The Legal Form of Enterprises

THE LEGAL FORM OF ENTERPRISES

LECTURE 2

LECTURE OUTLINE

Introduction

The sole trader

The partnership

The Company

The difference between companies and partnerships

Summary

INTRODUCTION

1 Most business enterprises fall under one of three basic categories: the sole proprietorship, the partnership and the company. For accounting purposes they differ principally in the composition of owner(s)' equity and in the distribution of profit.

2 Accounting principles and procedures are relevant to all business activities, regardless of the type of the entity or the form of the enterprise within which the activity is conducted

LECTURE OBJECTIVES

THE SOLE TRADER

3 The individual wishing to start his own business will not encounter too many obstacles in his path. The sole prerequisite in most cases is simply the acquisition of a licence. Any one wishing to render professional services, must also comply with the conditions of admission set by the professional body concerned.

4 Having obtained the necessary licence, the individual may commence business immediately. He is the sole decision maker, has the right to all profits, and is personally responsible for all the enterprise's obligations. He is moreover the sole owner and possessor of the assets concerned.

5 Regarding owner's equity in the sole proprietorship, it is composed of the capital he has paid in, plus profits earned, and less any losses suffered and any amounts he may have withdrawn from the enterprise.

THE PARTNERSHIP

6 In Zimbabwe a partnership is a legal relationship created in consequence of an agreement between two or more, but not more than 20 persons. According to this agreement, each person contributes to a lawful enterprise, the purpose of which is to make a profit to be divided among the partners. The prerequisites therefore, essential for the creation of a partnership are the following:

 There must be a valid agreement,

 According to which each partner contributes something,

 With the purpose of making a profit,

 Which will be to the communal advantage of all the partners

The creation of a partnership does not require any formalities, for instance, no written agreement is required. It is customary and preferable, however that the agreement should be in writing. The agreement may thus be written, oral or tacit (i.e. concluded by conduct alone).

7 The Legal position of partnerships. In Zimbabwe no legislation exists pertaining to partnerships; common law principles are therefore applied. A partnership, not being a legal person, has no independent legal existence separate from that of its constituent members. The partners are the collective bearers of the rights and obligations of the partnership - in other words, they have collective rights and collective duties as regards all the partnership's obligations

8 The partnership agreement.. It should preferably be in writing. Contents depend on individual circumstances. Common law principles apply where specific stipulations regarding any aspects is lacking. The agreement should cover the ratio according to which profits should be distributed. In the absence of this specification, common law principles require that profits be shared equally. It is extremely important to remember that before any partnership accounts are drawn up, the partnership agreement should be studied in order that its specifications may be carried out concisely

9 Dissolution of a partnership. The following may result in the dissolution of a partnership:

g. Voluntary action by the partner (mutual agreement, change in the membership of the partnership according to agreement).

h. The unilateral action of one partner (a partner may unilaterally declare the partnership dissolved, but this may render him liable to breach of contract, depending upon the circumstances).

i. Legal process (e.g. death of a partner, insolvency of the partnership or of a partner, or when a partnership has more than 20 members).

THE COMPANY

10 The legal personality. A company is at law considered a legal personality, an incorporated concern with legal capacity and hence may in its own right possess property, incur debts, and enter into legal transactions as