Form two-business-studies

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BUSINESS STUDIES FORM 2
NOTES

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TOPIC: FORMS OF BUSINESS UNITS
CONTENTS
• Introduction
• Sole proprietorship
• Partnership
• Co-operatives
• Limited liability companies
• Public corporations
INTRODUCTION
Forms of business units refers to types of business ownership which
includes the following:
• Sole proprietor
• Partnerships
• Co-operatives
• Limited liability companies
• Public corporations
• Parastatals
Business units can further be classified on the basis of their legal status
into two, namely:
a) Unincorporated business organisations
b) Incorporated business organizations
a) Unincorporated business organizations
This are those business units which the law has no or little control over
their formation, ownership and operations. There is no formal certificate of
registration required to form these business units. They may include
partnerships and sole proprietorships.

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b) Incorporated business units
These are business units where there is legal control over their formation,
ownership and operation.
These business are allowed to start operations after complying with all
legal requirements.
Examples are limited liability companies, co-operative societies and public
corporations
Differences between incorporated and unincorporated business
organisations
Unincorporated business
organisations
Incorporated business
organisations
There are no legal procedures to
be followed during their
formation
Legal procedures have to be
followed during their formation
The business is not a separate
legal entity
The business is a separate legal
entity
All transactions are conducted in
the name of the owner(s)
All transactions are conducted in
the name of the business
The owners have unlimited
liabilities
The owners have limited
liabilities
They lack perpetual existence They have perpetual existence
The business tends to be small in
size due to limited capital
The business tends to be large in
size due to the ability to raise
more capital
SOLE PROPRIETORSHIP
Ownership
This is a form of business unit which is owned by one person. This person
is known as a sole trader or a sole proprietor.

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Sole proprietorships are the most common forms of business units. They
mostly operate in retail and wholesale trade.
Formation
Formation of a sole proprietor is very simple since it requires very few
legal formalities.
In Kenyan, one only is required to apply to the local authority and if the
application is approved, he is issued with a trade license after paying the
trade license fee. The trade licence gives him the permission start his
business
Management
Management of a sole proprietorship is done by the owner. The owner
may however get assistance from his family members or employ other
people to assist him in managing the business.
The sole proprietor remains responsible for the success and failure of the
business
Capital
The amount of capital required to start a sole proprietorship is relatively
small compared to other forms of business units. The owner can raise
capital through the following sources:
• Owners’ savings (main source)
• Inheritance
• Grants and donations from friends and relatives
• Buying on credit
• Ploughing back profits
• Leasing and renting of property
• Borrowing from friends, banks and other financial institutions.
NOTE: The amount of capital borrowed depends on the following factors:

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• Whether the lender has funds to loan out
• The amount of interest to be charged on borrowed capital
• Ability of the borrower to repay the loan together with interest
• Whether the amount of money borrowed will serve the intended
purpose
Advantages of sole proprietorship
a) Requires fewer legal formalities to start hence reducing formation
costs
b) Decision making is faster since the sole proprietor does not consult
anybody
c) The owner exercises direct control over the business at all time
d) The owner enjoys close contact with his customers enabling him
cater for their individual needs
e) Direct contact with customers enables the owner to assess the credit
worthiness of his/her customers in order to know whom to allow
credit so as to avoid losing money through bad debts
f) The trader is accountable to himself
g) The sole trader is able to keep the top secrets of his/her business
h) The trader enjoys profits alone
i) The trader can get assistance from family members to run the
business
j) Requires less amount of capital to start
k) The owner works to his level best because he is accountable to
him/herself
l) The business is flexible i.e. it can switch from one line of trade to
another
Disadvantages of sole proprietorship
a) The business has limited liabilities. This means that in case business
assets are not enough to pay business debts, personal property of the
owner may be sold to repay the debts

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b) Expansion of the business may be limited due to scarcity of capital
c) The sole trader may overwork himself leaving him/her with little
time for leisure
d) The owner suffers all losses and risks alone
e) Lack of specialisation leads to poor performance. This is because one
person may not manage all the aspects of the business effectively
f) Death of the owner may lead to the collapse or poor performance of
the business
g) The owner may not enjoy benefits enjoyed by large scale business
such as easy access to loans
h) Lack of consultation may lead poor decision making
Dissolution
Dissolution refers to bringing a business to an end.
A sole proprietorship may be dissolved under the following circumstances
• If the owner decides to dissolve the business
• In case of death, insanity or bankruptcy of the owner
• In case the intended purpose is accomplished
• If the court orders the business to dissolve
Features of a sole proprietorship
a) It is owned and managed by one person
b) The owner is responsible for all the debts of the business
c) The owner provides capital to start the business
d) The business lacks a separate legal entity status i.e. the owner and the
business are regarded as one
e) The owner has unlimited liabilities
f) The owner enjoys all profits
g) The owner makes all decisions affecting his/her business
h) The owner bears all losses alone
i) Mostly, the business is smaller in size

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Circumstances under which sole proprietorship is appropriate
a) When the investor has limited capital
b) When the size of the market is small
c) When there is need to retain control over the business
d) When the investor would like to give personalized services
Role of a sole proprietorship in the economy
a) Creates employment to oneself and to others
b) Enables the utilisation of local natural resources
c) Provides revenue to the government in form of taxes
d) Helps in bringing goods and services closer to the people
PARTNERSHIP
Ownership
A partnership is a business unit which is owned by more than one person.
The people who own a partnership are known as partners.
A partnership is owned by a minimum of 2 partners and a maximum of 20,
except for partnerships which provide professional services such as law,
medicine, auditing, banking etc. which have a maximum of 50 partners.
Classification of partnerships
Partnerships may be categorised in either of the following ways:
• According to the type of partners
• According to the period of operation
a) According to the type of partners
When classified according to the type of partners, partnerships can either
be general or limited.
General partnership: in a general partnership, all members have
unlimited liabilities. This means if partners are unable to repay all business

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debts from the available business assets, personal property of the partners
will be sold to repay the debts
Limited partnership: in a limited partnership, partners have limited
liabilities. This means that if partners are unable to repay business debts
from the available business assets, partners only loose the capital they
contributed to the business but not their personal property.
NOTE: in a limited partnership, there must be one partner whose liabilities
are unlimited
b) According to period of operation
When classified according to the period of operation, partners can either
be temporary or permanent.
Temporary partnership: these are partnerships which are formed to
accomplish a specific objective after which they are dissolved. These
partnerships are also known as joint ventures.
Permanent partnerships: these are partnerships which are formed to
operate indefinitely
Types of partners
Partners may be classified according to the role they play, their liabilities,
their age and their capital contribution as discussed below
a) Role played by the partners
Partner can either be active or dormant. An active partner is the one who
plays an active role in the running of the business while a dormant partner
does not play an active role in the running of the business
A dormant partner is also known as a sleeping, passive or silent partner
b) Liabilities of the partners

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When classified according to their liabilities, partners can either be general
or limited. Limited partners have limited liabilities while general partners
have unlimited liabilities.
c) Age of partners
According to their ages, partners can either be min or major. A minor
partner is the one who is below 18 years. A minor partner only takes part
in the sharing of profits but cannot participate in the day to day running of
the business until he/she attains the majority age ( 18 years and above). A
major partners is the one who is above 18 years.
d) Capital contributions
When classified according to their capital contributions, partners can be
real or nominal. A real partner is the one who has contributed capital to the
business while a nominal partner is the one who does not contribute capital
to the business but allows the business to use his/her name for prestige in
order to attract customers.
A nominal partner may also be a person who retired from the partnership
but left his/her in the business in form of a loan which earns him interest
from the partnership at an agreed rate.
A nominal does not take part in the sharing of profits.
A nominal partner is also known as a quasi-partner.
Formation
When forming the partnership, partners have to agree on how the business
will be operated in order to avoid misunderstanding amongst themselves.
The agreement among partners is known as a partnership agreement.
The partnership agreement can either be oral or in writing. When it is in
writing, the partnership agreement is known as a partnership deed.
The partnership deed contains the following:

