Unit 2 The Nature and Scope of Small Business

HOW TO GET THE MOST FROM THIS COURSE

Each  study  unit  will  take  at  least  two  hours,  and  it  includes the introduction,  objectives,  main  content,  self-assessment exercises, conclusion,  summary,  tutor-marked  assignment  and references/further reading. Some of these exercises will necessitate contacting some small business  owners  (entrepreneurs)  and organisations  that  assist  these entrepreneurs  with  finance.  This is  to  enable  you  obtain  more information  in  practical  terms. There  are  textbooks  listed  under  the reference  section  for further  reading.  
They  are  meant  to  give  you additional information  when consulted. You are advised to practice the self-assessment exercises and  tutor-marked  assignment  for an  in-depth understanding of the course. The essence of studying the self-assessment exercises and tutor-marked assignment is to achieve the stated learning objectives.

MODULE 1  OVERVIEW OF SMALL BUSINESS

Unit 1   Definition of Basic Concepts: Small Business and Finance
Unit 2   The Nature and Scope of Small Business
Unit 3   Characteristics of Small Business
Unit 4   History of Small Business

UNIT 2  THE  NATURE  AND  SCOPE  OF  SMALL BUSINESS

CONTENTS
1.0  Introduction
2.0  Objective
3.0  Main Content
3.1  Small Business Activities in Nigeria 
3.2  Forms of Small Business
3.2.1  Sole Proprietorship
3.2.2  Partnership
3.2.3  Limited Liability Companies
3.2.4  Cooperative Societies
4.0  Conclusion
5.0  Summary
6.0  Tutor-Marked Assignment
7.0  References/Further Reading

1.0  INTRODUCTION

This unit examines the nature and scope of small business.  The nature and  scope  of  small  business  can  be  very  broad.  They include  all activities carried out by owners of small business, which are related to the production and distribution of  goods and services, for the purpose of earning profit. It also includes the forms of small business (ownership). 
Thus, we will examine the various small business activities carried out in Nigeria and also discuss the forms of small business. 

2.0  OBJECTIVES

At the end of this unit, you will be able to:
  identify some of the small businesses in Nigeria
  mention the various forms of business enterprise
  list the advantages and disadvantages associated with each form 
of business enterprise.

3.0  MAIN CONTENT3.1  Small Business Activities in Nigeria

Small  business  activities  in  Nigeria  are  found  in  these  areas, as identified by UNDP/SMEDAN (2006:53).

1.  Food processing enterprises
Food processing enterprises are the most common of small businesses. 
They are commonly referred to as restaurants. They account for about two-thirds of all small businesses, and are found everywhere meeting the basic food needs of local communities in both towns and villages. Most of the owners are women.
2.  Arts and crafts
With many cultural traditions, Nigeria has a rich and diverse heritage of traditional  arts  and  crafts.  There  are  many  people who  are  talented  in arts  and  crafts,  but  unfortunately,  they  have  little  or  no  external assistance for growth. They are found mostly in urban places where they are most patronised.
3.  Textiles and Clothing
Most  producers  of  textiles  and  clothing  in  Nigeria  are  small-scale enterprises.  They  are  mostly  found  in  commercial  areas like  Kano, Kaduna, Ibadan, Lagos, etc. Over the years, textile industry in Nigeria has suffered from government policies and foreign competition, leading to closure of factories, drop in market share and loss of jobs. 
We  also  have  the  tie-and-dye  sector,  which  prepares  textile with different designs and colours to make them attractive; there is also the garment  factory  that  helps  to  produce  dresses  of various  shapes  and types.
4.  Leather and Leather Products
Nigeria,  with  its  large  livestock  population,  particularly  cattle, sheep, and goats, has the raw materials for  leather and allied products industry. 
The leather enterprises produce shoes, bags, decorative accessories, etc. 
A typical example is the Naraguta Leather Works in Jos, Plateau state.
Small  business  activities  in  Nigeria  are  also  found  in  building and construction  enterprises,  electronic  and  information technology enterprises, basic metals, metal fabrication and engineering enterprises, among others.

