Economic environment unit5

THE UGANDA INSTITUTE

OF BANKING &

FINANCIAL SERVICES

UIBFS

ISO 9001:2008 CERTIFIED

Introduction to Basic Economic Theory and Concepts

The Banking Economic Systems

Pricing and Price Mechanism

Inflation

The Government and Economy

Types of Business Organizations

MODULE COVERAGE

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International Trade and Regional Groupings


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The major forms of business organizations• Sole proprietorshipSole proprietors are unincorporated businesses. Independent/ individual contractors,

consultants, freelancers and most small retailers are sole proprietors. A soleproprietorship is a type of business entity which legally has no separate existencefrom its owner.

Advantages:1. Simplicity: It is easy to establish and dissolve the business; no documents are

needed and no legal formalities are required.2. Quick decision making: Does not need to consult anybody in deciding the business

affairs.3. A sole proprietor is his/her own boss: Are not controlled by anyone as it’s their

business.4. Books of Accounts: Doesn’t have an obligation to publish their books of accounts.5. Profits: In case the business succeeds, the business owner enjoys all the profits.6. Easy operation: Sole proprietors have full control over their businesses as there is

no outside interference. In this case, business operations may be carried out easily.7. No direct government control: In the absence of direct government control, there is

some freedom for action; flexibility.

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Disadvantages1. Loss incidence: In the event that the business makes a loss, a sole proprietor

bears all the risks and losses alone.2. Limited financial resources: A sole proprietor can raise limited financial

resources; hence the size of the business may remain small.3. Unlimited liability. The liability of a sole proprietor is unlimited, i.e., in case of a

loss, his private assets can be sold to pay off the business creditors.4. Uncertain business life. The life of the business depends upon the life of the

owner since he/she works alone.• PartnershipA partnership is a type of business entity in which would-be sole proprietors come

together to do business, and to share with each other the profits or losses of thebusiness.

Advantages:a. Ease of formation. It is easy to form as there are no cumbersome legal

formalities required.b. Larger financial resources, as a number of partners contribute to the capital of

the enterprise.

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c. Specialization; it enables the pooling of abilities and the judgment of differentpartners with varying skills.

d. Flexibility of operations; it enjoys sufficient flexibility in its day-to-day operations.The nature of the business can be changes whenever the partners desire.

e. Protection of minority interests; no basic changes in the rights and obligations ofpartners can be made without the unanimous consent of all the partners.

f. The capacity of the firm to survive is higher than that of a sole proprietorship,i.e., the business can continue even after the death of one partner.

Disadvantages:a. Unlimited liability, i.e., every partner is liable for the entire debts of the firm.b. Limited resources; the amount of financial resources is limited to the

contributions made by the partners due to inadequate access to loans.c. Lack of harmony. The success of the partnership depends upon mutual

understanding among the partners. Any disagreement may paralyze thebusiness.

d. Lack of continuity. A partnership may come to an end with the retirement,incapacity, insolvency or death of an active member.

e. Non-transferability of shares or interest. No partner can transfer his/her sharesin the firm to an outsider without the consent of all the partners.

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Disadvantages of Partnerships..

f. Partners will have to shareprofits of the business yetsome may not equallycontribute to its operations.

g. Joint responsibility may leadto delays in makingdecisions.

h. Decisions made by onepartner are binding to allother partners though theymay not be agreeable tothem.

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• Limited liability companyA limited liability company is a type of business ownership under which the owners

hold shares proportionate to their investment. Share certificates are issued by thecompany in return for capital contribution, and the shareholders are free totransfer their ownership interest at any time by selling their shares to others.Unlike the case is with sole proprietorships and partnerships, companies legallyhave a corporate personality separate from its owners. A company can be public orprivate.

A public company usually refers to a company that is permitted to offer its securities(stocks, bonds, etc.) for sale to the general public, typically through a stockexchange. Usually, the securities of a public company are owned by many investorswhile the shares of a private company are owned by relatively few shareholders.

Advantages of limited companiesa. Limited liabilities, i.e., shareholders of a company are liable only to the extent of

the face value of shares held by them.b. Large financial resources; it facilitates the collection of huge financial resources

due to a big number of shareholders. Continuity; a company enjoysuninterrupted business and life.

c. As a corporate body, it continues to exist even if all its members die.

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d. Transferability of shares; a member of a public limited company can freelytransfer his/her shares without the consent of other members.

e. Professional management; due to its large financial resources, it can employexpert managers with the required skills which leads to profitability.

f. Public confidence. A company can acquire public confidence since its operationsare regulated by the government under the Company’s Act.

g. It is a separate legal entity, i.e., it is separate from the owners, and hence can sueand can be sued on its own.

Disadvantages limited companiesa. It is difficult to form as a number of documents have to be presented to the

Registrar of Companies.b. Excessive government control in the form of rules and regulations, submission of

periodic reports, all which reduces the efficiency and flexibility of the business.c. Delay in decision making; there are many levels of management, which result in

unnecessary bureaucracy.d. Conflicting of interests; since there are many people involved, there is a

possibility of having conflicting of interests, for example between managementand shareholders.

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• Co-operative SocietyA co-operative is defined as an autonomous association of persons united voluntarily

to meet their common economic, social, and cultural needs and aspirations through a jointly owned and democratically controlled enterprise. A co-operative may also be defined as a business owned and controlled equally by the people who use its services or who work at it.

Advantagesa. Easy to raise a relatively large sum of money to start a big business.b. Enjoys limited liability facility.c. The business will benefit more people who will be sharing profits realised by the

co-operative.d. The business is free to employ managers with relevant experience and

qualifications.e. Shares control of the business.Disadvantagesa. Loss of personal interests in the business.b. Ownership of decisions made: Everyone will have to accept ideas and decisions

of the Board of Directors.c. Diminished personal direct responsibility on part of the members.

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Documents

Economic environment unit5