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• Name of the partnership
• Address of the head office
• Location and area of operation of the partnership
• The term of the partnership ( whether temporary or permanent)
• The objectives of the business
• Amount of capital contributed by each partner
• Rate of interest on capital
• Drawings by partners and the rate of interest on drawings
• Salaries and commissions to partners
• Rate of interest on loans from partners to the business
• Procedures of dissolving the partnership
• Profit/loss sharing ratio
• Means of solving conflicts between partners
• Methods of valuing goodwill on the admission or retirement of a
partner
Once the partnership agreement is ready, the business can be registered by
the registrar of companies upon payment of the registration fee.
The name of the partnership should be different from the surnames of the
individual partners.
NOTE: in case the partnership deed has not been drawn or is ambiguous,
the contents of the partnership act of 1963 will apply. These contents are:
• All partners should contribute equal amount of capital
• No salary is to be paid to any partner
• No interest is to be allowed on capital
• No interest is to be charged on drawings
• All profits and losses are to shared equally
• Every partner has the right to inspect the books of account
• Every partner has a right to take part in decision making
• Interest must be paid on all loans advanced to partners

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• When the partnership is dissolving, external debts are paid first,
followed by loans from partners and lastly partners’ capital
• No partner should carry out competing business
• Any major change in the business such as the admission of a new
partner must be agreed upon by all the partners
• Partners should be compensated for the losses they incur while
executing duties of the business
Management
All partners share the responsibility of managing the business. This is done
by assigning different areas of management to partners based on their
specialities
Partners may also employ specialized personnel to manage the business on
their behalf especially when the business is too large or when the partners
are ignorant on how the business should be managed
Partners who take play an active role in the management of the business
are major, real and general partners. Minor, quasi and limited partners do
not play an active role in the management of the business. They are
however allowed to access the books of account and to offer advice to
active partners
Sources of capital
• Contributions by partners
• Loans from banks and other financial institutions
• Buying on hire purchase
• Buying goods on credit
• Ploughing back profits
• Leasing and renting property
Advantages of partnerships
a) Capital raised is higher

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b) Workload is reduced since work is distributed among partners
c) Losses are risks are shared
d) Requires fewer legal formalities to start compared to companies
e) Consultation in decision making results in good decisions
f) Combining of different talents in management results in efficient
management
Disadvantages of partnerships
a) A mistake made by one partner results in losses that are shared by all
partners
b) The liability of some partners is unlimited
c) Continued disagreements among partners may lead to dissolution
d) Decision making process may be slow since all partners have to be
consulted
e) Actions taken by any partner in good faith on behalf of the business
are binding to all other partners
f) Retirement or death of a partner may adversely affect the partnership
in case the business heavily relied on that partner
g) Compared to limited companies, partnerships have limited access to
major sources of capital
h) Lack of a variety of managerial skills especially when partners
manage the business alone
i) A hard working may not be rewarded for his/her hard due to the fact
that profits realised from efforts are shared
Dissolution
A partnership may come to an end under the following circumstances
a) If the partners mutually agree to dissolve
b) In case of death, insanity or bankruptcy of the main partner(s)
c) In case of the completion of the intended purpose or end of the
agreed time
d) If the court orders the business to dissolve

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e) When one of the partners requests for a dissolution in writing
f) If the business engages in unlawful activities or in activities that have
been rendered illegal by a change in law
g) In case of retirement or admission of a new partner, the partnership
may be dissolved temporarily or permanently
h) In case of continued disagreements among partners
Features of a partnership
a) Formed and owned by 2-20 people in the case of ordinary
partnerships and 2-50 people in te case of partnerships offering
professional services
b) Capital is mostly contributed by partners
c) The business is managed by partners
d) The business lacks legal entity status.
e) Partners have unlimited liabilities
f) Profits are shared
g) Losses are shared
h) Each partner can act as an agent of the business
i) Business decisions are made jointly
CO-OPERATIVES
A co-operative society is a group people who come together mainly to
provide convenient and efficient services to members.
Co-operatives are also formed in order to eliminate middlemen so that all
profits goes to members.
Co-operatives are formed by people who have common interests and
problems.

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The idea behind the formation of co-operatives is the need to pool together
individuals’ scarce resources so as to achieve common goals more
efficiently.
Ownership
Co-operative societies are owned by more than 10 adults who register as
members upon payment of a non-refundable membership fee
Members are further expected to buy shares in the co-operative. The value
of each should not be less than Ksh 20.
No single member should own more than 5% of the co-operative’s shares
capital. This is to ensure that the co-operative is not controlled by a single
member.
Membership to a co-operative is open and voluntary. This means that any
member of the public can join the society provided he shares the common
of objective as that of the society. The member can also leave the society
at will.
Members also have limited liabilities
Formation
Co-operative societies are formed by people who are above 18 years
irrespective of their social, economic or political background.
The number of members required to form a co-operative should not be less
than 10.
The atleast 10 members will draft rules and regulations to govern the
operations of the co-operative. These rules and regulations are known as
by-laws. The by-laws are submitted to the commissioner of co-operatives
for approval. Upon approval, the commissioner registers the co-operative
and issues it with the certificate of registration to enable it commence its
operations.

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NOTE: in case of failure by members to draft their own by-laws, the co-
operative societies’ act of 1996 can be adopted in part or whole
Management
A co-operative society is managed by a committee elected by members in
a general meeting. The committee consists of nine members.
The management committee then elects the executive committee members
i.e. the chairman, treasurer and the secretary amongst themselves.
The committee acts on behalf of members i.e. it can enter into contracts,
borrow money etc. on behalf of the society. The committee also educates
the members on their responsibilities by organising seminars.
The committee holds regular meetings to discuss matters affecting the co-
operative society.
The co-operative society can also hire professionals to assist in managing
the society.
The management committee members are not paid salaries for their
services to the society. Instead they are allowed sitting allowances and
honoraria in accordance with the guidelines of the commissioner of co-
operatives.
Where the committee fails to perform as expected, it can be voted out by
members in a general meeting or be dismissed by the commissioner of co-
operatives
Sources of capital
a) Membership contributions in the form of registration fee and share
capital contribution
b) Retained profit (earnings)
c) Interest on loans to members
d) Investment income
e) Acquiring property on credit or hire purchase

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Dissolution
A co-operative society may be dissolved under the following
circumstances:
a) In case of a court order
b) In case of an order from the commissioner
c) In case of a decision by members to dissolve the society
d) In case of withdrawal of members from the society leaving less than
ten members
e) In case the society is declared bankrupt
PRINCIPLES OF CO-OPERATIVES
These are rules and regulations which govern the operations of co-
operative societies. These principles are discussed below:
a) Principle of open and voluntary membership
Membership to a co-operative society is open to any member of the public
provided he shares the same objectives as the other members of the
society.
b) Principle of democratic administration
A co-operative society is managed on the basis of one man one vote. This
ensures that all members have an equal say in the running of the co-
operative
c) Principle of limited interest on share capital
Members earn interest or dividends on their share capital and savings.
These interest or dividends calculated on a percentage which is determined
by the income earned by the society for the year.
d) Principle of co-operation with other co-operatives

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A co-operative society is required to co-operate with other co-operatives
of the same level so as to learn from one another
e) Principle of education to members
A co-operative society should continuously educate their members on their
rights and responsibilities. This is done through organised seminars.
f) Principle of provision of dividends to members
Co-operatives are required to pay members dividends on their share capital
at a given rate.
TYPES OF CO-OPERATIVE SOCIETIES IN KENYA
In Kenya, co-operative societies are classified according to the nature of
their activities or according to the levels of operation
Classification according to the nature of their activities
When classified according to the nature of their activities, co-operative
societies can be categorised into:
a) Producer co-operatives
b) Consumer co-operatives
c) Savings and credit co-operative societies
a) Producer co-operative societies
A producer co-operative society is an association of producers who have
come together to improve the production and marketing of their products.
Functions (advantages) of producer co-operative societies
• Obtaining better prices for members’ products
• Providing better storage facilities for members’ products
• Providing affordable means of transporting members’ products to the
market
• Providing loans to members
• Grading, packing and processing products for members

