February 7, 2022

Your background The proposed business name and the starting date Location of the business Major activities of the business Uniqueness of your product/services What attracted you to this opportunity Explain your plans to exploit the opportunity What are your plans to diversity the business? What plans do you have for growth and expansion?

The aim of this last component of the business plan is to demonstrate your knowledge of inheritable or potential problems and risks and to show your willingness and ability to face them and deal with them. Relevant questions What are the inherent and potential problems , risk and other negatives your business may or will be faced with Will your intended business face any stringent regulatory requirements What potential legal liability or insurance problems might you face How can you avoid this problem, manage them or minimize their impact Can any problem be turned into opportunities? Types of critical risks and problem The are three types of critical risks and problems that you may wish to consider Inevitable risks and risks and problems Describe the nature of the problem and risks that your venture will be faced with, discuss how you will avoid or minimize their impacts Potential risks and problems Discuss the circumstances and situations that would prompt this risks and problems and how you will deal with them if they did Worst case scenario Give a worst case scenario of all inherent and potential risks that your intended business may suffer. summarize the consequences and what, if anything could be salvaged or recovered if these risks materialize .

The break-even analysis is used to analyze the effect on profits of different costs, volumes, and prices. This analysis shows the level of sales required to support the overhead of the business. The break-even point is that point at which the business will cover all its costs but will make me profit. The figures that we will use in the analysis can all be taken from your profit and losses. The first step is to break down all expenses, including cost f goods sold, into three categories: fixed, variable, and semi-variable. Fixed costs are those which remain the same regardless of the amount of sales. Some examples that are commonly fixed are: rent, management salaries, depreciation, interest, and professional services. Variable expenses are those expenses that vary directly with sales volume. Variable costs are direct material, sales commissions, and shipping costs. Semi-variable costs are those costs which vary with sales, but not indirect proportion. For example, if you double your sales, your utility expenses may increase but it probably will not double; on the other hand, it your sales drop to 0, utility expenses may fall, but it will not fall to.

In the operational phase of business planning, you will describe the facilities, labour and overheads required to manufacture your propose product(s) or render your proposed services(s). If you are in the manufacturing business, your will explain the manufacturing process for making your products. For a service business, you will describe the key process of offering your service(s). In both manufacturing and service industries, you should indicate any regulations, compliances and approvals that will affect your operations. Plant, Facilities And Equipment Type of Facilities Required List all equipment, machinery showing the cost, model and their capacities. List any other facilities required to set up the business and show your cost; lease purchases. Explain your plans for repairs and maintenance of the machinery Show your factory/office layout Levels of production (max. and mm) Explain expansion and future plans of your office/factory Production Strategy Describe your product development from ideation to sellable product or services Indicate costs you will incur when developing your new product What kind of technology will you use? What changes do you anticipate in technology and how will you cope with them? Describe your material requirements Who will be your main suppliers What alternative sources are available? What stock level do you anticipate? Describe the skills required for efficient production both for direct and indirect workers. Describe monthly production costs per product/service. What will be the total production costs in a month? Purchasing and stock control Production information evaluation Production Process Show stages to follow in producing the products/services Procedure/methods involved. What external factors are likely to affect your production process? How will you minimize the effects of external factors? Regulations Affecting Operation Outline the Government regulations and approvals that will affect your business Describe the required licenses and cost of procuring them. Are you legible for VAT, Income Tax and Local Authority Rates? What other approvals are required before commencing operations? (Consider health, trademarks, copyrights, safety regulations and environmental regulations

