Commerce: Meaning, Scope, Functions and Importance in Economy

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 Differences between Commodities and Stocks

i) Stocks represent ownership in a company, not a commodity:
When you buy stocks, you become a part-owner of a limited liability company. This differs from commodity trading, where you own a certain quantity of a physical asset like gold, oil, or agricultural products.

ii) Stock ownership has no time limit, unlike commodity contracts:
Owning stocks is not time-bound, you can hold them for as long as you want or sell them whenever you choose, provided the company still exists. Commodity contracts, however, have a short duration (usually a few months) and expire when the contract period ends, often leading to physical delivery of the commodity.

iii) Stocks can generate dividend income; commodity contracts do not:
Shareholders of a profitable company may receive dividends as part of the company’s earnings. On the other hand, commodity contracts do not offer any income stream.

iv) Commodity prices are typically more volatile than stock prices:
Although stock prices can fluctuate, commodity prices are usually more unstable. Factors like overproduction, crop failure, political instability, and shifts in consumer demand significantly impact commodity prices.

v) Commodity trading provides better opportunities for risk management and speculation:
Farmers, miners, and businesses that rely on commodities can manage price risks using forward, futures, and options contracts. This hedging helps protect them from adverse price changes. Speculators also use commodity trading to bet on price movements. Stocks offer fewer opportunities for such risk management and speculation.

vi) Stocks are mostly traded in spot markets, while commodities are not:
In the stock market, transactions typically occur on the spot market. This means payment and transfer of ownership happen immediately. Stocks can be bought directly from companies in the primary market or from previous owners in the secondary market. Commodity transactions, however, are not always spot-based.

Tangible and Intangible Assets

A distinction is often made between tangible and intangible assets.

Tangible assets: It refers to physical commodities such as goods and raw materials. These are items that have inherent utility and value.

Intangible assets include financial instruments such as foreign currencies, stock indices, shares, bonds, and other debt instruments. Unlike tangible assets, intangible ones do not provide direct utility or benefits until they are converted into goods or services through exchange.

Tangible assets can be converted into intangible ones through financial contracts such as forward, futures, and options. In these cases, tangible commodities serve as the underlying assets of the contract, and it is these contracts that are traded in commodity exchanges, not the physical commodities themselves. Conversely, intangible assets can be converted into tangible ones when buyers of these contracts take delivery of the actual goods once the contracts reach expiration.

 Sole Proprietorship

Definition of Sole Proprietorship:
A sole proprietorship is a business owned and managed by a single individual known as the sole proprietor. This type of business can range from managing one shop to overseeing multiple outlets. The sole proprietor may be involved in various trades, such as printing, publishing, or running a small manufacturing business.

In Nigeria, typical examples of sole proprietors include local shopkeepers, restaurant owners, photographers, mechanics, booksellers, patent medicine dealers, and beauty salon owners.

Sole proprietorship is the oldest, simplest, and most common business structure in Nigeria. Its success or failure depends heavily on the proprietor’s ability to offer goods or services that meet people’s needs at affordable prices.

The sole proprietor is fully in charge of the business, often relying on the support of close family members or hired professionals.

Sources of Capital for the Sole Proprietor

A sole proprietor can raise capital for the business through two main sources:

1. Personal Funds
2. External Sources

1. Personal Funds (Adjusted Capital Fund)

Personal funds provided by the proprietor are known as adjusted capital funds. These consist of:

• Initial Capital: The money contributed by the proprietor at the start of the business, including the value of personal assets transferred to the business.
• Retained Earnings (Ploughed-Back Profits): Profits reinvested into the business after deducting personal withdrawals by the proprietor.

2. External Sources

Obtaining external financing is often challenging for sole proprietors because lenders may doubt their ability to repay loans. However, they can still access small amounts from the following sources:

• Non-Institutional Loans: Borrowing from friends and family.
• Loans from Financial Institutions: Loans or overdrafts from thrift societies, cooperative societies, and banks.
• Trade Credit: Goods purchased on credit from suppliers (referred to as trade creditors) and services obtained on credit (known as accrued expenses).