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• Providing farm inputs on credit to members
• Educating members on better production methods
Examples of producer co-operative societies in Kenya are:
• Kenya co-operative creameries (KCC)
• Kenya planters co-operative union (KGGCU)
• Kenya grain growers co-operative union (KGGCU)
b) Consumer co-operative societies
These are formed by a group of consumers who come together and set up
shops from where they can buy goods of better quality more conveniently.
These co-operatives buy goods directly thereby eliminating middlemen i.e.
retailers and whole salers. As such they are able to sell goods to members
at relatively lower prices.
These co-operatives mostly deal in goods of general consumption e.g.
milk, grocery etc.
Members of the public are also allowed to buy from the society at normal
prices hence enabling the society make more profit.
Profit made by these co-operatives is shared by members in the ratio of
their purchases from the society
Examples of consumer co-operative societies in the Kenya are:
• Nairobi consumer co-operative union
• Railways co-operative society etc.
Advantages of consumer co-operative societies
a) They sell goods of high quality to members
b) They sell goods to members at lower prices
c) They sell goods to the public at normal prices thereby making more
profit
d) They give credit facilities to members

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e) They buy goods directly from producers hence eliminating
middlemen. This enables them make more profit
f) They may pay interest on members’ capital
g) They avail a variety of goods to members
h) They ensure constant supply of goods to members
i) They protect members against exploitation by traders
Disadvantages of consumer co-operative societies
a) They face stiff competition from large scale retailers who buy goods
directly from producers and sell them directly to consumers at lower
prices
b) They may not afford to employ qualified staff
c) They may not raise adequate capital due to the fact that majority of
its members are low income earners.
d) Subsistence production, makes them unpopular
e) Consumer shops may be mismanaged
c) Savings and credit co-operative societies (SACCOs)
These are co-operative societies which are formed with the objective of
enabling their members save money and access loans.
They are mostly attached to the employer i.e. the employer deducts part of
the employee’s earns on a monthly basis (check off system) and remits the
money to the society.
SACCOs have become very popular in Kenya especially due to the check
off system and due to the fact that they offer loans at lower interest rates
Examples of SACCOs in Kenya include:
• Mwalimu SACCO
• Stima SACCO
• Mhasibu SACCO etc.

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Advantages of SACCOs
a) Profits made by SACCOs are distributed to members in form of
dividends
b) They enable members to save
c) Enable members access loans at lower interest rates
d) In case a member dies, the outstanding loan is written off
e) They offer variety of loans to members e.g. school fees loans,
development loans, emergency loans etc.
f) In case a member dies, the beneficiaries are entitled double his share
contribution
g) Easy access to loans since it requires few formalities
h) They offer education to members on co-operative activities, their
rights and obligations
i) They may offer banking services through their front offices
j) Members are paid dividends on their share contributions
k) They insure members’ contributions and loans
l) They pay interest to members on their savings
Disadvantages of SACCOs
a) They may not have enough finances at their disposal to cater for the
needs of all their members
b) Continued default on loan repayment may cripple the society
financially
c) They face stiff competition from well-established financial
institutions
d) They may be mismanaged
e) They may be subjected to misappropriation of funds
Reasons for the popularity of SACCOS
a) They provide easy access to loans since very few formalities are
required
b) They offer loans at relatively lower interest rates

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c) They offer a variety of loans to their members
d) In case a member dies, the outstanding loan is written off
e) In case a member dies, his/her beneficially are entitled to double the
amount of his capital contribution
f) Channelling members’ share capital contributions through a check
off system
Classification according to level of operation
When classified according to the level of operation, co-operatives may
be categorised into two, namely:
• Primary co-operative societies
• Secondary co-operative societies
a) Primary co-operative societies
These are co-operative societies which are composed of individuals who
are either actual producers, consumers or people who come together to
save and obtain loans more conveniently
Most primary co-operative societies operate at village and district levels
though a few of them operate at national level
Most consumer co-operatives societies and most SACCOs are primary co-
operative societies since their membership is composed of individuals.
b) Secondary co-operative societies
These are co-operative societies which are composed of primary c0-
operative societies as their members.
They are also known as unions.
They are found either at district or national level.
NOTE: all co-operative societies in Kenya are under the Kenya federation
of co-operatives
Advantages of c-operative societies

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a) They serve the interests of members more effectively
b) They provide services to members more cheaply
c) Profits made by the society are shared among members in form of
dividends or interest
d) Management is democratic.
e) They enable members increase their incomes and their living
standard by giving them loans
f) They continuously educate their members on their rights,
responsibilities and the investment opportunities available
g) They offer credit facilities to their members e.g. in the form of farm
inputs
h) Membership is open and voluntary
i) Members have limited liabilities
j) They eliminate exploitation of members by middlemen. This is done
by buying directly from the producer and selling to their members.
k) The government through the ministry of co-operatives may step in to
assist them whenever they are in financial crisis
l) They offer loans to members at lower interest rates
m)Any member can be elected to the management committee.
Disadvantages of co-operatives
a) Some co-operatives have lesser capital hence they cannot benefit
from economies of scale
b) They may be poorly managed due to lack of trained personnel
c) Withdrawal of members from the society may create financial
problems since their capital contributions are refunded
d) They may suffer from political interference
e) They may subjected to corruption and embezzlement of funds
f) Some members may not be keen on the management of the society
since their capital contribution is small.
Problems facing co-operative societies

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a) Poor management
b) Financial problems
c) Low interest on members’ deposits discourages their participation
d) Low share capital
e) Lack of co-operative education and awareness among potential
members
f) Political interference
Features of co-operative societies
a) They separate legal entities
b) Members have limited liabilities
c) They can sell shares to the public
d) Membership is free and voluntary
e) All members are equal i.e. all have one vote irrespective of the
number of shares one owns
f) One member cannot own more than 5% of the society’s shares
g) Managed by an elected committee
h) Profits are shared amongst members in the form of dividends
i) Formed a minimum of 10 people and maximum
LIMITED LIABILITIES COMPANIES
A company is an association of persons who contribute capital in order to
carry out business with the aim of making profit.
A company is viewed by law as a separate legal entity separate from the
members who form it, therefore death, insanity, bankruptcy or retirement
of some of its members does not affect its continuity.
The members (owners) of a company are known as shareholders.
A company is regarded by the law as an artificial person, hence just like
natural persons, it can own property, enter into contracts, sue and be sued
in a court of law in its own name.

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A company unlike natural persons can only engage in those activities
which it is authorised to engage in by terms of its registration (acting intra
vires). E.g. a company registered to offer transport services cannot offer
banking services. A company which engages in activities which it is
registered to engage is said to acting against the law (ultra vires)
Formation
The people who come together to form a company are known as
promoters.
When forming the company, promoters are expected to come up with the
following documents
• The memorandum of association
• Articles of association
a) Memorandum of association
This is a document which defines the relationship between the company
and the outsiders.
Contents of the memorandum of association
Information contained in the memorandum of association is divided into
subsections known as clauses. These are discussed below
a) Name clauses
In contains the name of the company. This name must end with the word
limited (Ltd) which indicates that the liabilities of the company are
limited.
Some companies have their names ending with the initials PLC which
stands for public limited company. This indicates that it is a public
company and not a private company.

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b) The objects clause
The objects clause stipulates the activities the company should engage in.
the company is therefore not authorised to engage in any other activity
other than the one indicated in its objects clause.
The objects clause serves as a warning to the public that the company is
only authorised to engage in the stated activities only.
c) Situation clause
The situation clause indicates the location of the registered office of the
company where official communication can be sent to or received from.
d) Liability clause
This is clause which informs members of the public that the liabilities of
the members of the company are limited
e) Capital clause
This clause indicates the amount of capital the company is required to
raise and the subdivision of this capital into smaller units of equal value
known as shares.
The amount of capital indicated in the capital clause is known as the
authorised share capital, registered capital or nominal share capital.
This clause also specifies the types of shares and the value of each share
f) Declaration clause
This is a declaration which is signed by the promoters stating that they
wish to form the company and buy shares in the company.
The declaration should be signed by a minimum of seven promoters in the
case of a public limited company and a minimum of two in the case of a
private company.