In the organizational plan for the business, you will develop policies for staff development and human resource management. This will enable you to achieve the efficient product of goods of effective performance of services. You will present in detail the job analysis and descriptions, employee evaluations, training and staff compensation plans. You also indicate the support staff and services required for your business. Organizational Structure Developing an organizational structure In developing the structure for your organization the following have to be considered: The extent to which you will manage the business yourself. Duties and responsibility for your management team, key personnel as well as those of other level. The structure of the organizational to show which departments or levels of authority/decision making the organization will have. Those in lower level report respectively to those in middle level who in turn report td those in the top level. This means that each key person in the middle level controls his department more effectively while you are able to preside over all the departments and coordinate them effectively for the achievement of the desired results. The key features in this area are: The extent of control and authority for each level. Duties and responsibilities for each per n in each of each level. Salary you will pay to each person. Salary you personally intend to pay yourself monthly so as to keep personal issues away from those of the business. A chart should be drawn as above specific to your business and placed at a prominent place for all to see. Key Management personnel This is a very important area as you will need skilled, experienced and hardworking people. You have to start in a strong way to be able to penetrate &e market. The key people are those employees without whom you may not start your .business at all. Features to consider in this area are: The importance of the job to the organization. What type of person to hold the job and who he/she will be responsible to. Position, duties and responsibilities of each member of the team Proposed salaries for the management team. Incentives you wish to provide for members of the team. The most important issue here is differentiating between yourself and your business, So you have to decide and:- Pay appropriate salary to yourself Pay appropriate salary to your other employees. Other Personnel Caliber of employees Outline their job specifications Incentives and Employment Agreement Human beings are known to work harder if they are given some respective staff it is better to determine some extra payment like commission as reward for hard work. It is also important and a legal requirement to have a written and signed contract of employment letter with all your employees – permanent or casual alike. In the contract, you have to state:- Salary and other benefits Leave days per year Duties to be performed To whom the respective staff reports and who reports to him Sick-leave days if any Retirement benefits or pension plan Health insurance cover, etc Describe how you will evaluate, develop and remunerate your staff Outline staff regulations Describe how you will evaluate the performance of employees How will you reward outstanding performance People System Recruitment and selection Sourcing and appointment Training of employees/employer Needs analysis and mechanics Promotional: Appraisal and retention Policy and monitoring Remuneration and incentives Pay systems Communication channels Support services Bank Auditor/Accountant Lawyer Small business brokers Postal services Insurance Telephone/fax E-mail address Printers

In order to achieve the targeted sales, the way you price your products and/or services matter a lot. Examples of overall marketing strategies include: Market penetration Product development strategy When developing pricing strategy, you have to consider the following factors:- Methods of calculating the selling price of your products and/or services. Factors which will influence your price setting e.g. competitors’ price, demand for the product, production costs. Actual selling prices of your products and/or services. Credit terms to be offered. Discounts, e.g. trade discount, cash discount. Any after-sales services and relevant costs. Justify your prices, particularly if they are substantially above or below the prices of similar products and/or services in the market place. Demonstrate that your pricing decision is based on your company’s ability to make a profit. Show calculations for determining your selling price (methods of coming up with price) How does this compare with the price charged by each of your competitors – impact of products/services Cost price reduction approach What is your gross profit margin What price structures have you in place to cover quantity discounts – structure What credit terms will you offer to your customers? What discounts will you offer your agents, distributors What pricing policies do you have for after sales services? Describe the size of your competitors. Are they small, medium, or large in relation to your business. (Consider assets, sales volumes, number of employees, and number of brands). Sales Tactics Describe the methods you will use to make sales These selling techniques, including: Personal selling Selling indirectly e.g. use of agents Getting orders Satisfying customer needs Customer interviews Sales appeals Recruitment and retention of the sales force Ways of selecting and motivating distributors/agents and/or sales people Servicing, Warranties And Packaging In this part of a business plan, you are required to:- Discuss the types of packaging that you will use. The policies that you set regarding servicing and warranties Discuss the purpose of the packaging, servicing and warranties Explain how they fit in your overall marketing approach Explain why you feel that they will increase sales and profits. 1. For packaging, Explain what features will be responsible for sales, it is The appearance of the packaging Colour Texture or Design Is there something other than the sensory appeal of the package? For example: The packaging may make it easier for the customer to carry It may reduce the chances of breakage Discuss the cost of the packaging 2. For servicing: Describe your servicing programme. What features are included in this programme? Explain your purpose for each of these services Are they additional sources of income? Do they result in future sales by increasing customer satisfaction or by enhancing your reputation? Explain who will provide the services and under what arrangements: Do you intend to continue the servicing without additional change? If not, will the customer be able to buy a service contract or will he/she merely pay cash for each servicing? What will you charge for the servicing and what will your costs be? Advertising And Promotion Making your products and services known to your potential customers is essential in increasing sales. In this part of your business plan you should discuss your planed advertising and promotion programme. When setting an advertising and promotion programme, consider the following: 1. Decide on the purpose of the programme For example: Are you try to generate immediate profit and trying to build up your business mage? Are you trying to create awareness of your products? 