SELF-ASSESSMENT EXERCISE 1

Identify some small businesses in Nigeria and discuss their activities.

3.2   Forms of Small Business
3.2.1   Sole Proprietorship
The  sole  proprietorship  business  is  also  referred  to  as  a  one-man business  due  to  the  nature  of  the  business.  This  type  of business  is owned and run by one person, sometimes he may have employees. Sole proprietorship businesses have no need of legal requirements before they are  established.  With  little  capital  or skill,  you  can  start  this  type  of business.
Sole  proprietorship  business  can  be  defined  as  an unincorporated business  owned  by  one  person  who  provides the capital,  runs  the business and undertakes the risks and profits of the business alone. This form of business is very common in Nigeria, especially because of the economic  situation  of  the country,  which  has  made  it  necessary  for people to find a means of livelihood. 
The sole proprietorship business is commonly found in the agricultural sector,  retail  trade  and  in  the  provision  of  direct services.  Many  big business  concerns  which  exist  today  started as  sole  proprietorship business,  an  example  is  the  Dangote Group.  In  Nigeria,  factors  that make  people  start  a  sole proprietorship  business  are  unemployment, desire to be independent, inheritance etc. 

Advantages of sole proprietorship

1.  It  is  easy  to  start  with  minimum  cost,  and  there  are  no legal intricacies. Many businesses started with a capital as small as five thousand naira or less.
2.  The owner enjoys privacy in conducting his  business. Thus, the 
sole proprietor can keep his business affairs secret.
3.  Decisions can be taken quickly, since the owner does not need to consult anyone. This is particularly advantageous, where there is 
need to exploit a particular business opportunity quickly.
4.  In this type of business, the owner has a sense of independence. 
There are people who do not want to bear other people’s business 
responsibilities  or  to  be  dependent  on  others  for  the  source of their livelihood. For such people, this type of  business is the best option.

Disadvantages of sole proprietorship

1  Insufficient  capital  is  one  of  the  major  setbacks  of  this form of business. In most cases, the owner finds it difficult to raise capital for the growth of the business from banks, because he may not be able  to  provide  collaterals.  However,  this  problem  is being reduced through the assistance of government and micro-finance banks.
2.  There is no continuity in the business, as the death of the owner 
may lead to the end of the business, either because there is no one 
to  carry  on  the  business  or  other  family  members  do  not have adequate entrepreneurial ability to manage the business.
3.  Sole  proprietorship  has  unlimited  liability.  He  bears  the  risk of the business alone. If business fails, he  bears the entire loss, and 
his personal belongings may be sold to pay his creditors.
4.  An  entrepreneur  may  lack  entrepreneurial  ability  required  in
running the business. This hinders growth. 

3.2.2  Partnership

This  is  a  form  of  business  carried  on  by  two  or  more  people with  the sole  aim  of  making  profit.  The  maximum  number  of partners  differs from  country  to  country.  Partnership  has  been in  existence  for  quite  a long  time.  The  nature  of  partnership  is such  that  the  partners  are  co owners of the business. It is formed as a way of boosting the capital base of a business, through the contributions of the owners.
To avoid conflicts or misunderstanding over internal management of the business, it is wise to draw up a partnership deed. The partnership deed is  a  written  agreement  providing  for  such things  as  sharing  of responsibility among partners, sharing of profit and loss among partners, etc. There are two types of partnership, they are as follows.
1  General partnerships-  here, the  partners  take active  part in the 
management  of  the  business,  in  addition  to  the  contribution of 
capital.
2  Limited or sleeping partnerships-  here, partners are limited to 
the amount stated in the partnership agreement. Such partners do 
not,  normally,  involve  themselves  in  the  management  of  the 
business. 