Advantages and Disadvantages of Sole Proprietorship

Advantages of Sole Proprietorship

1. Easy and Inexpensive to Set Up
   • Starting a sole proprietorship is simple and requires minimal costs compared to other business forms.
2. Quick Decision-Making
   • The proprietor can make prompt decisions without needing consultations or meetings.
3. Flexible Business Operations
   • With no bureaucratic processes, the business can quickly adapt to changing circumstances.
4. Close Relationships
   • The proprietor can build strong, personal relationships with employees, customers, and suppliers, which helps promote the business.
5. Full Control and Independence
   • The proprietor enjoys complete freedom in running the business, leading to greater efficiency and success.
6. Tax Advantages
   • Taxes on sole proprietorship profits are generally lower than those on similar profits from other business structures.
7. Privacy of Business Affairs
   • Sole proprietors are not legally required to prepare and publish financial statements, protecting business information from rivals and the public.
8. Motivation for Hard Work
   • The proprietor enjoys all the profits and bears all the losses, providing strong motivation for hard work.
9. Few Legal Restrictions
   • Sole proprietorships face fewer legal requirements compared to other business forms.
10. Easier Supervision
    • The small size of the business allows the proprietor to monitor and manage every aspect of operations.

 Disadvantages of Sole Proprietorship

1. Limited Capital
   • Lack of sufficient capital restricts growth and expansion.
2. Managerial Challenges
   • As the business grows, the proprietor may struggle to manage it effectively, leading to operational difficulties.
3. Unlimited Personal Liability
   • The proprietor is personally responsible for all debts and liabilities of the business.
4. Lack of Continuity
   • The business may end with the death of the proprietor if there is no successor willing or able to continue it.
5. Risk of Poor Decisions
   • The absence of consultation can lead to impulsive or unwise decisions.
6. Difficulty Obtaining Loans
   • Banks are often hesitant to lend to sole proprietors due to limited assets and lack of collateral. This vulnerability can result in bankruptcy when credit is needed to solve liquidity problems.

Partnership

Partnership is defined as a relationship between persons carrying on business together with the aim of making a profit. Simply put, a partnership is an unincorporated profit-making business owned by at least two people. The owners are called partners, and they serve as the business’s entrepreneurs.

According to the Companies Act of 1948, a partnership should not exceed 20 members. However, in Nigeria, it is rare to find partnerships with as many as 20 partners. Partnerships conduct business under the names of the partners, and if a different name is used, it must be registered with the Registrar of Business Names, with the partners’ real names clearly indicated on the company’s letterhead. This ensures transparency and protects the public by revealing the identity of the partners.

Types of Partnership

There are two main types of partnership:

1. Ordinary Partnership
   • All partners share equal responsibilities, powers, and liability for the business’s debts.
   • Each partner can participate in the management of the business.
2. Limited Partnership
   • Some partners have limited liability, which means their responsibility is restricted to the capital they invest in the business.

In both types of partnerships, partners can be categorized based on the nature of their contributions, capital, skills, or expertise. Below are the various classifications of partners:

Active Partner

• Actively involved in the general management of the business.
• Has unlimited liability for the business’s debts.

Special Partner

• Not involved in the management of the business.
• Liability is limited to the capital invested.
• The death, bankruptcy, or mental incapacity of a special partner does not lead to the dissolution of the partnership.
• A special partner’s consent is not required to introduce a new member into the partnership.

Dormant Partner

• A dormant partner does not actively participate in the business and may have retired from active involvement.
• However, a dormant partner remains liable for the business’s debts, despite their non-involvement.

Nominal Partner

• A nominal partner’s name only boosts the business’s reputation.
• This partner does not participate in the management or share in the business’s profits.

Secret Partner

• A secret partner actively participates in the management of the business but keeps their involvement unknown to the public.

Deed of Partnership and Partnership Law

A partnership agreement can be made verbally, in writing, or implied through the actions of the parties involved. However, it is preferable to have a written contract to serve as a reference in case of disputes. A formal written agreement outlining the terms of a partnership is known as a deed of partnership.

Contents of a Partnership Deed

A typical partnership deed includes the following details:

1. Names of the Partners – The full names of all partners involved.
2. Nature of the Business – A description of the business activities.
3. Capital Contributions – The amount of capital each partner is required to contribute.
4. Profit and Loss Sharing – The agreed method for distributing profits and losses among the partners.
5. Interest on Capital – The percentage of interest to be paid on each partner’s capital contribution.
6. Limit on Drawings – The maximum amount a partner can withdraw and the interest payable on such drawings.
7. Goodwill Valuation – Guidelines for valuing goodwill in the event of a partner’s retirement or death.
8. Partner Salaries – Compensation for partners who provide special services to the partnership.
9. Dispute Resolution – Procedures for resolving conflicts before taking legal action.
10. Duration of the Partnership – The agreed length of time the partnership will exist.

Read also: Introduction To Commerce (Scope, Characteristics & Functions)