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NOTE: the memorandum also contains the names of the promoters, their
addresses, occupations and the number of shares they intend to buy. Each
promoter must sign against his/her details.
b) Articles of association
This is a document which governs the internal operations of the company.
It contains rules which govern the conduct of shareholders in relation to
each other and to the company.
Contents of the articles of association
a) Rights of type of shareholders e.g. voting rights
b) Methods of calling meetings e.g. a notice must be given to each
shareholder before a meeting is called
c) Rules governing the election of officials e.g. the chairman, directors
and auditors
d) Rules regarding the auditing of account
e) A list of directors with details of their names, addresses, occupations,
number of shares they have bought and the statement of agreement to
serve as directors.
f) A declaration that registration requires as laid down by the law have
been met. The declaration must be signed by a lawyer, secretary or a
director
g) A statement signed by directors stating that they have agreed to act
as directors
Once the above documents are ready, they are submitted by the promoters
to the registrar of companies for approval. If the registrar is satisfied that
the documents are correct, he will issue a certificate of registration
(certificate of incorporation) to the company upon payment of a
registration fee.
The certificate of incorporation makes the company a separate legal entity
from its members.

Page 27 of 198
Sources of capital
a) Issue of shares
This is the main source of capital for a company. A share is a unit of
capital for a company.
Example
A company may state its share capital as Ksh 10,000,000. But because it
cannot raise all this capital from one person, they subdivide this capital
into affordable units of equal value say Ksh 10 each. Each of these units is
known as a share. Therefore the company will be said to have 1,000,000
shares. A person becomes a member (shareholder) by buying shares in the
company.
Shareholders are entitled to a share of profits of the company. This share
of profits are known as dividends.
Each share is given a number. However after all shares of a given class
have been sold and fully paid for, they do not require numbering hence
they are grouped together into to bigger units known as stocks. A company
that deals in stocks in known as a joint stock company.
Types of shares
There are two types of shares.
• Ordinary shares
• Preference shares
1) Ordinary shares (equity shares)
These are shares which have the following rights (features)
• They have voting rights
• They have no fixed rate of returns (dividends). The dividends paid to
ordinary shareholders depends on the profits made by the company
• They have a claim to dividends after preference shares

Page 28 of 198
• They are paid last when the company is liquidated (dissolved)
Benefits of raising capital through sale of ordinary shares
a) The company acquires permanent capital as ordinary shares are not
redeemable
b) The company is not obliged to pay dividends to ordinary
shareholders
c) Rate of dividends on ordinary shares is not fixed since it is
determined by realised profits
d) Ordinary shareholders are paid last when the company is winding up
e) Ordinary shares require no security
2) Preference shares
These are shares with the following rights (features)
• Have a fixed rate of dividends
• Have a claim to dividends before ordinary shares
• Have no voting rights
• Can be redeemable or irredeemable: To redeem means to buy
back. Therefore redeemable shares are the ones that can be bought
back by the company at a future date whereas irredeemable shares
cannot be bought back by the company.
• Can be cumulative or non- cumulative: to cumulate means to
increase by adding. Cumulative shares therefore are the ones whose
dividends keeps accumulating until they are paid. This means that if
the company makes a loss or a profit that is not enough to pay
dividends owing to cumulative preference shares in the current year,
such dividend will be carried forward to the next year (s) when
enough profits will be made. Non- cumulative shares are the ones
whose dividends are not carried forward to future years i.e. they are
only entitled for dividends in the year when dividends are declared.
3) Debentures
A debenture is a loan from the public to the company.

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A debenture may also refer acknowledgement of a debt by a company.
Debenture being loans carries interest at fixed rates which must be paid
whether the company makes profit or not. Debentures are issued to the
public the same way as shares
Types of debentures
a) Redeemable debentures
These are debentures that can be bought back by the company within a
specified future date
b) Irredeemable
These are debentures that cannot be bought back by the company. They
can however be redeemed when the company is being dissolved
(liquidated)
c) Mortgage ( secured) debentures
To mortgage means to attach property as security. Mortgage debentures
are therefore the ones to which company property is attached (pledged) as
security.
d) Naked (unsecured)debentures
These are debentures to which no security is attached. They are treated the
same way creditors are treated in the event that the company is being
liquidated.
Differences between shares and debentures
Shares Debentures
A share is a unit of capital in a
limited company
A debenture is a loan advanced
to a limited company
Shareholders are owners of the
company
Debenture holders are creditors
of the company
Shares earn dividends Debentures earn interest

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Dividends on shares are paid
only when the company makes
profit
Interest on debentures must be
paid whether the company makes
profit or not
Shares represent capital invested
hence do not require security
Debentures are loans and
security must be provided by the
company
Shareholders have voting rights Debentures have no voting rights
Share capital cannot be
withdrawn unless when the
company is dissolving
Debentures can be withdrawn at
any time
In case of dissolution,
shareholders are paid last
In case of dissolution, debenture
holders are paid first
Reasons why public limited companies prefer raising finance through
issue of ordinary shares to debentures
a) Debentures are units of loans which must be repaid while ordinary
shares are units of capital and are not paid back
b) Ordinary shareholders are not paid a fixed rate of dividends but
debenture holders are paid a fixed rate of interest irrespective of
whether the company makes profits or not
c) Payment of interest on debentures is a legal obligation failure to
which may lead to liquidation while dividends on shares is not a
legal obligation
d) Shareholders contribute important ideas during AGM on how to run
the company while debenture do not contribute any ideas since they
do not attend the AGM
Differences between debit financing and equity financing
Debt financing (Raising capital
through sale of debentures)
Equity financing (Raising
capital through sale of
ordinary shares)

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Usually redeemable It is a permanent source of
capital
Payment of interest on finance is
a legal obligation
Payment of dividends is not a
legal obligation
Rate of interest on finance is
fixed
Rate of dividends varies with the
amount of profit realised
Involves costs such as insurance
and security
Does not involve such costs
It is usually secured It is not secured
4) Loans from banks and other financial institutions
A company may borrow money from banks and other financial
institutions in the form of loans. These loans carry interest at an agreed
rate.
5) Ploughing back profits
A company may decide not to distribute all its profits to members in form
of dividends but to set aside part of the profits for a specific purpose. Profit
set aside this way is known as a reserve
6) Bank overdraft
A backdraft is an over-withdrawal of the amount in the account holder’s
account. A company can arrange with its back to be allowed overdraft
facilities.
7) Leasing and renting of property
8) Buying goods on credit
9) Acquiring property through hire purchase
Features of limited liability companies
a) It is a separate legal entity
b) Shareholders have limited liabilities
c) Most capital is raised through sale of shares

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d) Managed by a board of directors
e) Profits are shared among shareholders in the form of dividends
f) Has perpetual existence
g) The procedure of formation, registration and operation is controlled
by law
TYPES OF COMPANIES
Limited companies can be classified into two;
• Private limited company
• Public limited company
a) Private limited company
This is a company which has the following characteristics:
a) They are formed by a minimum of 2 and a maximum of 50
shareholders (excluding employees.
b) It does not advertise its shares to the public. It therefore sells them
privately to specific people
c) It restricts the transfer of shares i.e. a shareholder cannot sell his/her
shares without the consent of other shareholders
d) Can be managed by one or two shareholders. But a big private
limited company may be managed by a board of directors
e) It can start trading immediately after receiving a certificate of
incorporation
Advantages of a private limited company
a) It is easy to form since it involves a shorter procedure with less cost
compared to a public limited company
b) It has a separate legal entity from its owners hence it can own
property, sue, be sued and enter into contracts
c) The liabilities of shareholders is limited
d) It enjoys wide sources of capital
e) It is in a position to hire professionals to manage it

