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Business units and finance

Commerce · WAEC and JAMB · SS2 and SS3

Comparison territory. Know the formation, liability, capital source and continuity of each type and you can answer any version.

What you need to know

  • Sole proprietorship: one owner, unlimited liability, easy to form, limited capital, dies with the owner.
  • Partnership: 2 to 20 members, unlimited liability except for limited partners, governed by a deed.
  • Private limited company: limited liability, shares not offered to the public, may be formed by one person under CAMA 2020.
  • Public limited company: limited liability, shares offered publicly, minimum of two members, must publish accounts.
  • Cooperative society: owned by members, one member one vote, surplus shared by patronage.
  • Public corporation: created by statute, state-owned, provides essential services.
  • Memorandum of association governs relations with outsiders; articles govern internal management.
  • Sources of finance: owner capital, retained profit, bank loan, overdraft, trade credit, hire purchase, leasing, shares, debentures.

Key terms

Limited liability
Shareholders can lose only what they invested; personal assets are protected.
Debenture
A loan to a company carrying fixed interest. A debenture holder is a creditor, not an owner.
Working capital
Current assets minus current liabilities — what funds day-to-day operations.

Formulae

  • Working capital = current assets - current liabilities
  • Net profit = gross profit - expenses
  • Turnover rate = cost of goods sold / average stock

Worked example

A business has current assets of N850,000 and current liabilities of N300,000. Find its working capital.

  1. Working capital = current assets - current liabilities
  2. = 850,000 - 300,000

The mistake to avoid

Shareholders are owners; debenture holders are lenders. Debenture interest must be paid whether or not the company profits, while dividends need not be.

In the exam

Business-unit comparisons are best written as a table: formation, membership, liability, capital, continuity. Five rows covers almost any question.