The trustee has discretion in the distribution of funds to each beneficiary. The most
common example is the family trust.

Unit Trusts

Unit trusts are recommended when more than one family is involved. The interest in
the trust is divided into units, similar to shares. Each unit holder may have a number
of units in the trust. Distribution from the trust is determined according to the number
of units held.

Importantly, trustees are legally liable for the debts of the trust. They can use the assets
of the trust to meet those debts. However, if there’s a shortfall, they are responsible for
covering the difference from their own resources.

The trust is not liable to pay tax. Tax is assessed to the trustee or to the beneficiaries that
are entitled to receive the trust net income.

Advantages and disadvantages of a trust

The following are the advantages and disadvantages of a trust

Advantages
i. Reduced liability - especially if corporate trustee.
ii. Asset protection.
21
iii. Flexibility of asset and income distribution.

Disadvantages

i. Can be expensive and complex to establish and administer.

ii. Difficult to dissolve, dismantle, or make changes once established
particularly where children are involved.
iii. Any profits retained to reinvest into the business, will incur penalty tax rates.
iv. Cannot distribute losses, only profits.

The table below summarizes the similarities and differences among the business
structures that have been explained so far.

22
2.2.5 Co-operative Organization

This section introduces another business organisation known as a cooperative

organisation. A co-operative form of business organization is different from other
forms of organization. It is a voluntary association of persons for mutual benefit and
its aims are accomplished through self- help and collective effort. The main principle
underlying a cooperative organization is mutual help, i.e., each for one and all for
each. A minimum of 10 persons are required to form a co-operative society in Malawi.
To be called a co-operative society it must be registered with the Registrar of Co-
operative Societies under the Co-operative Societies Act. In Malawi the Department of
Cooperatives is housed in the Ministry of Trade and Industry. The capital of a coopera-
tive Society is raised from its members by way of share capital. It can also obtain ad-
ditional resources by way of loans from the State and Central Co-operative Banks.

A Co-operative society has much in common with partnership, yet there are differences
between the two types of organisation. In partnership, mutual benefit is restricted to
partners only, but in a co-operative society it extends to its members as also the public.
For example in a consumer co-operative store or a co-operative credit society, the ben-
efits are available to the members as well as the general public. Besides, partnership
requires the existence of some business activity whereas a cooperative may be formed
whenever individuals have common needs, which are difficult to fulfil single-handed.
Also, registration is optional in the case of partnership but it is
compulsory for a co-operative society.

Type of Co-operative Societies

Co-operative societies may be classified into different categories according to the na-
ture of activities performed by them. The main types of co-operative societies are:

1. Consumers’ co-operative societies.

2. Producers’ co-operative societies.
3. Co-operative marketing societies.
4. Co-operative credit societies.
5. Co-operative farming societies.
6. Co-operative housing societies.

(a) Consumers’ co-operative societies: Consumer’ cooperatives are organised

by consumers to eliminate middlemen and to establish direct relations with the
manufacturers or wholesalers. These societies are formed by consumers
to ensure a steady supply of goods and services of high quality at reasonable prices.
It purchases goods either from the manufacturers or wholesalers for sale at
reasonable prices. The profit if any, is distributed among members as dividend
in the ratio of capital contributed and also bonus in proportion to the
23
 purchases made by them.

(b) Producers’ co-operative societies: Producers’ cooperatives are formed to

help the members in procuring inputs for production of goods or services. These
societies generally provide raw material, tools and equipment and other
common facilities to its members. This helps them to concentrate their
attention on production of goods. The society provides inputs to the members
and takes over their output for sale to outsiders. The basis for distribution
of bonus is the goods delivered for sale by each member.

(c) Co-operative marketing societies: Co-operative marketing societies are

voluntary associations of small producers, who find it difficult to individually
sell their products at a profit. The main purpose of such a society is to ensure
a steady and favourable market for the output of its members. The output
is pooled together and sold at the best price. The sale proceeds are distributed
in proportion to the contribution of the members to the pool. Marketing
co-operatives eliminate middlemen and ensure honest trading practices
in weighing, measuring and accounting.

(d) Co-operative credit societies: Such societies are formed to provide financial
help in the form of loans to members. The funds of these societies consist of share
capital contributed by the members and the deposits made by them and outsiders. The
funds are used in giving loans to needy members on easy terms. Thus, the members are
protected from the exploitation of moneylenders, who charge very high rates of inter-
est. Another important purpose of credit co-operatives is to encourage the habit of thrift
among their members.

(e) Co-operative farming societies: In co-operative farming societies, small farm-

ers join together and pool their resources for cultivating their land collectively. Their
objective is to achieve economies of large scale farming and maximising agricultural
output. Such societies are particularly important in the case of countries like India,
where agriculture suffers from excessive sub-division and fragmentation of land. Co-
operative farming makes it possible for members to use modem tools and equipments,
good seeds, fertilizer and irrigation facilities in order to achieve higher production.