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f) It starts traded immediately it receives a certificate of incorporation
g) It is assured of continuity i.e. death of a shareholder (s) does not
affect its continuity
Disadvantages of private limited companies
a) It is required to submit annual returns on prescribed forms to the
registrar of companies immediately after the annual general meeting.
This may be so involving.
b) It cannot sell shares to the public. This limits its access to more
capital
c) Transfer of shares is restricted
d) It is only allowed to carry activities spelt out in its objects clause
e) Shareholders do not directly control the business since management
is done by directors
f) Decision making takes long since each decision must be sanctioned
by shareholders
b) Public limited company
This is a company with the following characteristics
a) It can be formed by a minimum of 7 shareholders and no set
maximum
b) It can only start trading after being issued with a certificate of
trading.
NOTE: a certificate of trading is issued after the certificate of
incorporation. It is issued after the company has raised the minimum
amount of capital as spelt out in its capital clause.
c) It is managed by a board of directors
d) Its shares and debentures are freely transferable from one person to
another. This may be done through a stock exchange market.
e) It advertises and invites the public to subscribe (buy) to its shares and
debentures

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NOTE: the advertisement inviting members of the public to subscribe
to a company’s shares and debentures is contained in a special booklet
known as the prospectus. A prospectus contains the details of the type,
amount and value of the shares or debentures offered.
Advantages of a public limited company
a) It has access to a wide range of sources of capital
b) Shareholders have limited liabilities
c) It can afford to hire professionals to manage it
d) It has a wide choice of business opportunities i.e. its wide capital
sources enables it to expand operations to new markets
e) Shares are freely transferable
f) It is assured of continuity
g) It enjoys economies of large scale operations i.e. it is able to reduce
its production costs in order to maximize profit
h) Its employees are well motivated e.g. by giving them an opportunity
to buy shares in the company
Disadvantages of public limited companies
a) Cost of formation may be high. Examples of expenses incurred when
forming a public limited company include; legal costs, registration
fees and taxes
b) It is required by law to comply with a number of requirements e.g.
filing of tax returns, maintaining a list of all its shareholders etc.
c) Shareholders do not have direct control over the running of the
business since management is done by a board of directors.
d) Lacks secrecy. This is because they are required by law to publish
their end year financial statements. Any member of the public can
also access these financial statements from the registrar after
payment of a small fee.
e) Directors may have personal interests that may conflicts interests of
the company

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f) Slow decision making since all major decisions must be sanctioned
by shareholders
g) It may experience high costs of operation
h) It is subjected to double taxation. This is because its profits are taxed
and are the dividends distributed to its shareholders.
Management
Management of a private company is determined by its size. A small
private company may be managed by one director known as the managing
director. A bigger private company is managed by a board of directors.
A small public company can be managed by two directors one of whom
must a managing director. A bigger public company is managed by a
board of directors and other professional staff such as auditors,
accountants, lawyers etc. the directors are responsible for the formulation
of the company’s policies
Below the directors are the professional managers e.g. the general
manager, the marketing manager, the personnel manager and the finance
manager. The managers are responsible for their own departments. They
however take collective responsibility for the implementation of the
company’s plans.
Differences between a private limited company and a public limited
company
Private limited company Public limited company
Formed by a minimum of two
and a maximum of fifty
shareholders
Formed by a minimum of seven
shareholder. The maximum is
controlled by the number and
type of shares
Managed by atleast one director Managed by atleast two directors
and the maximum is not
specified

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Shares are not freely transferable
i.e. any transfer must be
endorsed by all shareholders
Shares are freely transferable
Does not advertise its shares to
the public
Advertises its shares to the
public
Its audited accounts do not have
to be published in the press
Its audited accounts must be
published in the press
Differences between a public limited company and a partnership
Public limited company Partnership
Formed by a minimum of 7
members and no specified
maximum
Formed by a minimum of 2 and
a maximum of 20 members (
except for partnerships providing
professional services whose
maximum membership is 50)
Members have a limited liability Partners have unlimited liability
Managed by a board of directors Managed by partners themselves
Regulated by articles and
memorandum of association
Regulated by the partnership
deed or the partnership act
Pays corporation tax Pays income tax
Can be sued under its name Individual partners are sued
It is a legal entity It is not a legal entity
Differences between public limited company and a co-operative
society
Co-operative society Public limited company
It is welfare motivated It is profit motivated
It serves members only It serves members and outsiders
maximum
maximum

Page 37 of 198
Governed on the basis of one
member one vote
Governed on the basis of one
share one vote
Co-operates with other co-
operatives
Competes with other companies
Governed by the co-operatives
act
Governed by the company’ act
Has only one class of
shareholders
Has several types of shareholder
THE STOCK EXCHANGE MARKET
This is a market where shares of quoted companies are bought and sold.
Definitions
Stock: refers to a group of shares in a public limited company.
A quoted company: this is a company that has been registered (listed) as
a member of the stock exchange market.
Securities: refers to shares. It may also refer to documents which support
share ownership
Initial public offer (IPO): refers to situations where a company has
floated new shares for subscription by the public i.e. has invited the public
to buy its new shares. New shares are issued in a primary market.
Secondary market: this is a market for second hand shares. It facilities
the transfer of shares from one person to another.
Stock broker: refers to individuals or organisations which buy and sell
shares on behalf of investors
Investor: refers to an individual or an organisation who intends to buy or
sell shares in the stock exchange.
Jobbers: these are dealers in shares who buy and sell shares and other
securities on their own behalf with the intention of making profit

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The capital markets authority: this is an organization established by the
government to supervise and oversee the operations of the stock exchange
NOTE
• It is only quoted companies that can have their shares traded in the
stock exchange.
• The only stock exchange market in Kenya is the Nairobi stock
exchange.
• Apart from shares, the stock exchange may also deal in government
securities such as bonds, treasury bills and stocks of local authorities.
• The stock exchange facilities both primary and secondary share
deals
• An investor cannot buy or sell shares directly in the stock exchange
market, he/she can only buy or sell shares through stock brokers.
Role played by the stock exchange market an economy
a) Facilitates buying of shares
The stock exchange market provides the market for investors willing to
buy shares in different quoted companies
b) Facilitates selling of shares
The stock exchange market provides a steady market for those wishing to
sell their securities
c) Safeguards investors’ interests
The stock exchange market safeguards the interest of investors by putting
in place standards of performance to be attained before a company is
quoted. The stock exchange market also ensures that quoted companies are
observing certain set regulations

Page 39 of 198
d) Provides useful information to investors
The stock exchange market provides timely, accurate and reliable
information to enable them make investment decisions
e) Enables companies raise capital
The stock exchange market enables companies raise capital by providing a
market where they can issue shares to the public.
f) Creates employment
Stock exchange market has created employment opportunities for those
people who facilitate the buying and selling of shares. This may include
stock brokers and their agents.
g) Raises revenue for the government
The government raises revenue through fees and other dues charged on
activities carried out in the stock exchange market. The government may
revenue from the stock exchange market in the form of taxes and license
fees.
h) Avails a variety of securities
The stock exchange market fulfils the needs of different investors by
availing to them a variety of securities from different companies
i) Fixes prices
The stock exchange market provides an environment buyers and sellers of
securities meet to determine the prices of securities.
j) Measures a country’s economic progress
The performance of securities in the stock exchange market indicates a
country’s economic progress. E.g. a rise in demand and prices of securities
indicates that the economy is doing well.
k) Promotes a saving culture

Page 40 of 198
Stock exchange market provides an avenue where investors can channel
their excess funds hence they save funds by investing them in the stock
exchange.
Benefits enjoyed by a company quoted on the stock exchange
a) The company can sell its shares and other securities easily to raise
capital
b) Interested investors can invest in different companies by buying their
shares and securities
c) It improves the image of the company as a well-managed, profitable
and a financially stable company
d) Quotation on the stock exchange improves the management of the
company as managers try to uphold the integrity of the company
e) It improves the credit rating of the company making it easier for the
company to obtain loans from financial institutions
f) The stock exchange advertises the company to the public
Dissolution of limited liability companies
Dissolution of a limited company is also known as liquidation or winding
up. A limited liability company may be dissolved under the following
circumstances:
a) Insolvency
This refers to a situation where the company is unable to pay its debts. A
company may be dissolved if fails to pay its debts. If this happens, the
company may be placed in the hands of the official receiver (placed under
receivership)
b) Ultra vires
Refers to where the company is engaging in activities contrary to the
provisions of its objects clause. A company which is acting ultra vires will
be wound up.