2. Identify the advertising and promotion target. Will your advertising and promotion be directed toward the general population, your entire market or a portion of the market? 3. Determine what media to be used. Use most appropriate media for your target market. 4. Determine the amount to be spent, the frequency of the advertisement and the content of the advertisement. 5. Decide in advance how you will measure the effectiveness of the advertising programme. 6. Determine the plans for initial promotional campaign and plans for regular promotional methods. 7. Determine the cost for each promotional event. 8. Determine how you will measure the promotional effectiveness. For your business plan, include as much information as you have. What will be the frequency of your advertising? How do you intend to promote each product/service? What promotional activities do your competitors use? What is your advertising and promotional budget? How will you measure the effectiveness of each promotional activity? Distribution Strategy Reaching the market: Marketing channels These refer to how goods reach the market place. For a business there are two choice of channels: 1. To distribute to end users 2. through intermediaries Multi- level marketing these is used to describe a variety of ways of reaching consumers: by a chain of direct selling agents this includes pyramid selling which is legally regulated as many self employed people were duped into buying a stock of product which was being sold to fill up the distribution lines and rarely to end users. Multi-level or network marketing involves setting up a pyramid structure of sales agent, who earn commission on their sales to consumers and to other agents and both on their sales to consumers and to other agents the agent does not need to buy stock in order to make a sale, other than for demonstration purposes thus if final users are not buying the product the system breaks down In describing the channels distribution you tend to use. Consider the following: Types of channels of distribution available Nature and channels you will utilize Location/premises improvement resources Outline your distribution channels geographical area you intend to serve What means of transport will you use and how much will it cost? What problems do you anticipate in your distribution network? Indicate methods of solving the problem

A very important part of your market research is the investigation of your potential competitors. When doing this investigation, don’t think of your competitors as ‘enemies’, consider them as a source of information. Look at what your would be competitors are doing, analyse the factors that have contributed to their success or failure. Determine if there are any gaps to be filled. Capitalise on these gaps and areas of weaknesses. The following are some of the items that are included in this section: Competitive comparison Use this topic for a general comparison of your offering as one of several choices a potential buyer can make. Use a separate topic, in the market analysis section, for detailed comparison of strengths and weaknesses of your specific competitors. You should discuss how your product lines and retail offering compare in general to the others. For example, your outdoor store might offer better ski equipment than others, or perhaps it is located next to the slopes and caters to rental needs. Your jewelry store might be mid-range in price but well known for proficiency in appraisals, remounts, and renovation. Your hobby shop has by far the largest selection of model trains and airplanes. In other words, in this topic you want to discuss how you are positioned in the market. Why do people buy from your business instead of from others in the same market? What do you offer, at what price, to whom, and how does your mix compare to others? Think about specific kinds of benefits, features, and market groups, comparing where you think you can show the difference. Describe the important competitive features of your products and/or services. Do you sell better features, better price, better quality, better service, or some other factor? Sourcing and fulfillment Explain your product sourcing and the cost of fulfilling your service. Manufacturers and assemblers should present spreadsheet output showing standard costs and overhead. Distributors should present discount and margin structures. Service companies should present costs of fulfilling service obligations. For example, sourcing is extremely important to a manufacturing company. Your vendors determine your standard costs and hold the key to continued operation. Analyze your standard costs and the materials or services you purchase as part of your manufacturing operation. Look for strengths and weaknesses. Manufacturing companies want to have ample information about resource planning and sourcing of vital materials, especially if you are preparing a plan for outsiders, such as bankers or investors, or for business valuation. In this case, you may have additional documentation you can copy and attach as appendices, perhaps even contracts with important suppliers, standard cost breakdowns, bills of materials, and other information. Where materials are particularly vital to your manufacturing, you might discuss whether second sources or alternative sources are available, and