(f) Co-operative housing societies: They are formed to provide residential accom-
modation to the members. They undertake the purchase and development of land and/
or construction of houses/flats on the land. Some housing co-operatives provide their
members with necessary loans at low rates of interest to build houses. These societies
are gaining popularity in big cities.

24
Characteristics of Co-operative Organisation

The following are the main characteristics of cooperative societies:

(i) Voluntary association: In co-operatives, the membership is voluntary. Anybody

having a common interest is free to join a co-operative society. The member can
also leave the society any time after giving proper notice.

(ii) Equal voting rights: In a co-operative society, the principle of one-man one
vote is adopted. A member has only one vote irrespective of the number
of share(s) held by him. Thus, a co-operative society is run on democratic
principles.

(iii) Separate legal entity: A co-operative society is required to be registered under

the Co-operative Societies Act. Registration provides it a separate legal entity.
Its existence is quite different from its members. The death, insolvency or
lunacy of a member does not affect its existence. It can sue and be sued in
its own name. It can make agreements as well as purchase and sell properly
in its own name.

(iv) Service motive: A co-operative society is based on the service motive of

its members. It’s main objective is to provide service to the members and not
to maximize profits. Earning profit is the most important objective of other
forms of business organisation. It is not so in the case of co-operatives.

(v) Distribution of surplus: Out of the profits of the cooperative, members are paid
dividend and bonus. The bonus is given according to the volume of business
transacted by each member with the co-operative society. For example, in a
consumer co-operative society, bonus is paid in proportion to the purchases
made by members during a year. In producers’ co-operative the valued goods
delivered for sale form the basis of distributing bonus.

Merits of Co-operative Organisations

The co-operative form of organisation offers the following advantages:

(i) Easy to form: A co-operative society is voluntary association and may be formed
with a minimum of ten adult members. Its registration is very simple and can
be done without much legal formalities.

(ii) Open membership: Membership in a Co-operative organisation is open to all

having a common interest. A person can become a member at any time he likes
and can leave the society by returning his shares without affecting its
25
 continuity.

(iii) Democratic management: A co-operative society is managed in a democratic

manner. It is based on principle of one man one vote. All members have equal
rights and can have a voice in its management.

(iv) Limited liability: The liability of the members of a cooperative society is

limited to the extent of capital contributed by them. They don’t have to
bear personal liability for the debts of the society.

(v) Stability: A co-operative society has a separate legal existence. It is not affected
by the death, insolvency, lunacy or permanent incapacity of any of its members.
It has a fairly stable life and continues to exist for a long period.

(vi) Economical operations: The operation of co-operative society is quite

economical due to elimination of middlemen and the voluntarily services
provided by its members.

(vii) Government patronage: Government gives all kind of help to co-operatives,

such as loans at lower rates of interest and relief in taxation.

(viii) Other benefits: Certain non-economic benefits are also derived by members
through cooperatives. Credit cooperatives, for instance, promote habits of thrift
and producers’ co-operative encourage joint activity among members.

Limitations of Co-operative Organisations

As against the above-mentioned advantages of cooperatives the following limitations

and drawbacks of this form of organisation must also be noted:

(i) Limited capital: Co-operatives are usually at a disadvantage in raising capital

because of the low rate of return on capital invested by members.

(ii) Inefficient management: The management of a cooperative society is generally

inefficient because the managing committee consists of part-time and
inexperienced people. Qualified managers are not attracted towards a
co-operative on account of its limited capacity to pay adequate remuneration.

(v) Absence of motivation: A co-operative society is formed for mutual benefit

and the interest of individual members are not fully satisfied. There is no direct
link between effort and reward. Hence members are not inclined to put in their
best efforts in a co-operative society.

26
(vi) Differences and factionalism among members: Once the initial enthusiasm
about the co-operative ideal is exhausted, differences and group conflicts arise
among members. Then it becomes very difficult to get full cooperation of the
members. The selfish motives of members begin to dominate and service
motive is sometimes forgotten. But the society continues because it functions
in the interest of members.

(vii) Rigid rules and regulations: Excessive government regulation and control over
Co-operatives affect their functioning. For example, a Co-operative society
is required to get its accounts audited by the auditors of the co-operative
department and submit its accounts regularly to the Registrar. These regulations
and control may adversely affect the flexibility of operations and the
efficiency of management in a co-operative society.

