Forms of Business Units 4

Principles of co-operatives

i) Open and voluntary membership

Membership is open and voluntary to any person who has attained the age of 18 years. No one should be denied membership due to social, political,
tribal or religious differences.

A member is also free to leave the society at

ii) Democratic Administration

The principle is one man one vote. Each member of the co-operative has only one vote irrespective of the number of shares held by him or how much he buys or sells to the society

iii) Dividend or repayment

-Any profit/surplus made at the end of every financial year should be distributed to the members in relations to their contribution.

-Part of the profit may be retained/reserved/put in to strengthen the financial position of the society.

iv) Limited interest on share capital

-A little or no interest is paid on share capital contributed (co-operatives do not encourage financial investment habits but to enhance production, to encourage savings and serve the members)

v) Promotion of Education

Co-operative societies should endeavor to educate their members and staff on the ideas of the society in order to enhance/improve quality of decisions made by the concerned parties.

Education is conducted through seminars, study tours, open days

vi) Co-operation with other co-operatives
Co-operatives must learn from each other’s experience since they have a lot in common.

- Their co-operation should be extended to local national and international.


• Majority of the co-operatives are small in size and therefore cannot benefit from economies of scale.

• Members have a right to withdraw from the society and when they do, cooperatives refunds the capital back which might create financial problems
to the society.

• Corruption and embezzlement of funds is a problem for many cooperatives.

• Most co-operatives are not able to attract qualified managerial staff hence leading to mismanagement.

• Many suffer from political interference. Sometimes; the election of the management committee is interceded with by some people with personal interest in certain candidates hence the best person may not be elected to run the affairs of the society.

This leads to poor management and inefficiency.

• Members may not take keen interest in the affairs of a co-operative society because their capital contribution is small.

Dissolution of co-operative societies

A co-operative society may be dissolved under any of the following circumstances.

i). Order from commissioner of co-operatives

ii). Voluntary dissolution by members

iii). Withdrawal of members from the society leaving less than ten members

iv). If the society is declared bankrupt

Limited Liability Companies (Joint Stock Companies)

Defination: A company; Is an association of persons registered under the companies act who contribute capital in order to carry out business with a view of making a profit.

The act of registering a company is referred to as incorporation.

Incorporation creates an organization that is separate and distinct from the person forming it.

- A company is a legal entity that has the status of an ‘’artificial person”.

It therefore has most of the rights and obligations of a human being.

A company can therefore do the following

  • Own property
  • Enter into contracts in its own name.
  • Borrow money.
  • Hire and fire employees.
  • Sue and be sued on its own right.
  • Form subordinate agencies, ie, agencies under its authority.
  • Disseminate or spread information.

    - The owners (members) of a company are referred to as shareholders.

    Features of Companies (Limited Liability Companies)
    - A company in an artificial person and has the same rights as a natural person.

    It can therefore sue and be sued in a court of law, own property and enter into contracts in its own name.

    -The members have limited liabilities.

    -Companies have perpetual life which is independent of the lives of its owners.

    Death, insanity or bankruptcy of a member does not affect the existence of the company. (this is referred to as perpetual existence or perpetual succession)

    - A company is created for a particular purpose or purposes.


    - People who wish to form
    company are referred to as promoters

    - The promoters submit the following documents to the registrar of companies:

    i) Memorandum of Association

    -This is a document that defines the relationship between the company and the outsiders.

    It contains the following:

    a) Name of the company/Name clause; -The name of the company must be started and should end with the word “Limited” (Ltd).This indicates that the liability of the company is limited.

    -Some companies end their names with “PLC” which stands for “Public limited company” which makes the public aware that although it is a limited
    liability company it is a public not private.

    b) The objects of the company/objective clause;-This set out the activities that the company should engage in

    - The activities listed in this clause serve as a warning to outsiders that the company is authorized in these activities only.

    c) Situation clause;-Every company must have a registered office where official notices and other communication can be received and sent

    d) Capital clause;-It also states that the amount of capital which the business can raise and the divisions of this capital into units of equal value called shares i.e. authorized share capital also called registered or nominal share capital.

    - It also specifies the types of shares and the value of each share

    e) Declaration clause:-This is a declaration signed by the promoters stating that they wish to form the company and undertake to buy shares in the proposed firm

    - The declaration is signed by a minimum of seven promoters for public limited company and a minimum of two for private company.
    - The memorandum of association also contains the names of the promoters
    - The promoters signs against the memorandum showing details of their names, addresses, occupation and shares they intend to buy. Each signatory should agree to take at least one share.

    i) Articles of Association

    - This is a document that governs the internal operations of the company

    - It also contains rules and regulations affecting the shareholders in relation to the company and in relation to the shareholders themselves.

    It contains the following;

    • Rights of each type of shareholder e.g. voting rights

    • Methods of calling meeting and procedures

    • Rules governing election of officials such as chairman of the company, directors and auditors

    • Rules regarding preparation and auditing of accounts

    • Powers, duties and rights of directors

    • Methods dealing with any alterations on the capital.

    ii) A list of directors with details of their names, addresses, occupations,shares subscribed and statements of agreement to serve as directors

    iii) Declaration that registration requirements as laid down by law (by the companies act) have been met. The declaration must be signed by the secretary or a director or a lawyer.

    iv) A statement signed by the directors stating that they have agreed to act as directors.

    v) A statement of share capital- this statement gives the amount of capital that the company wishes to raise and its subdivision into shares.

    - Once the above documents are ready, they are submitted by the promoters to the registrar of companies.

    On approval by the Registrar and on payment of a registration fee, a certificate of incorporation (certificate of registration) is issued

    - The certificate of incorporation gives the company a separate legal entity.

    Sources of capital

    1. Shares; The main source of capital for any company is the sale of shares.

    -A share is a unit of capital in a company e.g. if a company states that its capital is ksh.100,000 divided into equal shares of ksh.10 each.

    - Each shareholder is entitled to the company’s profit proportionate to the number of shares he/she holds in the company.

    Types of shares:

    a) Ordinary shares

    b) Preference shares

    Forms of Business Units page 1 | Forms of Business Units page 2 | Forms of Business Units Page 3 | Forms of Business Units Page 4 |Forms of Business Units Page 5 |Forms of Business Units Page 6 |Forms of Business Units Page 7

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