whether or not you use them or maintain relationships with them. This is also a good time to look at your sourcing strategy, and whether or not you can improve your business by improving your product sourcing. But sourcing is not just for product-based companies. For example, a professional service company, such as an accounting practice, medical practice, law practice, management consulting firm, or graphic design firm, is normally going to provide the service by employing professionals. In this case, the cost is mainly the salaries of those professionals. Other service businesses are quite different. The travel agency provides a service through a combination of knowledge, rights, and infrastructure, including computer systems and databases. The Internet provider or telephone company provides a service by owning and maintaining a network of communications infrastructure. A restaurant is a service business whose costs are a combination of salaries (for kitchen and table waiting) and food costs. Description of competitors Size of competitors. Profitability of competitors Operating methods Description of competitors Identify those businesses which will be competing with yours Size of competition Determine the assets, sales volume and market share of the major competitors Profitability of competitors Try to determine how profitable the business is for those businesses already in the field. Determine: Which business are making profits Which ones are making losses and How much (profit or loss). Operating methods For each of the major competitors, try to identify the relevant operating methods. Consider the following. Price of the product and/or service Quality of the product and/or service Hours of operation; ability of personnel Servicing, warranties and packaging Methods of selling; distribution channels Credit terms; volume, discounts. Location, advertising and sales promotion Reputation of the business, etc Once you have identified your competitors you need to further classify these as Primary Secondary Potential This is because:-  The classification makes your research easier Your marketing strategy may be different for each group. How can you find out the size and profitability of your competitors’ businesses? You may use the following tips: Read the publications that cover the business scenes, e.g. annual reports. Conduct primary research by contacting business directly. This may not be very useful. Contact the firm’s suppliers or other individuals who are in a position to know or estimate the position. Make a reasonable estimate from the bits and pieces of information you have collected.

Market area size and trend Market area : Specify your intended market. In what geographical area is your market to be located? Market size: Once you have identified your market, determine the size of that market. This may be done in unit sales and in Kenya shillings. It is useful to have several years of sales figures so that comparisons can be made. Market trends and outlook While historical data in market size is important, it is not correct to merely project from that data into the future. Other factors may cause the market to change drastically. One way of estimating the outlook for the future is to analyse the trends that are occurring or are expected to occur in the market. The analysis of these trends is important because it is not only used to determine the market size, but also to determine how best you can operate in the market. For example, if you intend to open up a food store, you may find that there is a definite trend of people eating away from home, particularly at fast food restaurants. This trend, if it continues, will have a positive effect in the food stores. Knowing the trend tells you much about the expected size of your market and also points out questions that you will want to consider when deciding to operate your store, e.g. Will you want to locate your store in an area where there are many or few fast food outlets/ Will you want to include fast food items in your stores? Will you want to advertise the advantages of eating at home and the disadvantages of eating out? To determine your research may require primary and secondary data sources. To determine the trends in the market you have to identified the trends that are relevant and of interest to you; Marketing analysis One of the greatest needs of the owners of small businesses is to understand and develop marketing programmes for their products and services. Small business success is based on the ability to build a growing body of satisfied customers. Modern marketing programmes are built around “the marketing concept” and performance, which directs the owners to focus their efforts to identifying, satisfying and following the customer’s needs all at a profit. The marketing concept The marketing concept rests on the importance of customers to a business and states that: all business policies and activities should be aimed at satisfying customer needs, profitable sales volume is a better company goal than maximum sales volume When applying the marketing concept, a small business should: 1. Determine the needs of their customers (market research) 2. Analyze their competitive advantages (market strategy) 3. Select specific markets to serve ( target marketing ) 4. Determine how to satisfy those needs ( market mix) Market research In order to manage the marketing functions successfully, information about the market is necessary. Frequently a small market research program, based on a questionnaire presented to present customers and or prospective customers, can disclose problems and areas of dissatisfaction that can be easily remedied, or new products or services that could be offered successfully. Market research should also encompass and identify trends that may affect sale profitability levels. Population shifts legal developments, and the local economic situation should