Guidelines for the formation of Cooperative societies in Malawi

According to the Cooperative act, at least ten people can be allowed to form a
Cooperative in Malawi. The group must express the common need for the formation
of the Cooperative. You can express your need for the Cooperative at the zone office
of the Ministry of Commerce and Industry. Upon satisfaction with the need having
conducted feasibility study, the Zone Officer writes the department of
Cooperatives recommending the formation of the Cooperative. The people in need of the
Cooperative are trained in the areas of Cooperative philosophy, ideology, management,
bookkeeping, law, and Cooperative principles. After being trained the department of
Cooperatives assists them in the establishment of the Cooperatives by putting in place
systems and structure. They are now required to register the Cooperative by applying to
the department of Cooperatives. The Chairperson, Secretary and Treasure have to sign.
The application has to be accompanied by three copies of by – laws.

In the by –law are the following

Membership eligibility requirement - who is eligible for membership

• Meetings – how often will they conduct their meetings

• Voting procedures in the meetings
• Election procedures for Directors and their duties
• Issues of finance – how to handle business losses
• Non-member business – procedures to be followed for non-member to do
business with the Cooperative
• Dissolution – what if the Cooperatives has to be dissolved
• Amendment of the by-laws

27
The application form must also be accompanied by the application fee paid to the
Registrar of Cooperatives in the department of Cooperatives within the Minis-
try of Commerce and Industry. Upon approval, the Registrar issues a Certificate of
Registration t which an attached acknowledged /certified by-laws (your by-laws
stamped), the Cooperative act and the government general receipt (for the registration
fee)

Steps in organizing Cooperatives

1) Determining the economic need - having identified the need during the first
meeting , discuss the following
a) Do you have the adequate information about the perceived need? You can’t
solve the problem you don’t understand.
b) Could the Cooperative effort address that need?
c) What information about Cooperatives is readily available?
d) Who can serve as an advisor to the Cooperatives
e) Who can be the beneficiaries of the Cooperatives?

A general/exploratory meeting has to be held where all concerned are heard.

1) Select a steering committee which will explore more on the issues raised during
the exploratory meeting. The committee should have an interest in the
Cooperatives and should also have sound business judgment. The steering
committee has 2 major roles:
a) To decide the feasibility of the Cooperative – to find if the Cooperative
will benefit the members.
b) To prepare a specific, detailed business plan for the proposed Cooperative.
The committee should consult specialist in business.

1) Conduct a member survey and market or supply analysis – To find the

individual need of the prospective member, where will they sell, who the
buyers will be. This is the duty of the steering committee. Convene a second
exploratory meeting where the steering committee presents their findings to
the people.
2) Prepare a full-fledged business plan – the plan defines the Cooperative’s
operations and other structural issues before the Cooperative is finalised.
3) Draft legal prepare for registration – convene another exploratory meeting
where every member of the Cooperative and should understand the by-laws.
After one year organises an annual general meeting where the by-laws are
approved and the Board of Directors is elected. Having formed the Board
of Directors, conduct a first board meeting to discuss issues of management –
who should be the manager, what qualifications need they to have, what will
be their salaries, how to implement the business plan, identify where and how
28
 to acquire capital.

Factors affecting the success of the Cooperatives

1) Clearly identify the economic need – keep in mind the problems you are trying
to solve
2) Reaching the agreement on the mission of the Cooperatives – work collectively
towards achieving the goal.
3) Develop a good leadership style
4) Gain the commitment of every member to do business with the Cooperatives
5) Follow sound business practices

2.2.6 Franchising

A Franchise is a business arrangement in which the owner of the trademark, trade name
or copyright has licensed others to use it in selling goods and services.
A Franchisee (a purchaser of a franchise) is generally legally independent on the
integrated business system of the Franchisor (A seller of the franchise). In other
words, a franchisee can operate as an independent business person but still realise the
advantage of a regional or national organisation.

Advantages of a Franchise to the Franchisee

i. Training and Guidance: Usually the franchisor provides training and guidance
to the franchisor on how the new business should be run. The franchisor
usually does this to safeguard his/her trade mark.

ii. Brand Name Appeal: Some franchises are so well known and popular among
the customers that if one buys such a franchise, one is likely to succeed. Some
brand names are known internationally, such as McDonalds, Shoprite etc.

iii. A proven Track record: Usually franchises are associated with trade names that
have already proven successful. The franchisor may have already proven that
the operation is successful.

iv. Financial Assistance: The franchisor may be able to help the new owner secure
financial assistance needed to run the operation. Some franchisors have
personally helped the franchisee get started by lending money and not requiring
any repayment until the operation is running smoothly.

v. Benefits from International Adverts: Some international brands are advertised

in international media and in so doing all franchisees associated with such a
brand are assisted.
29
vi. Economies of Experience may apply for example in knowing the marketing
techniques that have worked best for other franchisees.

vii. Economies of Scale may apply, for example in nationally agreed terms with
suppliers which takes into account of the total franchised business.

viii. Easier to obtain finance from financial institutions because statistically fewer
franchises fail than other types of businesses.
ix. Research and Development and market analysis are usually done by the
franchisor to keep abreast of the environmental changes.