Advantages of partnership

1.  Capital  and  skill  are  easily  obtained  to  start  or  expand  the 
business.  The  partners  can  raise  more  capital  by  pooling  all 
resources together for the benefit of the business.
2.  It  is  easy  to  form  and  organise,  because  it  is  devoid  of 
complicated  legal  requirements;  and  the  organisation  benefits 
from the skills of partners. 
3.  The  business  has  greater  continuity  than  the  sole proprietorship business.  The  death  of  a  partner  may  not  lead to a  total dissolution of the business, since other partners can still go ahead.
4.  There  is  personal  contact  with  both  employees  and customers. 
This is because of the relatively small size of the business when 
compared with limited liability companies.

Disadvantages of partnership

1.  Distrust,  disloyalty  and  divided  interest  of  partners  may create problems for the business, especially where some partners are not committed to the goal of the business.
2.  Unlimited  liability  of  partners  poses  a  big  problem  in  a 
partnership  agreement,  especially  in  cases  of  losses.  Personal 
belonging  of  partners  could  be  taken  to  settle  serious business 
debt.
3.  All partners have to be consulted before major decisions relating to the business are taken, thus, decisions may take a longer time to be reached than what obtains in the sole proprietorship.
4.  Each partner is responsible for the action of the others. A partner
may enter a risky contract which is binding on the other partner. 
In case of failure, every partner will be affected.

3.2.3  Limited Liability Companies

In Nigeria, limited liability companies are of two types. These are listed below.
1  Private Limited Liability Company
This is a business enterprise, formed by two  to fifty people. Shares of the company are not quoted on the  stock exchange market. This means that  the  public  do  not  subscribe  to  its  shares.  In  all formal documentation, private limited companies are expected to use ‘limited’ 
(Ltd) after their name.
2  Public Limited Liability Company  or Joint Stock Company 
This  is a business enterprise formed by the association of,  at least, seven members, with no restriction on the maximum number of members. The shares of this company are quoted on the stock exchange. In all formal 
documentation,  public  limited  companies  are  expected  to  use ‘Public Limited company’ (Plc) after their name.
A limited liability company is usually considered as a legal entity that can own assets, enter a contract, sue and be sued; it can also have bank accounts in its name, incur liabilities and employ other people to work 
for  it  (Olowe,  2008).  This  means  that  limited  liability companies  are legally  separate  from  all  other  persons  in  the company.  Thus,  the company’s  assets  and  liabilities  belong  to the  company,  not  to  the members of the company.
In  Nigeria, the formation of limited liability companies is governed by Company and Allied Decree of 1990. The law states that such company must  be  registered  with  the  Registrar  of  Companies  -the  Corporate Affairs Commission. A memorandum and article of association must be submitted by the company. 
The memorandum of association of a company is a document that states the details of the relationship of the company with the outside world. It contains  the  following-  company  name,  office  location and  address, objectives and nature of the business, liabilities of shareholders, amount and type of share capital, and so on. The article of association, on the other hand, gives details of the internal workings of the company, such as- time and schedule of meeting, power of directors, etc. 
Once necessary documents are submitted, and verification is conducted by  the  Registrar  of  Companies,  the  company  will then  be  issued  a certificate of incorporation.

Advantages of limited liability companies

1.  Liabilities  of  owners  are  limited  to  the  amount  of  capital 
contributed
2.  It  is  easier  to  raise  additional  capital  on  the  identity  of  the company
3.  The company enjoys continuity. This means that the company is 
expected  to  continue  to  exist,  irrespective  of  the  death  of  any 
member.
4.  The  company  offers  special  adaptability  for  small,  medium  or large businesses. This means that a public company can be set up under small, medium, or large scale basis.

Disadvantages of Limited Liability Companies

1  Limited liability companies  are  usually under the watchful eyes 
of  the  government,  in  terms  of  their  profits,  activities, 
employment, etc. Thus the business lacks privacy.
2  There is delay in making decisions because of the relatively large size of the business.
3  There  is  so  much  bureaucracy.  Duties  must  be  discharged 
according  to prescribed rules and regulations; there is too much 
emphasis  on  routine  work.  This  prevents  the  use  of  personal 
initiatives.
4.  There  is  usually  no  personal  relationship  between  the 
management  of  the  company  and  workers  on  one  hand,  and 
management and customers on the other hand.