be monitored to enable early identification of problems and opportunities. Competitor activity also should be monitored; competitors may be entering or leaving the market. For example it is very useful to know your competitors strategies are (i.e , how do they compete?). Marketing strategy Marketing strategy includes identifying customer groups (target markets ) , which a small business can serve than its large competitors , and tailoring its product offerings prices , distribution, promotion al efforts and services towards that particular market segment ( managing the market mix). Ideally the strategy should try and address customer needs which currently are not been met in the market place and which represent adequate potential size and profitability. A good strategy implies that a small business cannot be all things to all people and must analyze its market and it’s on capabilities and so as to focus on a target market. Target marketing Owners of small businesses have limited resources to spend on marketing activities. Concentrating their marketing efforts in one or two key segments is the basics of target marketing. Market segmentation is the process of dividing the total market for a product or service into groups with similar needs, such that each group is likely to respond favorably to a specific marketing strategy in order to divide the total market into appropriate segments an entrepreneur must consider segmentation variable which are parameters that identify the particular dimensions that distinguish one form of business behavior from another The major ways to segment a market are: 1. Geographical segmentation: specializing in serving the needs of customers in a particular geographical are. (for example a neighborhood shop may send advertisements only to people living one half kilometers of the shop) 2. Customer segmentation: identifying and promoting to those group of people who are most likely to buy the product. In other words, selling to heavy users before developing new users 3. Demographic segmentation: these refer to certain characteristics that describe customers and their purchasing power for example age, marital status, gender, sex and income. Managing the market mix There are four key marketing decisions areas in a marketing program. They are: Product and services: product decisions will transform the basic product or service idea into a bundle of satisfaction. Effective product strategies for a small business may include concentrating in a narrow product line developing a highly specialized product or service or providing a product –service e package containing unusual amount of service. Promotion: promotion activities will communicate the necessary information to target markets this marketing decision area includes advertising, salesmanship and other promotional activities in general. High quality salesmanship is a must for small businesses because of their limited ability to advertise heavily. Price: pricing declensions

The marketing plan is the second stage of preparing your business plan. This phase is highly critical because it provides the basis for the organizational, operational and financial plans. You will need to conduct a market research i.e., an in-depth analysis of your intended market. This will enable you to describe your market opportunities and challenges. You can then develop the marketing strategies, tactics and policies required to exploit the market opportunities. You should note the sources of any market data you use and present your facts convincingly. Customers Describe your potential customers Classify your customers into groups Conducting Market Research and Analysis You need adequate information about your market so that you can have a good marketing plan. This information can be attained through marketing research. In this part of the marketing plan, you are required to gather information relating to the following: Customer profiles. Market area, size and trend Competition. You can then use the information gathered to estimate your market share and sales. Discussed below are the pertinent information that you will need in relation to the above (i.e. customer profiles, competition and market area, size and trend). Customer profile It is important to understand your potential or current customers because without customers, there is no business. Steps in researching your customers You can use the following steps when conducting research about your customers. 1. Determine who your customer are Customers can be: Wholesalers – businessman who buy the product to re-sell to retailers and sometimes to final customers. Retailers – businessman who buy the product and sell to the final consumers. Final consumers or end-users – Persons or groups of persons who use the products to sanctify their needs. Final consumers may be individuals, households and institutions such as schools, churches, hospitals, etc. Determine the key characteristics of the potential customers Income Age Sex Education Occupation and any other relevant characteristics Characteristics of the customers, income and occupation – demographic and location of customers. This information will be useful in determining the appropriate pricing, promotion and advertising strategies. Determine why customers buy certain products and/or services. Some of reasons could be Value propositions Businesses address needs by putting forth a value proposition i.e. a set of benefits they offer to customers to justify their needs e.g. the intangible value proposition is made physical by an offering that can be a combination of products s, services information and experience A brand is also an offering and all businesses strife to build brand strength i.e. a strong favourable brand image, the offering will be successful if it delivers value and satisfaction to the target buyer. Customers buy products and/or services to satisfy various needs and