Disadvantages of a Franchise to the Franchisee

(i) Franchise fees: Franchises are associated with fees and the amount of fees
depends on the nature of the franchise.
(ii) The control exercised by the franchisor: There is lack of independence since the
franchisor makes the rule which the franchisee has to follow.
(iii) Unfulfilled promises by some franchisors: Some franchisors may not fulfil
their promises in terms of training, financial and /or technical assistance.
(iv) Not your own creation: This is someone else’s idea, the franchisee is
implementing no creating.
(v) The franchise may not be suited to your area. For example, in a country where
people do not have the lifestyle of patronising fast food restaurants, ‘Hungry
Lions’ may not be a good franchise for that area.
(vi) The franchisor needs to ensure regular disclosures of information by the
franchisee to protect their loyalties and the franchise agreement. This can
become intrusive into the financial affairs of the franchisee.
(vii) The brand name of the franchisor can become a liability of things go wrong.
A national problem with the franchise can dramatically affect the franchise who
has no control over events.
(viii) The goodwill your business builds up is not entirely yours, as it is dependent
on a continuing franchise agreement. This could cause problems when you
decide sell the business.

Advantages of a Franchise to the Franchisor

Franchising is a way of expanding a small business into a big business in a relatively

short time.

Disadvantages of a Franchise to the Franchisor

i. Franchising inevitably means loss of control compared to a conventional outlet.

Franchisees are more independent than branch Managers
30
ii. Failure of one franchise through no fault of the franchisor can do considerable
damage to the reputation of the franchisor.

iii. The franchisor may take many obligations in the franchise agreement, such as
continuing commercial and technical assistance during the life time of the
agreement.

Franchise Contract

A contract is supposed to be signed between the franchisor and franchisee. The contract
contains a number of issues including the following:

o Specification of the buying price and any additional fees that may be required
o The territory to be served by the franchisee’s firm. Businesses serving the same
kind of franchise should not choke each other in the same territory.
o Specification of quality standards
o Date and conditions of termination of the franchise

What to Do before Buying a Franchise

Let us now look at some critical issues that need to be investigated before one decides
to get into a franchise. Franchising is associated with a number of risks. It is thus not
recommendable to rush into it. One has to take time to investigate the nature of the
franchise. The investigation has to cover the following issues:

(a) The character of the franchisor. Some franchisors may not have acceptable
moral character which they want potential franchisees to believe.
(b) The financial stability of his businesses. The franchisor must himself /herself
run commercially viable businesses in order generate trust to all his/her
stakeholder; including potential franchisees.
(c) The number of franchisees under the franchisor. The greater the number of
franchises under the franchisor, the more the likelihood of his sound
experiences in managing franchises.
(d) The number of the franchises that have failed and reasons for failure. This
information could generate lessons on whether to buy a franchise from a
particular individual or not.
(e) The financial standing of some of the existing franchisees. The business
performance of the existing franchises could tell a lot about the viability of
a franchise arrangement with a particular franchisor.
(f) The type of assistance that the franchisor will provide towards the operation
of the new franchise
(g) The price of the franchise. Franchises are not cheap. It is important to know the
franchise price to help make decision on whether to go ahead or not.
31
(h) The extra fees or loyalties which the franchisor will charge. All extra costs
associated with the franchise on offer must be investigated to minimise or
eliminate any risks of being surprised with unexpected bills from the
franchisor.

Unit Two Summary

In this Unit, you have learnt several different types of business organisations.
Specifically, you have learnt about Sole proprietorships, Partnership, Corporation,
Cooperative, Association, Franchise, Trust and Mergers and Acquisitions. For each
one of the business structures, you have learnt their characteristics, advantages and
disadvantages.

Activity 1.b
Self -Evaluation-Activity

Critically discuss the factors that influence the success of cooperatives.

32
 Unit Three:
Mergers and Acquisitions (M&A)
3.0 Introduction

An understanding of mergers and acquisitions as a discipline is increasingly important

in modern business. A glance at any business newspaper or business news web page
will indicate that mergers and acquisitions are big business and are taking place all the
time. As technology continues to develop, and as deregulation and globalization evolve,
the old barriers to trade and national influence become less and less of an obstruction
to international trade. In this context, mergers and acquisitions are likely to become an
even more important consideration in strategic planning and strategy implementation
in the future.

