Chapter 4 : Types of business organization

Business organisations: the private sector

Sole trader
• Sole trader - is a business owned by one person. The owner is the sole
proprietor

• There are only a few legal regulations which must be followed:

1. The owner must register with, and send annual accounts to, the
Government Tax Office.

2. The name of the business is significant. - In most countries, it is

sufficient for the owner to put the business name on all of the
business’s documents and to put a notice in the main office stating
who owns the business.

3. Observe laws which apply to all businesses in that industry. For

example, health and safety laws

Advantages of being a sole trader Disadvantages of being a sole trader

• Few legal regulations - • Individual - No one to discuss

There were few rules business matters with as they are
and regulations for the sole owner.
the trader to worry • No limited liability - Sole traders
about when setting up do not have the benefit of
the business. limited liability(means that the
• You are your own liability of shareholders in a
boss. This means that company is limited to only the
a sole trader has amount they invested). The
complete control over business is not a separate legal
the business and there unit therefore they are fully
is no need to consult responsible for any debts that the
 with or ask others business may have due to
before making unlimited liability Unlimited
decisions. liability (means that the owners
• Independence - Sole of a business can be held
traders have the responsible for the debts of the
freedom to choose business they own. Their liability
their own holidays, is not limited to the investment
hours of work, prices they made in the business.)
to be charged and • sources of finance are limited - to
whom to employ (if the owner’s savings, profits made
the work load cannot by the business and small bank
be handles by one loans. There are no other owners
person alone.) who can put capital into the
• Close contact - with business. Banks are often
their customers, the reluctant to lend large amounts
personal satisfaction to sole trading businesses.
of knowing the regular • No opportunity for expansion -
customers and the Sole traders are likely to remain
ability to respond small because capital for
quickly to their needs expansion is so restricted. Thus,
and demands. business is unlikely to benefit
• Profits do not have to from economies of scale and
be shared - thus sole cannot offer much training or
traders have an opportunities for workers
incentive to work as • No help - If the owner is ill, there
hard as possible to is no one who can take control of
keep all of the profits, the business. The business cannot
after paying tax. be passed on to future
• Privacy - He does not generations– when the sole
have to give trader dies, the business will
information about his legally not exist any longer. This is
business to anyone because there is no continuity of
else – other than the the business after the death of
Tax Office. He enjoys the owner.
complete secrecy in
business matters.
Partnerships
• Partnership - is a form of business in which two or more people agree to
jointly own a business

• The partners will contribute to the capital of the business, will usually
have a say in the running of the business and will share any profits made.

• A partnership agreement is the written and legal agreement between

business partners which is not essential for partners to have such an
agreement but it is always recommended.

Advantages of a partnership Disadvantages of a partnership

• More capital – larger • No limited liability - The partners

sum of finance could do not have limited liability. If
now be invested into the business failed, then
the business and this creditors could still force the
would allow expansion partners to sell their own
of the business. property to pay business debts.
• Shared responsibility - • No continuity - The business did
The responsibilities of not have a separate legal
running the business identity. If one of the partners
will now be shared. died, then the partnership
Specializations of he would end. (Both sole traders
partners can be used and partnerships are said to be
to enhance the quality unincorporated businesses
of services provided y because they do not have a
the business. separate legal identity from the
• Availability of help - owners.)
Absences and holidays • Dispute - Partners can disagree
did not lead to major on business decisions, which
problems as one of the may lead to legal disputes
partners was always • Consulting all partners is time-
available. consuming.
• All partners will be • Loss of money - If one of the
motivated to work partners is very inefficient or
hard because they actually dishonest, then the
would benefit from the other partners could suffer by
 profits. losing money in the business.
• Shared losses - Any • Limited growth - Most countries,
losses made by the including India, limit the number
business would now be of partners to 20 and this means
shared by the partners. that business growth would be
limited by the amount of capital
that 20 people could invest.

 Limited partnerships
o In some countries it is possible to create a Limited Liability
Partnership(LLP).
o It offers partners limited liability but shares in such businesses
cannot be bought and sold.
o This type of partnership is a separate legal unit which still exists
after a partner’s death ,unlike ordinary partnerships that end with
the death of one of the partners.

Private limited companies

• Private limited companies - are businesses owned by shareholders but

they cannot sell shares to the public.

• A company is a separate legal unit from its owners – it is an

incorporated business. This means that

o Continuity - a company exists separately from the owners and will

continue to exist if one of the owners should die

o A company can make contracts or legal agreements

o Company accounts are kept separate from the accounts of the

owners.

o “ PVT LTD” is usually added to the name of a private limited

company
 • A company is owned by shareholders, who are owners of a limited
company. They buy shares which represent part ownership of the
company. These shareholders appoint directors to run the business.

Advantages of private limited company Disadvantages of private limited company

• Large capital - Shares can be sold to a • Large number of regulations - There are
large number of people (in some significant legal matters which have to be dealt
countries there is a maximum with before a company can be formed. In
number). These would be likely to be particular, two important forms or documents
friends or relatives of the founder. have to be sent to the Registrar of Companies.
Shares cannot be advertised for sale • The Articles of Association
to the general public. The sale of • The Memorandum of Association
shares could lead to much larger Once these documents have been received by
sums of capital invested in the the Registrar of Companies, a Certificate of
business than the sole traders or Incorporation will be issued to allow the
partnership could manage to raise company to start trading.
themselves. The business could • Restrictions - Shares cannot be sold or
therefore expand more rapidly. transferred to anyone else without the
• Limited liability - All shareholders agreement of the other shareholders. This rule
have limited liability. This is an can make some people reluctant to invest in
important advantage. It means that if such a company because they may not be able
the company failed with debts owing to sell their shares quickly if they require their
to creditors, the shareholders could investment back.
not be forced to sell their possessions • No privacy - The accounts of a company are less
to pay the debts. The shareholders secret than for either a sole trader or a
could only lose their original partnership. Each year the latest accounts must
investment in the shares – their be sent to the Registrar of Companies and
liability is limited to the original members of the public can inspect them.
investment. Shareholders in a • Lesser capital can be raised compared to public
company have less risk than sole limited company - For rapidly expanding
traders and partners businesses, the company cannot offer its shares
• Control - The people who started the to the general public. Therefore it will not be
company are able to keep control of possible to raise really large sums of capital to
it, as long as they do not sell too invest back into the business.
many shares to other people.