determine the factors that influence the customers to buy or not buy products and/or service. Many factors influence the customers to buy product and/or service. Some of the factors you should investigate are Product considerations Price Quality  Appearance (colour, texture, shape, materials, etc.) Packaging Size (Weight and volume) Fragility, ease of handling, transportability Servicing, warranties, durability Operating characteristics (efficiency, adaptability, etc) Business considerations Location and facilities Reputation of company Methods of selling Timing (hours of operation, delivery times) Credit facilities Advertising and promotion Variety of goods and/or services. Capability of employees Other considerations Shift in income Seasonality, or weather changes Changing customers attitudes and lifestylesChanges in the economy (recession, depression, inflation, etc). When and why they purchase

Describe the products of service of your business: List and describe the products or services you sell. For each business offering, cover the main points, including what the product or service is, how much it costs, what sorts of customers make purchases, and why. What customer need does each product or service line fill? You might not want or need to include every product or service in the list, but at least consider the main sales lines. It is always a good idea to think in terms of customer needs and customer benefits as you define your product offerings, rather than thinking of your side of the equation–how much the product or service costs, and how you deliver it to the customer. As you list and describe your sales lines, you may run into one of the serendipitous benefits of good business planning, which is generating new ideas. Describe your product offerings in terms of customer types and customer needs, and you’ll often discover new needs and new kinds of customers to cover. This describes; Main product/services and their subsidiaries (brands) Main features of proposed products/services indicate colour, shape, texture, quality and packaging of the product(s). Benefits of products to customers and the customers needs, Indicate the performance, Convenience, economy, comfort, durability, usage flexibility, service and warranties of the product(s) or service(s). Competitive advantage of your services/products and uniqueness Why customers should buy your products/services Packaging strategy Trade marks or other proprietary features Strategic formulation and implementation Once the business unit has developed its principal strategies, it must work out details supporting programmes .even the unit has decided to attain technological leadership, it must plan programmes to strengthen its Research & Development department, gathers technological evidence, develop leading –edge products, train the technical sales force, and develop advertisements to communicate its technological leadership. Entry and growth strategy Explain acceptance of your products/services in the market Indicate superior pricing, advertising, distribution or promotion Measures to sustain your business in the market Plans for growth and development of opportunities Trends which signal growth and opportunities Taking advantages of opportunities Strategic alliance. Small businesses can also form strategic alliances with other small firms in ways that enhance mutual competitive strength. statistics suggests that about a half of all small businesses maintain one or more strategic alliances with businesses that are smaller or equal in size , especially when it comes to outside contractors , licensing partners , import /export operations , marketing agreements and shared manufacturing . Strategic alliances allow business firms to combine their resources without compromising their independent legal status. Strategic alliance match makers can help small businesses find suitable alliance partners, entrepreneurs can improve their chances of creating and maintaining a successful alliance by establishing productive connections, identifying the best person to contact being prepared to confirm benefits of that alliance learning to speak the partner-s “language”, and monitoring the progress of the alliance. Marketing alliances Many strategic alliances take the form of marketing alliances they fall into four categories , 1. Product or service alliance: one company licenses another to produce its product, or two companies jointly market their complementary products or new products –two service business—have also joined together in a marketing alliance. 2. Promotional alliances: one company agrees to carry out a promotion for another company’s product or service. Mc Donald’s, for example, has often teamed with Disney to offer products related to current Disney films t people buying its food. 3. Logistics alliances: one company offers logistical services for another company’s products. 4. Pricing collaborations: one or more companies join in a special pricing collaboration. it is common for hotel and car companies to offer mutual price discounts Companies need to give creative thought to finding partners that might compliment their strengths and offset their weaknesses. Well – managed alliances allow companies to obtain a greater sales impact at less cost. To keep their strategic alliances thriving, corporations have begun to develop organizational structures to support them and have come to view their ability to form and manage partnerships as core skills in and of themselves (called Partner Relationship Management, PRM) companies can designate a core group in charge of partnerships, even if it is not formal, to manage and monitor alliances. Goals indicate what a business unit wants to achieve, strategy is a game plan to getting there. Every business must design a strategy for achieving its goal consisting of a marketing strategy compatible with technology strategy and sourcing strategies.