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c) Amalgamation
Refers to joining together of two or more companies to form one company
which is completely different from the original companies. When this
happens, the companies joining together must be dissolved.
d) Court order
A company may be ordered by a court of law to dissolve especially when
there are complaints from creditors.
e) Decision by share holders
The shareholders may decide to dissolve a company. This decision can
only be arrived at in a general meeting.
PUBLIC CORPORATIONS
Public corporations (state corporations) are organisations which are
formed and/or controlled by the government.
More than 50% of their shares are owned by the government.
Public corporations are formed to provide essential services to the public
more cheaply.
Examples of public corporations include:
• Mumias sugar company
• Kenya commercial bank
• Telcom Kenya
• Kenyatta national hospital
• Public schools
• Postal Corporation of Kenya etc.
Formation

Page 42 of 198
Most public corporations are formed by an act of parliament while a few
are formed under the existing laws. E.g. all public schools are formed
under the existing laws i.e. the education act.
When a corporation is formed by an act of parliament, the act outlines the
following:
a) Proposed name of the corporation
b) Aims and objectives of the corporation
c) Goods or services to be provided or produced
d) Location and area of operation of the corporation
e) The appointment of executives
f) The powers of the board of directors
g) The ministry under which it will operate
Management.
Corporations are managed by a board of directors which is headed by a
chairman.
The chairman and the members of the board of directors are appointed by
the president or by the respective minister.
The chairman of the board of directors reports to the government through
the minister.
The managing director is the secretary to the board of directors and is the
chief executive officer of the corporation.
Sources of finance (capital)
The initial financing is provided by the government through the concerned
ministry. Thereafter, the corporation will be expected to generate finances
on its own. Other sources of capital may include:
• Ploughed back profits
• Profits from investments in the economy
• Loans from banks and other financial institutions

Page 43 of 198
• Sale of its property etc.
Advantages of public corporations
a) Initial capital is readily available since it is provided by the
government
b) They provide goods and services to the public at relatively lower
prices
c) They benefit from economies of large scale production i.e. they are
able to lower the cost of production in order to maximize profit.
d) Some corporations are monopolies e.g. Kenya power and lighting
company. Therefore they enjoy the benefits of enjoyed by
monopolies such as lower advertising costs
e) The government comes to their aid whenever they are in a financial
crisis
f) They provide revenue to the government
g) They create employment
Disadvantages of public corporations
a) They may not provide the goods and services they produce to every
part of the country as they are expected
b) They may incur high operational costs
c) Slow decision making processing because of the large number of
people to be involved
d) Their performance may be poor due to the fact that managers are
political appointees who may be lacking appropriate management
skills.
e) Corporations may be insensitive to customers’ feelings especially
when they are monopolies
Dissolution of public corporations
Public corporations are dissolved by the government. This may happen
under the following circumstances

Page 44 of 198
a) Persistent loss making
b) Bankruptcy
Types of public corporations
a) Marketing boards
These are public corporations formed by the government to assist local
farmers in marketing and selling their prices at the best possible price
Their functions include
• Collecting, transporting and storing produce from farmers
• Processing, grading and parking the produce
• Searching for markets
• Selling products on behalf of farmers
• Undertaking market research
• Stabilising prices by controlling supply
b) Commercial (trading) corporations
These are public corporations which are established with the aim of
engaging in business to provide goods and services at a profit. E.g. Kenya
power and lighting company, postal corporation of Kenya
c) Finance and banking corporations
These are corporations which are established to do the following:
• Provide banking services
• Earn revenue to the government
• Mobilise funds from the public and channel them to investment
activities
• Supporting trade by providing loans
d) Research corporations

Page 45 of 198
These are corporations which are established to provide research services
in order to support the development of industry, agriculture etc. e.g. Kenya
agricultural research institute
TRENDS IN PUBLIC CORPORATIONS
Emerging issues in public corporations include
a) Privatisation
b) Nationalisation
1) Privatization of public corporations
Privatisation is the process through which the government gives up
ownership of public corporations by selling its shares to the private sector
The government can sell part of its shares to the public so as to reduce its
shareholding to below 50%
Some of the circumstances (reasons) under which a public corporation
may be privatised include:
a) If the corporation makes losses regularly
b) To improve service delivery
c) To eliminate wastage of resources
d) To raise revenue to the government
e) To eliminate political interference
f) To promote local ownership of such corporations
g) To make management more accountable
Advantages of privatization
a) Enables the government to raise capital through sale of shares
b) Enables the government to concentrate on other state responsibilities
c) Attracts foreign investment

Page 46 of 198
d) The government obtains revenue by taxing the profits made by the
firm
e) Reduces government expenditure
f) Offers opportunity for private citizens to participate in business
g) Enhances efficiency in the management of the firm
2) Nationalisation
Refers to the process where the government acquires total ownership of
privately owned business organisations thereby transforming into public
corporations
Reasons for nationalisation
a) For security reasons e.g. weapon making businesses
b) To provide non profitable but essential services to the citizens
c) Need to protect consumers from exploitation from high prices
charged on goods provided by a private investor
d) Need to avoid foreign control over an industry
e) Changes in political ideology
f) To generate revenue
Ways in which the government participates in the operations of state
corporations
a) Appointing directors
b) Providing legal advice
c) Giving financial support
d) Supervising the activities of state corporations
e) Auditing the accounting records of state corporations
f) Training staff in state corporations.
PARASTATALS

Page 47 of 198
A Parastatals is a public corporation which is fully owned by the
government. Its formation, management, sources of capital is the same as
that of a public corporation.
Ways of improving the efficiency of Parastatals
a) Employing qualified staff
b) Organizing regular training for staff
c) Enforcing laws to punish errant Parastatals
d) Controlling errant staff
e) Reducing undue influence by government
f) Motivating staff
g) Restructuring them so as to make them more competitive
h) Reducing monopolistic tendencies
SUMMARY OF DIFFERENT FORMS OF BUSINESS UNITS
Characterist
ics
Sole
propriet
orship
partnersh
ip
Limited
liability
compan
ies
Parastata
ls
Co-
operatives
Formation Individu
al’s
decision
Agreemen
t by
partners
Registrat
ion by
the
registrar
of
compani
es
Act of
parliamen
t
Members’
decision
Ownership/m
embership
On
person
2-20
partners
2-50
sharehol
ders for
a private
limited
compan
y and 7
and no
Gov’t
owned
10 and no
maximum
members

Page 48 of 198
maximu
m for
public
limited
compani
es
Sources of
capital
• O
wn
ers,
sav
ing
s
• Lo
ans
• Ret
ain
ed
pro
fit
• Mem
bers’
contr
ibuti
ons
• Loan
s
• Retai
ned
profi
ts
• Iss
ue
of
sha
res
• Lo
ans
• Re
tai
ne
d
pro
fit
• Cr
edi
t
pur
ch
ase
s
• Le
asi
ng
an
d
ren
tin
g
• Gov
ern
men
t
• Reta
ined
profi
t
• Leas
ing
and
renti
ng
• Mem
bers’
contr
ibuti
ons
• Inter
est
on
loans
• Retai
ned
profi
t

Page 49 of 198
management Owner
with
employe
es or
family
members
Active
partners
with
employees
Board of
directors
Chairman
with the
board of
directors
Managem
ent
committee
Sources of short term financing to businesses
a) Promissory notes
b) Trade credit
c) Bank overdraft
d) Retained earnings
e) Personal savings
f) Contributions from relatives
g) Bills of exchange
Advantages of leasing as a method of raising capital
a) Lease finance is not secured i.e. no property is attached to it
b) It is a long term source of capital
c) The borrower has an option of buying the asset after expiry of the
lease period
d) Leasing is not subject to credit control by the central bank
e) Rental charges may be lower than inflation rate
Reasons why a firm would prefer trade credit as a source of capital to
a bank loan
a) Bank loan is always secured while trade credit is not secured
b) Bank loan is expensive since interest must be paid while in trade
credit, the borrower will only forego discounts
c) Acquiring a loan involves a long procedure while the acquisition of
trade credit does not require long procedure

