The concept of business unit
A business unit is an organisation, enterprise, or firm that deals with the production, distribution, or exchange of products lo make profits. It may be set up by an individual or a group of individuals. Business units have different classifications as explained throughout this topic.
Size classification
Size classification of businesses is a method that is used to categorise businesses according to metrics such as annual turnover. number of employees, or value of assets. This classification aids stakcholders in understanding the business landseape and tailoring regulations and policies to support different businesses according to their sizes. Globally businesses are also classified according to various measures including the nature of the market, capital requirements, regulatory environment, and level of technology adapted depending on the level of a country’s development.
In Tanzania, the size classification of businesses is guided by the indicators provided in the Tanzania Small and Medium Enterprise (SME.) Development Policy of 2003. The policy defines the business size from micro to large enterprises.
Ownership structure of business units
Business units are classified into two forms of ownership, that is public and private. Public ownership consists of businesses owned partially or totally by the govemment such as parastatals and corporations. Private ownership consists of businesses that are owned privately by individuals or groups such as sole proprietorship.
Company
A company is a corporate association of persons formed to carry out specific functions to generate profit. It is a ‘corporate body’ created under the law and it exists on its own, separate from the memhers
who comprise it.
In the eyes of the law, a company is an artificial person that can enter into contracts, own properties, incur liabilities, sue others, be sued by others, and
do anything for which it has been formed for. Examples of companies in Tanzania are Tanzania Commercial Bank (TCB). the People’s Bank of Zanzibar (PBZ), Air Tanzania Company Limited (ATCL). and Tanzania Electric Supply Company Limited (TANESCO).
Types of companies
Companies are classified based on the nature of capital, ownership, control or holding, access to capital, and other factors as follows:
Classification of companies based on the nature of capital Based on the nature of capital, companies are classified as follows:
Companies limited by shares: In these kinds of companies, the liabilities of members are limited to the extent of the number of fully paid-up shares. This means that in case of winding up. members will be liable only for the number and value of shares that have been fully paid for.
Companies limited by guarantee: These are companies without any sharcholder but are owned by members called guarantors who agree to pay a nominal amount of debts or liabilities in the event of winding up. The profit eamed by the companies is re-invested in the company to be used for different purposes. For example. most of the non-profit making companies operate as companies limited by guarantee such as TPSF.
Unlimited companies: These are companies without limits on their members’ assets. In these companies’ sharecholders become liable for all the debts of the company in case the company becomes insolvent.
If the company does not have sufficient assets to pay all the liabilities during its winding up. the personal belongings of shareholders will be used to compensate for the deficit.
Classification of companies hased on ownership
The classification of companies based on ownership is as follows:
Private companies: These are those companies whose articles of association restrict the free transferability of shares. In terms of members, private companies need to have a minimum of two and a maximum of fifty members.
Public limited companies: These companies allow their members to freely transfer their shares to others. They need to have a minimum of seven members, but they have unlimited maximum number of
members. Most large-scale industrial and commercial companies fall under this type of company.
Classification of companies based on control or holding
The classification of companies based on control or holding is as follows:
Holding and subsidiary or group companies: In some cases, the company’s shares might be held fully or partly by another company. The company owning these shares becomes the bolding or parent company. Likewise, the company whose shares are owned by the parent company becomes a subsidiary company. Holding companies may exercise control over their subsidiaries. Thus, when company
“A” holds more than 50 per cent shares of company B, then company “A” is the parent or bolding company and company “B” is a subsidiary company.
Associate or affiliate companies: These are those in which other companies have significant influence. This implies control of at least 20 percent and not more than 50 percent of total share capital of a company.
Classification of companies in terms of access to capital
The classification of companies in terms of access to capital is as follows:
Listed companies: These companies have their securities listed on stock exchange markets. This means persons can freely buy and sell their shares. In such markets, public companies are commonly listed.
Unlisted companies: These companies, do not list their securities on stock exchange markets. Private companies can fall under this category.
Other classifications of companies
The following are other types of companies:
Government companies: These are those in which more than 50 percent of share capital is held by either the central govemment. or by one or more state govemments, or jointly by the central govemment and one or more state goverments.
Foreign companies: These are those that are incorporated or registered under the laws of one state but perform their businesses outside their domestic country.
Charitable companies under certain specific sections: Certain companies have charitable purposes as their objectives. Charitable companies focus on the promotion of arts, science, culture, religion, education, sports,trade, and commerce as their objectives.
These companies are not for profit making: hence they do not pay any dividends to their members.
Donnant companies: These are companies that exist but are inactive in a given period.
These companies are generally formed for future projects. They do not have significant accounting transactions and do not have to carry out all compliance with regulatory authorities.
Features of a company
The following are the features of a company:
Separate legal entity: There is a clear line of separation between the business and its owners. The business assets are separte from those of the owners or sharcholders.
Perpetual succession: Companies are established with a belief of indefinite operation. This means companies are designed in such a way that the death of any member will not significantly affect the continuity or going concem of the company.
Contr0l: Companies are always managed by the boardl of directors who act on behalf of the owners. They are responsible for appointing and guiding the top management and overseing the daily functioning of the company.
Liability: Contrary to the unlimited companies, limited companies have limited liability. The liabilities of owners of the business are limited to the amount of capital they have agreed to contribute or the amount of capital guaranteed by owners in the event of a crisis.
Common seal: Since there are many owners of a company, a common seal is prepared to identify all of them as one. The common seal is required to appear in all dealings of the company to guarantee the involvement of the company. In the ahsence of such a seal, company participation is not guaranteed and hence exempted.
Risk sharing: This is when the risk of the company is bome by every owner of the company and is limited to the amount of capital they have agreed to contribute. As the amount is home by many, the risk is spread out and thus, reducing its impact on an individual shareholder.
Advantages of a company
Operating a business as a company has the following advantages:
Encourages business expansion: It is easy for a company to grow since a company’ capital can be raised from different sources. Therefore, expanding the business becomes casier. Companies can inerease their capital by issuing more shres or debentures. They can also use their reserves to fund their expansion.
Transfer of ownership: For public companies shareholders are free to sell their shares at any moment in the stock market. This makes the company’s ability to continue with operation regardless of the transition in ownership (change in ownership).
Limited liubility: Unless otherwise stated, the liability of shareholders is limited to the amount of capital they have agreed to contribute or the guarantee that a sharebolder provides. If the company fails to meet its obligations to pay creditors, the personal property of sharebolders will not be taken to pay the company’s liahilities.
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