Try to find out what is expected to happen within the industry in the future. Are the sales, profits and competitors expected to increase, decrease or stabilize? Show figures. What new product or new production methods are expected? Will the industry become more or less competitive with other industries? Proprietary position Do your products and/or services have any competitive advantage because of patents, copyrights, trademarks, franchise or dealership rights and the like? If so, explain the advantages and state how long this proprietary position is likely to last. State any other factors that give you a competitive advantage. Industry Characteristics Determine the important characteristics of the industry and list those that are relevant to your business. List those characteristics which could have an impact upon your business, beneficially or adversely. Some characteristics that you might wish to consider are:- Capital requirements Distribution channels Technology to use- modern, outdated sophiscated or simple Whether it is capital or labour intensive Competition from imports Market segmentation and size of competitors Describe the seasonal factors that are experienced in the industry. Industrial trends and prospect Describe the trends and prospect of sales in the industries – indicate sign of growth, stability or decline. Describe the trends and prospects of technological development in the industry Competitive trend in the industry and what future holds for the industry e.g product innovations

This is an association of persons, called share holders who contribute capital to carry out business together with a view of making profit. A company is however a legal entity separate from the shareholders. Formation of a limited liability company The people who decided to form a company are referred to as promoters’ .During the formation; the promoters prepare the following documents: Memorandum of association This document defines the relationship of the proposed business with the outsiders. The following are some of the clauses it contains: Name clause Objects clause Situation clause Liability clause Capital clause declaration Articles of association This document governs the internal operations of the proposed company. it also contains rules and regulations relating the shareholders to the company and the relationship among shareholders themselves. Some of its other contents are: Rights of each type of shareholder. Methods of calling and conducting meetings. Rules governing the election of officials. Rules governing preparation and auditing of accounts. Powers, duties and rights of directors. List of directors This contains the names of the directors, their addresses, occupations shares subscribed by each of them and their acceptance to serve as directors. Directors statement of agreement The directors sign in this document to indicate their acceptance to act as directors. Declaration This is a document in which the promoters declare that all legal requirements have been complied with .Once the above documents are ready, they are lodged with the registrar of companies and business names who issues a certificate of incorporation. (Registration) Sources of capital for Limited Liability Company 1. Shares A share is a unit of capital in a company. Members contribute to the company by buying shares .There are two types of shares: Ordinary (equity) shares and preference shares .Some of the characteristics of ordinary shares are: Have voting rights, No fixed rate of interest Have a claim to dividends after the preference shares. Are paid lastly if the company is winding up. Some of the characteristics of preference shares are: Have a fixed rate of dividends. Have a prior claim to dividends over the ordinary shares. No voting rights. Can be either redeemable or irredeemable. Can be cumulative or non cumulative Can be convertible into ordinary shares. 2. Debentures Debentures are loans from the public to the company. They therefore carry interest at fixed rates which is payable whether profits are made or not. Debentures can be redeemable or irredeemable. They can also be secured (mortgaged) or unsecured (naked). 3. Loans from banks and other financial institutions. 4. Profits ploughed back. 5. Bank overdrafts. 6. Leasing and renting of property. 7. Credit and hire purchase buying. Types of limited companies Limited liability companies may be classified into either private or public limited company: 1. Private companies. A private limited company may be identified by the following characteristics: Can be formed by two to fifty members. Does not invite subscription for shares and debentures from the public. Restricts the transfer of shares and debentures. Can be managed by at least one director. Can start business immediately after receiving a certificate of incorporation. 2. Public limited companies A public limited company may be identified by the following characteristics: Formed by a minimum of seven members and no maximum. Cannot start business before it receives a certificate of trading. Accounts are required to be published. Shares and debentures are freely transferable. Invite the public to subscribe for shares and debentures. Advantages of a limited liability company The following are some of the advantages of a public limited company: Wide range of sources of capital. Limited liability.  Can afford specialized management. Not affected by death, insanity or bankruptcy of a share holder. Enjoys economies of scale. Enjoy legal personality status. Can afford to put in place schemes meant to motivate employees. Disadvantages of a limited liability company The following are some of the disadvantages of a limited liability company: High cost and long procedures of formation. Operations are inflexible and rigid. Alienation of members from the business. Lack of secrecy. Directors’ personal interest might conflict with those of the company. Decision making might take long. May suffer from diseconomies of large scale. Taxation on profits and also on dividends results into double taxation. Dissolution of public limited companies A company may be liquidated under the following circumstances: Bankruptcy. Decision by share holders to dissolves the business If the company acts contrary to the provisions of the objects clause of the memorandum of association (Ultra-vires). Court order. Amalgamation /absorption.