3.1 Unit Objectives

By the end of this unit, you should be able to:

1. Explain the concept of Mergers and Acquisitions
2. Explain the different forms of Mergers and Acquisitions
3. Examine the reasons companies Merge and Acquire
4. Evaluate the challenges associated with Mergers and Acquisitions

Key terms

You will find the following key words or phrases in this unit. Watch for these and make
sure that you understand what they mean and how they are used in the unit Mergers

• Mergers
• Acquisitions
• Consolidation
• Vertical Mergers
• Horizontal Mergers
• Conglomerate M&A

3.2 The Meaning of Mergers and Acquisitions

A merger or an acquisition in a company sense can be defined as the combination of

two or more companies into one new company or corporation. From a legal point of
view, a merger is a legal consolidation of two companies into one entity, whereas an
acquisition occurs when one company takes over another and completely establishes
itself as the new owner (in which case the target company still exists as an independent
33
legal entity controlled by the acquirer).

Mergers and Acquisitions (M&A) are both aspects of strategic business management,
dealing with the buying, selling, dividing and combining of different companies and
similar entities that can help an enterprise grow rapidly in its sector or location of ori-
gin, or a new field or new location, without creating a subsidiary, other child entity or
using a joint venture.

M&A can be defined as a type of restructuring in that they result in some entity
reorganization with the aim to provide growth or positive value. One form of M&A
is known as consolidation. Consolidation of an industry or sector occurs when wide-
spread M&A activity concentrates the resources of many small companies into a few
larger ones, such as occurred with the automotive industry between 1910 and 1940. In
a consolidation, neither of the previous companies remains independently.

The distinction between a “merger” and an “acquisition” has become increasingly

blurred in various respects (particularly in terms of the ultimate economic outcome),
although it has not completely disappeared in all situations. From a legal point of view,
a merger is a legal consolidation of two companies into one entity, whereas an acquisi-
tion occurs when one company takes over another and completely establishes itself as
the new owner (in which case the target company still exists as an independent legal
entity controlled by the acquirer). Either structure can result in the economic and finan-
cial consolidation of the two entities. In practice, a deal that is an acquisition for legal
purposes may be euphemistically called a “merger of equals” if both CEOs agree that
joining together is in the best interest of both of their companies, while when the deal is
unfriendly (that is, when the target company does not want to be purchased) it is almost
always regarded as an “acquisition”.

You may wish to remember that an acquisition or takeover is the purchase of one busi-
ness or company by another company or other business entity. Such purchase may be
of 100%, or nearly 100%, of the assets or ownership equity of the acquired entity.

Acquisitions are divided into “private” and “public” acquisitions, depending on

whether the acquiree or merging company (also termed a target) is or is not listed on a
public stock market. Some public companies rely on acquisitions as an important value
creation strategy. An additional dimension or categorization consists of whether an
acquisition is friendly or hostile.

Achieving acquisition success has proven to be very difficult, while various studies
have shown that 50% of acquisitions were unsuccessful. The acquisition process is
very complex, with many dimensions influencing its outcome. “Serial acquirers” ap-
pear to be more successful with M&A than companies who only make an acquisition
occasionally (see Douma & Schreuder, 2013, chapter 13).
34
Whether a purchase is perceived as being a “friendly” one or a “hostile” depends sig-
nificantly on how the proposed acquisition is communicated to and perceived by the
target company’s board of directors, employees and shareholders. It is normal for M&A
deal communications to take place in a so-called “confidentiality bubble” wherein the
flow of information is restricted pursuant to confidentiality agreements. In the case of
a friendly transaction, the companies cooperate in negotiations; in the case of a hostile
deal, the board and/or management of the target is unwilling to be bought or the target’s
board has no prior knowledge of the offer. Hostile acquisitions can, and often do, ulti-
mately become “friendly”, as the acquirer secures endorsement of the transaction from
the board of the acquiree company. This usually requires an improvement in the terms
of the offer and/or through negotiation.

The usual acquisition process usually involves a purchase of a smaller firm by a larger
one. Sometimes, however, a smaller firm will acquire management control of a larger
and/or longer-established company and retain the name of the latter for the post-acqui-
sition combined entity. This is known as a reverse takeover. Another type of acquisition
is the reverse merger, a form of transaction that enables a private company to be pub-
licly listed in a relatively short time frame. A reverse merger occurs when a privately
held company (often one that has strong prospects and is eager to raise financing) buys
a publicly listed shell company, usually one with no business and limited assets.

3.2.1 Structures of Securing Control of another company

There are also a variety of structures used in securing control over the assets of a
company, which have different tax and regulatory implications:

• The buyer buys the shares, and therefore control, of the target company being
purchased. Ownership control of the company in turn conveys effective control
over the assets of the company, but since the company is acquired intact as
a going concern, this form of transaction carries with it all of the liabilities
accrued by that business over its past and all of the risks that company faces
in its commercial environment.