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d) Trade credit does not involve any explicit costs unlike a bank loan
which will require the restrictive use of security
e) For a firm to secure a loan, it must have maintained a healthy bank
account with the bank while to secure trade credit, a firm does not
need to have a bank account
TRENDS IN FORMS OF BUSINESS UNITS
The following are some of the current trends in forms of business units
a) Holding companies
A holding company is one that acquire 51% or more shares in one or more
other companies. The companies owned are known as subsidiaries of the
holding company. The subsidiaries retain their names.
b) Cartels
A cartel is a group of related companies that agree to work together in
order to control output, prices and the markets of their goods and services.
E.g. O.P.E.C.
Features of cartels
a) Cartels sell similar goods
b) Their members decide on their share of the market
c) Members form rules governing their operations
d) They are made up of competing firms
e) Members agree to fix prices of goods sold
Disadvantages of a cartel
a) They may result in monopolistic situations
b) They may lead to the production of inferior goods due to lack of
competition

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c) Prices of goods may be kept high
d) They may restrict entry of other firms into the market hence limiting
consumer choice
e) Leads to shortages
f) Denies customers bargaining power
c) Privatisation
Privatisation is the changing of state owned corporations into public
limited companies
d) Absorptions (takeovers)
Absorption refers to a business taking over another business by buying all
its assets making it cease to exist.
e) Mergers (amalgamations)
This where two or more businesses combine to form a new business. The
merging businesses totally cease to exist.
Reasons for mergers (amalgamations)
a) To lower cost of production
b) To make it easier to face risks
c) To control prices
d) To make it easier to borrow
e) To avoid decline in profits/loss making
f) To control inputs
g) To control a wider market
h) Desire to share research
i) To bring on board new skills
j) To venture into new businesses
Advantages of mergers (amalgamations)
a) Reduces competition amongst firms hence reducing advertising costs
b) Brings together a pool of managerial skills

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c) Ensures that a firm has steady supply of raw materials
d) Firms will enjoy economies of scale enabling them to lower the cost
of production
e) It may result in control of a wider market
f) Results in market diversification which helps in spreading risks faced
by the firm
g) Enables the firm effectively utilize the resources
h) Creates empolyment
f) Check-off system
This where money is deducted by the employer and directly submitted to
the SACCO on behalf of the employee who is a member of the SACCO.
Check-off system is one of the reasons behind the success of SACCOs
g) Burial benevolent funds (BBF)
This is a system mostly in SACCOs which is aimed at assisting their
members financially during burials
h) Front office savings account (FOSA)
This is a service which used in SACCOs to enable their members
conveniently deposit and withdraw money.
i) Franchising
This is where one business grants another the rights to manufacture,
distribute or provide its branded products using the name of the business
that granted the right. E.g. general motors have a right to sell Toyota, Isuzu
and Nissan vehicles
j) Trusts
This is where a group of companies work together to reduce competition.
A trust may also be formed when a company buys more than 50% of
shares in another company so as to reduce competition

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k) Globalisation
Refers to the use of technology to enable business conduct their operations
worldwide.
l) Performance contract
These are contracts signed by employees in state corporations where they
commit perform to set standards.
TOPIC2: GOVERNMENT AND BUSINESS
CONTENTS
• Introduction
• Reasons for government involvement in business activities
• Methods of government involvement in business activities
• Merits and demerits of government involvement in business
activities
• Consumer protection
INTRODUCTION
The government gets involved in business activities in several ways. These
include:
a) Production of goods and services
b) Distribution of goods and services
c) Offering advisory services to producers and traders
d) Promotion of trade and economic development
e) Protecting consumers against exploitation by business people
f) As a consumer of goods and services
REASONS FOR GOVERNMENT INVOLVEMENT IN BUSINESS
ACTIVITIES

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a) To prevent the exploitation of consumers by business people. Such
exploitation may include selling of commodities at high prices or
selling poor quality commodities.
b) To provide essential goods and services in areas where private
business do not operate due to low profitability
c) To provide essential goods and services which the private sector is
unable because they require high capital e.g. electricity
d) To attract foreign investors into the country by initiating major
business projects which attract foreign investors
e) To stimulate economic growth and development in the country
f) To provide very sensitive goods and services which cannot be left in
the hands of the private sector e.g. fire arms
g) To create employment opportunities through initiating projects
which create jobs
h) To prevent dominance of foreign investors in the economy. It does
this by investing in areas where the local people are unable to invest
in
METHODS OF GOVERNMENT INVOLVEMENT IN BUSINESS
ACTIVITIES
These are the ways through which the government gets involved in
business activities. These methods are discussed below:
1) Regulation
The government may regulate the operations of businesses through
methods such as
• Licensing
• Ensuring standards
• Legislations
a) Licensing

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A business must be given permission to operate by the government. This
permission is indicated by the issuance of a license.
A licence is therefore a document which shows that a business has been
allowed by the government to start operating
It is usually obtained upon payment of a fee known as the license fee.
Reasons for licensing
a) Regulates the number of businesses operating in a given area so as to
avoid unhealthy competition
b) Controls the type and amount of goods entering and leaving the
country
c) Helps in getting rid of illegal businesses
d) Helps in ensuring that traders engage licensed activities only
e) To ensure that those engaging in professional activities such as
accountancy meet the requirements of the profession
f) To raise revenue to the government
b) Ensuring standard
The government regulates business activities by setting standards that
businesses must meet in their operations.
In Kenya, the Kenya bureau of standards (KEBS) is charged with the
responsibility of setting standards especially for manufactured goods and
ensuring that such standard are adhered to. Products which meet the set
standard are stamped with the KEBS logo as a sign of quality.
Functions of Kenya bureau of standards (KEBS)
a) It sets the required standards for all goods sold in Kenya
b) Ensuring that set standard are maintained through regular inspection
c) Prosecuting those who produce inferior goods
d) Putting a stamp of approval to show that the established standards
have been met

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e) Carrying out testing on measuring apparatus to establish accuracy
standards.
c) Legislations
Legislations are rules and regulations put in place by the government to
regulate business activities. The government can therefore come up with
rules and regulations that regulate the operations of businesses. For
example the government may ban hawking in certain areas such as within
the city centre
Other methods of regulating businesses include the following:
• Imposition of taxes
• Issuing guidelines to business people
• Total ban on new businesses where there is need
• Registration of business
• Fixing quotas
2) Training
The government organises trainings for business people. This is mainly
done at the Kenya business training institute (K.B.T.I)
Reasons for training business people
a) To expose them to modern developments in management
b) To educate them on better and efficient methods of operating
businesses e.g. effective advertising and book-keeping methods
c) To expose them to problems facing businesses and their possible
solutions
d) To impart proper business ethics to business people e.g. good
customer relations.
e) To educate them on ways of using the available resources to
minimize cost and maximize profit
f) To inform them on the available business opportunities

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g) To expose them to government policies and legislations regarding
the operations of businesses
3) Trade promotion
Trade promotion refers to a government initiated and supported policy to
encourage the local people enter into business.
The aim or trade promotion is to increase the volume and variety of goods
and services traded in.
Trade promotion may take two forms:
• External trade promotion
• Internal trade promotion
a) External trade promotion
This is a form of trade promotion which aims at encouraging the local
business people to enter into export trade. It is also intended to encourage
foreign investors into the country.
In Kenya external trade promotion is done by the ministry of trade and
industry. It can also be done by commercial attaches and Kenya external
trade authority (K.E.T.A)
Commercial attaches
These are offices sent by the country’s government to work with
embassies in foreign countries as support in the field of trade.
Functions of commercial attaches
a) Explore and identify new markets for exports from their home
countries
b) Research and analyse markets for exports from their home countries
c) Takes and keep important statistical data of products e.g. volumes,
packaging sizes and method of manufacturing.