Public limited companies

• Public limited companies - are businesses owned by shareholders but
they can sell shares to the public and their shares are tradable on the
Stock Exchange

• most suitable for very large businesses

• “PLC” is usually added to the name of a public limited company

 • Public limited companies are not in the public sector of industry

Advantages of public limited company Disadvantages of public limited company

• Limited liability - This form of • Large number of regulations - The legal

business organization still offers formalities of forming such a company
limited liability to shareholders. are quite complicated and time-
• Continuity - It is an incorporated consuming.
business and has a separate legal • There are many controls over
identity to the owners or public limited companies in
shareholders. Its accounts are kept order to try to protect the
separately from those of the owners interests of the shareholders.
and there is continuity should one These include the publication of
of the shareholders die. accounts, which anyone can ask
• Large capital - There is now the to see.
opportunity to raise very large • Selling shares to the public is expensive
capital sums to invest in the - The directors will often ask a specialist
business. There is no limit to the merchant bank to help them in this
number of shareholders a public process. It will charge a commission for
limited company can have. its services. The publication and printing
• No restrictions - Buying, selling or of thousands of copies of the
transfer of shares is easily possible. prospectus is an additional cost.
• Well known reputation - A business • Loss of control - There is a very real
trading as a public limited company danger that although the original
usually has high status and should owners of the business might become
find it easier to attract suppliers rich by selling shares in their business,
prepared to sell goods on credit and they may lose control over it when it
banks willing to lend to it than other ‘goes public’. This is an important point
types of businesses. which we will investigate further.

 Control and ownership in a public limited company

o All shareholders are all invited to attend the Annual General
Meeting (AGM) - a legal requirement for all companies.
Shareholders may attend and vote on who they want to be on the
Board of Directors for the coming year.
o The only decision that shareholders can have a real impact on at
the AGM is the election of professional managers as company
directors. They are given the responsibility of running the business
and taking decisions.
o Managers are responsible for the to take day-to-day decisions as
The directors cannot possibly control all of the business by
themselves.
 o The shareholders own, but the directors and managers control.
Sometimes, this is called the divorce between ownership and
control.
o Directors and managers may run the business to meet their own
objectives.
o These could be increased status, growth of the business to justify
higher management salaries, or reducing dividends to shareholders
to pay for expansion plans
o Dividends - payments made to shareholders from the profits (after
tax) of a company. They are the return to shareholders for investing
in the company.

Risk, ownership and limited liability – summary

Franchising
• A franchise - is a business based upon the use of the brand names,
promotional logos and trading methods of an existing successful
business. The franchisee buys the license to operate this business from
the franchisor.
 • The franchisor is a business with a product or service idea that it does not
want to sell to consumers directly. Instead, it appoints franchisees to use
the idea or product and to sell it to consumers.
• example - McDonald's, Dunkin' Donuts, Taco Bell, Baskin Robbins

Joint ventures
• A joint venture - is where two or more businesses start a new project
together, sharing capital, risks and profits.
• Example:
o Tata and Starbucks
o Samsung and spotify
o Ford and Toyota
 Business organisations in the public sector

Public corporations

• A public corporation is a business in the public sector that is owned

and controlled by the state (government).
• They are usually businesses which have been nationalized. This means
that they were once owned by private individuals, but were purchased by
the government
• Example – water supply and railway services
• Government ministers appoint a Board of Directors, who will be given
the responsibility of managing the business and get clear objectives to
follow and run the corporation

Advantages of public corporations Disadvantages of public corporations

• Some industries are considered so • There are no private shareholders to

important that government ownership is insist on high profits and efficiency. The
thought to be essential. These include profit motive might not be as powerful
water supply and electricity generation as in private sector industries.
in many countries. • Government subsidies can lead to
• If industries are controlled by inefficiency as managers will always
monopolies because it would be think that the government will help
wasteful to have competitors – two sets them if the business makes a loss. It may
of railway lines to a certain town, for also be unfair if the public corporation
example – then these natural receives a subsidy but private firms in
monopolies are often owned by the the same industry do not.
government. It is argued that this will • Often there is no close competition to
ensure consumers are not taken the public corporations. There is
advantage of by privately owned therefore a lack of incentive to increase
monopolists. consumer choice, increase efficiency or
• If an important business is failing and even improve customer service.
likely to collapse, the government can • Governments can use these businesses
step in to nationalize it. This will keep for political reasons, for example, to
the business open and secure jobs. create more jobs just before an election.
• Important public services, such as TV This prevents the public corporations
and radio broadcasting, are often in the being operated like other profit-making
public sector. Non-profitable but businesses.
important programs can still be made
available to the public.
Other public sector enterprises

• Local government authorities or municipalities usually operate some

trading activities.
• Some of these services are free to the user and paid for out of local taxes
o such as street lighting and schools.
• Other services are charged for and expected to break even at least.
o These might include street markets, swimming pools and theatres.
• If they do not cover their costs, a local government subsidy is usually
provided.
• In order to cut costs and reduce the burden on local taxpayers, an
increasing range of services is now being privatized, so reducing the role
of local government in providing goods and services.