• The buyer buys the assets of the target company. The cash the target receives
from the sell-off is paid back to its shareholders by dividend or through
liquidation. This type of transaction leaves the target company as an empty
shell, if the buyer buys out the entire assets. A buyer often structures the
transaction as an asset purchase to “cherry-pick” the assets that it wants
and leave out the assets and liabilities that it does not. This can be
particularly important where foreseeable liabilities may include future,
unquantified damage awards such as those that could arise from litigation
over defective products, employee benefits or terminations, or environmental
damage. A disadvantage of this structure is the tax that many jurisdictions,
35
 particularly outside the United States, impose on transfers of the individual
assets, whereas stock transactions can frequently be structured as like-kind
exchanges or other arrangements that are tax-free or tax-neutral, both to
the buyer and to the seller’s shareholders.

The terms “demerger”, “spin-off” and “spin-out” are sometimes used to indicate a
situation where one company splits into two, generating a second company which may
or may not become separately listed on a stock exchange.

As per knowledge-based views, firms can generate greater values through the
retention of knowledge-based resources which they generate and integrate.[6]
Extracting technological benefits during and after acquisition is ever challenging
issue because of organizational differences. Based on the content analysis of seven
interviews authors concluded five following components for their grounded model of
acquisition:

3.2.2 Challenges Associated with Acquisitions

1. Improper documentation and changing implicit knowledge makes it difficult

to share information during acquisition.
2. For acquired firm symbolic and cultural independence which is the base
of technology and capabilities are more important than administrative
independence.
3. Detailed knowledge exchange and integrations are difficult when the acquired
firm is large and high performing.
4. Management of executives from acquired firm is critical in terms of promotions
and pay incentives to utilize their talent and value their expertise.
5. Transfer of technologies and capabilities are most difficult task to manage
because of complications of acquisition implementation. The risk of losing
implicit knowledge is always associated with the fast pace acquisition.

3.2.3 Motivations for M&A

The dominant rationale used to explain M&A activity is that acquiring firms seek
improved financial performance or reduce risk. The following motives are considered
to improve financial performance or reduce risk:

• Economy of scale: This refers to the fact that the combined company can often
reduce its fixed costs by removing duplicate departments or operations,
lowering the costs of the company relative to the same revenue stream,
thus increasing profit margins.
• Economy of scope: This refers to the efficiencies primarily associated with
demand-side changes, such as increasing or decreasing the scope of marketing
36
 and distribution, of different types of products.
• Increased revenue or market share: This assumes that the buyer will be
absorbing a major competitor and thus increase its market power (by capturing
increased market share) to set prices.
• Cross-selling: For example, a bank buying a stock broker could then sell
its banking products to the stock broker’s customers, while the broker can
sign up the bank’s customers for brokerage accounts. Or, a manufacturer
can acquire and sell complementary products.
• Synergy: For example, managerial economies such as the increased
opportunity of managerial specialization. Another example is purchasing
economies due to increased order size and associated bulk-buying discounts.
• Taxation: A profitable company can buy a loss maker to use the target’s loss
as their advantage by reducing their tax liability. In the United States and many
other countries, rules are in place to limit the ability of profitable companies to
“shop” for loss making companies, limiting the tax motive of an acquiring
company.
• Geographical or other diversification: This is designed to smooth the earnings
results of a company, which over the long term smoothens the stock price of
a company, giving conservative investors more confidence in investing in
the company. However, this does not always deliver value to shareholders
(see below).
• Resource transfer: resources are unevenly distributed across firms (Barney,
1991) and the interaction of target and acquiring firm resources can create value
through either overcoming information asymmetry or by combining scarce
resources.[18]
• Vertical integration: Vertical integration occurs when an upstream and
downstream firm merge (or one acquires the other). There are several reasons
for this to occur. One reason is to internalise an externality problem. A common
example of such an externality is double marginalization. Double
marginalization occurs when both the upstream and downstream firms
have monopoly power and each firm reduces output from the competitive
level to the monopoly level, creating two deadweight losses. Following a
merger, the vertically integrated firm can collect one deadweight loss by setting
the downstream firm’s output to the competitive level. This increases
profits and consumer surplus. A merger that creates a vertically integrated
firm can be profitable.
• Absorption of similar businesses under single management: similar portfolio
invested by two different mutual funds namely united money market fund
and united growth and income fund, caused the management to absorb
united money market fund into united growth and income fund.
• Access to hidden or nonperforming assets (land, real estate).

37
3.2.4 Different Forms of M&A

The M&A process itself is a multifaceted which depends upon the type of merging
companies.