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d) Attends meetings, seminars and workshops where trade patterns of
respective foreign countries are discussed hence keeping data on new
markets for exports
e) Advertise their country’s exports in foreign countries besides
publishing such exports in business journals of foreign countries
f) Identify buyers, agents and distributors of their home country’s
exports
g) Informs traders in their home countries of the standard required for
export
h) Assist sales missions from their home countries by organising
educational tours for them
i) Organise visits to trade fairs and exhibitions for business people from
their home countries
j) Make detailed reports on commercial activities that may improve
exports from their home countries.
Kenya external trade authority
Its functions
b) Expands and diversifies exports
c) Expands and diversifies foreign markets
d) Developing bilateral and multilateral trade
e) Providing information to Kenyan producers on the available selling
opportunities in foreign countries
f) Educates and advertises exporters on trade regulations and
commercial practices in other countries
g) Arranges courses and seminars for business people and relevant
government officials to inform them on how to promote exports
Problems faced by K.E.T.A and commercial attaches
a) Poor infrastructure which hampers operations of investors

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b) High rate of taxation that discourages investors and makes local
goods less competitive
c) High production costs that makes local products very expensive
d) Insecurity that discourages investors
e) Corruption which may add extra costs to investments
f) Inadequate funds which makes it difficult for K.E.T.A and
commercial attaches to carry their functions
h) Internal trade promotions
This is a form of trade promotion that aims at helping the local people to
start and run businesses. Internal trade promotion is the responsibility of
the ministry of trade and industry.
Internal trade promotion can also be done through Kenya chamber of
commerce and industry
Functions of the ministry of trade and industry
a) Advising business people on matters relating to the type of goods to
produce, available sources of finance, suitable locations for their
businesses and the legal formalities required for various businesses.
b) Training businesses people on appropriate ways of carrying out
businesses
c) Offering business people financial assistance to enable them start and
operate their businesses
d) Organising shows, trade fairs and exhibitions from where local
traders can advertise their products
e) Providing incentives such as tax exemptions to encourage local
businesses
f) Creating a conducive business environment
Functions of the Kenya chamber of commerce and industry

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a) Issues certificates to those who want to export goods to other
countries
b) Informing members on all the registration requirements affecting
their businesses
c) Acting as an agent between the government and businessmen on
matters relating to business activities
d) Holding courses for the members and discussing problems affecting
their businesses
e) Publishing business journals for members and interested parties
f) Organising trade shows and participating in national shows
g) Organising participation in trade shows outside the country
h) Collecting statistics which are vital for government budgeting
4) Provision of public utilities
Public utilities are essential services such as water, transport, electricity,
sewerage, communication etc.
These services are provided either by the central government or by the
county governments through businesses set up by them.
Businesses set up to provide public utilities enjoy some level of monopoly
and are financed by the government e.g. the Kenya power and lighting
company. The major objective of these businesses is to provide public
utilities affordably, profit making is their secondary objective.
Public utilities provided by the central government are meant for the
welfare of the general public whereas those provided by the county
government are meant to benefit the residents of the given county
Examples of public utilities
a) Good infrastructure

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b) Reliable and less expensive power supply
c) Water supply and good sewerage systems
d) Good communication systems
e) Education
f) Healthcare
g) Security to help create confidence among investors
5) Enabling environment
The government plays an important role in ensuring that the business
environment is conducive.
Ways of creating a conducive business environment
a) Offering subsidies
A subsidy is a financial assistance given by the government to the
businesses people in order to enable them lower their production costs so
as to sell goods at lower prices.
Subsidies may take the following forms
• Technical assistance
• Cheap financing
• Manpower assistance etc.
b) Giving incentives
Incentives are things that are given to encourage one to do something. The
government may offer various incentives to business people in order to
encourage them invest.
Incentives may take the following forms:
• Tax holidays and tax exemptions
• Duty free privileges
• Expatriate protection for foreign investors etc.

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c) Protection of local businesses from unfavourable foreign
competition
This refers to putting in place legal measures and regulations which are
aimed at shielding local industries from foreign competition. This is
because big foreign firms which are able to take advantage of economies
of scale and sell their goods at relatively lower prices compared to the
local small firms may take control of the local market if allowed to operate
freely hence forcing local businesses to close down.
The government therefore has to come up with measures that will protect
local businesses. Such measures may involve the use of import duties and
import quotas.
Import duties increases taxes on imports making them expensive compared
to the locally manufactured goods whereas import quotas reduces the
amount of goods to be imported.
Other methods of creating an enabling environment include:
a) Providing basic infrastructure
b) Enabling business people get access to loans
c) Lowering taxes
d) Easing licensing procedures
e) Providing adequate security
f) Ensuring there is political stability
g) Putting in place anti-dumping rules
d) Loan guarantee
The government may act as a guarantor to enable local businesses access
loans from international financial institutions.
A guarantor is a person who undertakes to pay the loan in case the loanee
defaults in payment.

Page 63 of 198
MERITS OF GOVERNMENT INVOLVED IN BUSINESS
ACTIVITIES
a) The government is able to carry out businesses that require large
amount of start-up capital which the private investors cannot raise.
E.g. Kenya power and lighting company.
b) Government involvement in business activities facilities the
provision of essential but non-profitable services since most of these
services are provided by the government. E.g. medical care,
education, provision of water, construction of roads
c) Businesses started and run by the government helps solve the
problem of unemployment.
d) Profits realised by businesses run by the government may be
distributed to all citizens in the form of provision of services e.g.
education and health care.
e) Businesses run by the government helps create competition which
may make private investor improve quality and charge fair prices of
their goods and services
f) Government involvement in business activities helps reduce foreign
dominance in an economy.
DEMERITS OF GOVERNMENT INVOLVEMENT IN BUSINESS
ACTIVITIES
a) Businesses run by the government may be mismanaged since in most
cases managers are political appointees who may not have the
required qualifications.
b) Government involvement in business activities may scare away
potential investors who would have rendered the same services more
efficiently
c) Government-run businesses may consistently make losses forcing the
government to finance them using tax payers money

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d) Most government-run businesses and projects require high amount of
start-up capital, expensive equipment and highly trained staff which
may be very costly.
e) Government-run businesses are subjected to increased cases of
corruption and embezzlement of funds
CONSUMER PROTECTION
Consumer protection involves safeguarding the consumer from
exploitation by producers and business people.
The consumer may be exploited through:
• Unfair pricing
• Selling poor quality goods and services
• Misleading advertising
• Misleading on quantities of goods etc.
Need (reasons) for consumer protection
a) To ensure commodities sold to consumers are of good quality
b) To ensure that commodities offered for sale to consumers are of right
quantity and size
c) To ensure that the required health standards are maintained e.g.
businesses premises such as butcheries should be clean and hygienic.
d) To ensure that safety standard are observed when constructing
business buildings. For example buildings such as schools, hospitals
and supermarkets should be firm and safe i.e. with emergency exists.
e) To ensure fair prices are charged on goods and services
f) To ensure that goods are readily available to consumers. This is to
ensure that business people and producers do not create artificial
shortages by hoarding products so as to increase their prices.
g) To protect consumers against false and misleading advertisement

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h) To ensure consumers are protecting from the sale of harmful
commodities which may adversely affect their health. For instance,
all products should have expiry dates printed on their packages
i) To protect consumers against breach of contract since businesses
people may fail to honour contracts entered into with consumers with
regard to the sale of goods.
METHODS OF CONSUMER PROTECTION
Methods of consumer protection can be classified into two:
• Government initiated methods
• Consumer initiated methods
• Non-governmental organisations
a) Government initiated methods
These are methods the government uses to protect consumers from
exploitation by business people. These methods are discussed below.
a) Setting up standards
Setting of standards in Kenya is the responsibility of the Kenya bureau of
standards (KEBS). KEBS sets national quality standards and ensures
commodities conform to the set standards.
KEBS also requires that commodities are examined and tested before
being used.
b) Weights and measures act
The government ensures that equipment used for weighing and measuring
are correct and accurate. This is done by regular checking and testing of
these equipment.

Form two-business-studies

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