3.2.4  Cooperative Societies

This  is  a  self-help  business  enterprise  formed  by  consumers and producers who have the aim of carrying on a business for the benefits of all  members.  We  have  many  types  of  cooperatives, but  three  types  of cooperatives will be discussed here.
1  Producers’ cooperatives
This  is  an  association  of  producers  of  a  particular  commodity. It  is formed to promote the interest of producers in the area of pricing and marketing. An example is agricultural cooperative societies.
2  Consumers’ cooperatives
This is an association of consumers who buy products in bulk, from the source at wholesale price, and sell them at retail price to both members and  non-members.  The  objective  of  this  society  is  to reap  the  profit which the middlemen would have earned.
3  Credit and thrift cooperatives
These  are  formed  with  the  aim  of  promoting  saving  culture among members.  Members  in  this  association  contribute  money for  savings, based  on  their  abilities.  The  saved  money  is  then made  available  to members  through  loans  at  rates  of  interest much  lower  than  financial institutions. The money contributed or saved can also be used for other investment purposes like investing in shares, establishing businesses etc. 
This type of cooperative is common among workers. An example is the ASUU Cooperative in all Nigerian universities.

Advantages of cooperative societies

1.   Producers  of  similar  commodities,  with  small  capital  base,  are able  to  pool  their  resources  together  in  order  to  produce  on  a large scale. 
2.  Consumers’  cooperatives  help  to  keep  prices  within  bearable limits for consumers by buying at a cheap rate from source and selling at an affordable price to consumers. 
3.  Credit and thrift societies encourage the culture of saving among people, thereby boosting investment in the country.

Disadvantages of cooperative societies

1.  Lack  of  sufficient  capital  may  be  a  serious  setback,  in  that,  the resources of members may be small.
2.   Societies are always run by inexperienced managers who are not versed in the techniques of modern management. This affects the growth of the societies.

SELF-ASSESSMENT EXERCISE 2

i.  Identify the various forms of business enterprise.
ii.  Mention the advantages and disadvantages associated with each 
form of business enterprise?

4.0  CONCLUSION

In this unit, you are exposed to the various business activities in which entrepreneurs can invest their money on. They include food processing enterprises,  arts  and  crafts,  textiles  and  clothing,  leather  products,  etc. 
When  the  business  line  has  been  selected,  the  choice  of  the  form  of business organisation that needs to be set up is then made, which ranges from sole proprietorship to cooperative societies. There are advantages and disadvantages associated with each of them.

5.0  SUMMARY

In  this  unit,  you  are  made  aware  of  the  scope  of  small  businesses  in Nigeria. The unit, specifically, identifies and discusses the activities of some  small  businesses  in  Nigeria.  Various  forms  of  small  business organisations have also been examined, with their associated advantages and disadvantages. 
In the next study unit, you will be exposed to some of the characteristics of small businesses. 
Next Unit 3   Characteristics of Small Business

6.0  TUTOR-MARKED ASSIGNMENT

1.  Mention four major small businesses in your locality and discuss 
their activities
2.  What are the various forms of business enterprises?

7.0  REFERENCES/FURTHER READING

Olagunju,  Y.A.  (2008).  Entrepreneurship  and  Small  Scale Business Enterprises  Development  in  Nigeria.  Ibadan: University Press PLC.
Olowe,  R.A.  (2008).  Financial  Management:  Concepts, Financial System  and  Business  Finance.  Lagos:  Brierly  Jones Nigeria Limited.
UNDP/SMEDAN  (2006).  National  Policy  on  Micro,  Small, and Medium Enterprises. Abuja.

Next Unit 3   Characteristics of Small Business