• A horizontal merger is usually between two companies in the same business

sector. The example of horizontal merger would be if a health care system buys
another health care system. This means that synergy can obtained through
many forms including such as; increased market share, cost savings and
exploring new market opportunities.
• A vertical merger represents the buying of supplier of a business. In the same
example as above if a health care system buys the ambulance services from
their service suppliers is an example of vertical buying. The vertical buying
is aimed at reducing overhead cost of operations and economy of scale.
• Conglomerate M&A is the third form of M&A process which deals the merger
between two irrelevant companies. The example of conglomerate M&A with
relevance to above scenario would be if health care system buys a restaurant
chain. The objective may be diversification of capital investment.[21]

3.2.5 Brand Considerations

Mergers and acquisitions often create brand problems, beginning with what to call
the company after the transaction and going down into detail about what to do about
overlapping and competing product brands. Decisions about what brand equity to write
off are not inconsequential. And, given the ability for the right brand choices to drive
preference and earn a price premium, the future success of a merger or acquisition
depends on making wise brand choices. Brand decision-makers essentially can choose
from four different approaches to dealing with naming issues, each with specific pros
and cons:

Keep one name and discontinue the other. The strongest legacy brand with the best
prospects for the future lives on. In the merger of United Airlines and Continental
Airlines, the United brand will continue forward, while Continental is retired.

1. Keep one name and demote the other. The strongest name becomes the
company name and the weaker one is demoted to a divisional brand or product
brand. An example is Caterpillar Inc. keeping the Bucyrus International name.
2. Keep both names and use them together. Some companies try to please
everyone and keep the value of both brands by using them together. This
can create an unwieldy name, as in the case of Price water house
Coopers, which has since changed its brand name to “PwC”.
3. Discard both legacy names and adopt a totally new one. The classic example
is the merger of Bell Atlantic with GTE, which became Verizon
38
 Communications. Not every merger with a new name is successful. By
consolidating into YRC Worldwide, the company lost the considerable value
of both Yellow Freight and Roadway Corp.

The factors influencing brand decisions in a merger or acquisition transaction can range
from political to tactical. Ego can drive choice just as well as rational factors such as
brand value and costs involved with changing brands.

Beyond the bigger issue of what to call the company after the transaction comes the
ongoing detailed choices about what divisional, product and service brands to keep.
The detailed decisions about the brand portfolio are covered under the topic brand
architecture.

Unit Three Summary

In this Unit, you have learnt the concept of Mergers and acquisitions. You have learnt
that from a legal point of view, a merger is a legal consolidation of two companies into
one entity, whereas an acquisition occurs when one company takes over another and
completely establishes itself as the new owner (in which case the target company still
exists as an independent legal entity controlled by the acquirer. You have also learnt the
various forms of M&E and the challenges associated with forms of businesses.

Activity 1-c
Self-Evaluation-Activity 1-c

Describe the following terms in your own words: (i) Vertical Merger (ii) Hostile
Takeover (iii) Merger of Equals.

39
 Unit Four:
Choice of Form of Business Organisation
4.0 Introduction

Having discussed the characteristics, merits, limitations of the various form of organi-
sation (sole proprietorship, partnership, co-operative and company organisation) we
may consider how to select most suitable form of organisation for a business venture.

4.1 Unit Objectives

By the end of this unit, you should be able to:

1. Explain factors that influence the choice of a business organisation

2. Choose the right business organisation for a business activity

Choice of a suitable form of organisation is important because the success and

growth of a business depends a great deal on it. The form of organisation determines
availability of finance, risk associated with business, division of profit, owners’
control, Stability and durability of business, and so on. Since business and
entrepreneurial objectives vary, no single form of organisation can be considered as
the best for all kind of business. The selection of a suitable form of organisation is
generally made after careful consideration of the following factors:

i. Scale of operations-manufacturing, trading, service;

ii. Scale of operations-volume of business (small, medium, large) and the market
area served (local, national, international). In this way, your vision regarding
the sizeand nature of your business should guide the form of business
organization that you can choose.
iii. Degree of risk and liability. If you want to bear all the risk and reliability,
a simple business structure would be appropriate such as sole proprietorship.
iv. Division of profit. If you want to get all the profits from the business, then a
sole proprietorship would be more appropriate.
v. Continuity of the business – certain forms of business are not long lasting e.g.
sole proprietorship, others are long lasting e.g. corporations
vi. Legal procedure. Some business structures have complicated legal procedures
to establish, register and even to dissolve.
vii. Management requirement – some business structures require special expertise,
such as corporations
viii. Degree of control desired by owner. If the owner wants full control of the
40
 business they would rather go for a sole proprietorship. If they can accept
multiple ownership of the business, the other business structures would have
to be considered.

It needs to be emphasized that these factors are inter-related and influence each oth-
er. For instance, the financial requirements of a business depend upon the nature of
business as well as the scale of operations. The establishment of an industrial enterprise
on a large scale would need greater outlay of the capital, than a small enterprise for the
same purpose. Similarly, the degree of risk and liability will depend both on the amount
invested and the nature of demand for the products of the enterprise. Thus, for a small
enterprise (say, a workshop or a grocery shop) the risk will be limited and so will be the
owner’s liability, even if his personal assets may be used to discharge business debts.
Control and sharing of profit are interconnected and both are related to the risk and li-
ability. If the risk and liability are not heavy, the entrepreneur would not like to give up
control and share profits with others.

Unit Four Summary

In this Unit, you have learnt the factors that influence the choice of business
organisations. You have learnt that the choice of a particular business organisation
depends on many factors such as scale of operations, degree of risk and liability,
division of profit and continuity of the business, just to mention a few. Entrepreneurs
should therefore examine their situation carefully before choosing an appropriate
business structure for themselves.

Activity 1-d
Self -Evaluation-Activity

Discuss FOUR factors that an entrepreneur should consider before choosing a

business legal business structure.

41
 Answers to all Unit Activities in the Module
Answers to Self Activity 1a

In your own words, define the term business in your own words.

There are many ways of defining a business. An organization or economic system

where goods and services are exchanged for one another or for money. It can also
be described as the activity of making, buying, and selling goods or services. Every
business requires some form of investment and enough customers to whom its output
can be sold on a consistent basis in order to make a profit. Businesses can be privately
owned, not-for-profit or state-owned.
Activity 1-a
Self -Evaluation-Activity .

In your own words, define the term business in no more than twenty words.

The regular production or purchase and sale of goods undertaken with an objective of
earning profit and acquiring wealth through the satisfaction of human wants.
Answers to Self Activity 1b
Critically discuss the factors that influence the success of cooperatives.
Your response should include the following:

a. Clearly identify the economic need – keep in mind the problems you are
trying to solve
b. Reaching the agreement on the mission of the Cooperatives – work
collectively towards achieving the goal.
c. Develop a good leadership style
d. Gain the commitment of every member to do business with the Cooperatives
e. Follow sound business practices
Answers to Self- Activity 1c
Describe the following terms in your own words: (i) Vertical Merger (ii) Hostile
Takeover (iii) Merger of Equals

You could describe these terms in the following ways:

A Vertical Merger is a merger between two companies producing different goods

or services for one specific finished product. A vertical merger occurs when two or
more firms, operating at different levels within an industry’s supply chain, merge
operations. Most often the logic behind the merger is to increase synergies created
by merging firms that would be more efficient operating as one.
42
A hostile takeover is an unfriendly acquisition attempt by a company or raider that is
strongly resisted by the management and the board of directors of the target firm.

A Merger of Equals is the combination of two firms of about the same size to form a
single company. In a merger of equals, shareholders from both firms surrender their
shares and receive securities issued by the new company
Answers to Self Activity 1d:
Discuss FOUR factors that an entrepreneur should consider before choosing a
business legal business structure

In your response you could choose any four of the following factors:

i. Degree of risk and liability. If you want to bear all the risk and reliability,
a simple business structure would be appropriate such as sole proprietorship.
ii. Division of profit. If you want to get all the profits from the business, then
a sole proprietorship would be more appropriate.
iii. Continuity of the business – certain forms of business are not long lasting e.g.
sole proprietorship, others are long lasting e.g. corporations
iv. Legal procedure. Some business structures have complicated legal
procedures to establish, register and even to dissolve.
v. Management requirement – some business structures require special
expertise, such as corporations

43
 References

Fellows, P.J. (1997). Guidelines for Small Scale Fruit and Vegetable Processors, FAO
Technical Bulletin #127, FAO Publications, Rome, Italy.

Kumwenda, I and Kachule R. (2003). Evolution and performance of farmer

organizations in Malawi.

Kuratko, D.F. and Hodgetts, R. M. (2001). Entrepreneurship: A Contemporary

Approach. Fifth Edition.

Longenecker, J.G.. Moore, C.W and Petty, J.W. (2003). Small Business Management:
An entrepreneurial emphasis(12e), Mason, OH: Thompson

Malawi Government (2003). Cooperatives Sector in Malawi. Needs and relevant

assessment for support.

Malawi Government (2002). Cooperative Societies Act and Cooperative Societies

Regulation. No 36, 1998.

Osborne, R.L. (1995). The essence of entrepreneurial success. Management Decision,

33(7):4-9.

Osterwalder, A and Pigneur, Y.(2010). Business Model Generation. Hobeken, NJ:

John Wiley and Sons.

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