Types of business entities

• Private sector: owned and controlled by private individuals and businesses rather
than the government. The aim is to earn profit for its owners (a positive difference
between a firm’s sales revenue and its costs.)

• Public sector: under the ownership and control of the govt. usually provide goods
and services which are underprovided by the private sector.

• Reason for public sector:

1. To ensure everyone has access to basic services.
2. To avoid wasteful competition, the govt can achieve huge economies of scale
in the provision of certain services.
3. To protect citizens and businesses through institutes such as police and law,
which govern the country’s law and order system.
4. To stabilise the economy
5. To create employment opportunities

• 4 main types of profit-based organisations:

1. Sole traders: an individual who owns his/her personal business. The owner runs
and controls the business and is the only reason for its success or failure. Can
choose to work alone or employ other people to help. They are unincorporated
(the owner is the same legal entity as the business itself)
Advantages:
➢ Few legal formalities: easy to set up, and start-up costs are lower.
➢ Profit taking: only the owner, so he receives all the profits earned.
➢ Being your own boss: have flexibility in decision-making (working
hours)
➢ Personalised service: to customers. In larger businesses, the service is
more generic and impersonal.
➢ Privacy: enjoy confidentiality and do not have to make their financial
records available to the public
➢ Quicker decision making: no owners to consult, make decisions based
on their needs and preferences.
 Disadvantages:
➢ Unlimited liability: no limit to the amount of debts he is legally
responsible for if the business fails.
➢ Limited source of finance: difficult to save funds beyond personal
savings. Growth will be difficult cause of this.
➢ High risks: statistically, they have the largest risk of failure. Larger firms
create a threat to the survival of smaller businesses.
➢ Workload and stress: one person manages accounts, marketing, and
human resource management.
➢ Limited economies of scale: not able to exploit the benefits of large-
scale production, so the prices might be less competitive.
➢ Lack of continuity: This can be jeopardised if the owner is absent.

2. Partnerships: a for-profit private sector business owned by two or more persons.

For ordinary partnerships, the maximum number of owners is 20. They are
financed mainly from personal funds. They can also raise money from silent
partners (owners who do not actively participate in the partnership but have a
financial stake and are eligible for a portion of any profits earned). Without a
contract, profits and losses must be shared equally.
The deed of partnership must include:
➢ The amount of finance contributed by each owner.
➢ The roles, obligations, and responsibilities of each
➢ How profits and losses are to be shared
➢ Conditions of introducing new partners
➢ Clauses for withdrawal of a partner
➢ Procedures for ending the partnership.
Advantages :
➢ Financial strength: since there are more owners. It is easier to secure
external sources of finance due to low risk
➢ Specialisation and division of labour: benefit more shared expertise,
shared workload, and moral support
➢ Financial privacy: do not have to publicise their financial records
➢ Cost-effective: as they specialise in certain aspects of their business
raising labour productivity.
Disadvantages:
➢ Unlimited liability: responsible for debts wholly or separately
➢ Lack of continuity: problems exist if a partner leaves the firm or passes
away as partnership deed becomes invalid.
➢ Prolonged decision: likely to take longer due to more owners involved
➢ Lack of harmony: disagreements and conflicts are common. A mistake
made by one person can reduce the profits for every partner
,
Two types of limited liability companies:
3. Privately held companies: limited liability companies that cannot raise share
capital from the public via a stock exchange. Shares can only be sold to friends and
family with prior agreement from the BOD so that they can maintain overall
control of the company. Companies are businesses owned by their shareholders.
Shareholders are individuals/ other businesses that have invested money to
provide share capital for a company/ corporation.
corporations are sometimes also called joint-stock companies, as the shares of the
businesses are jointly held by numerous entities. Companies are incorporated
businesses because of legal differences between the owners of the company and
the business itself.
A stock exchange is a marketplace for trading stocks and shares of publicly held
companies. Shareholders elect a Board of Directors (BOD) to run the company on
their behalf. Elected because of their skills and expertise as shareholders do not
necessarily want to get involved in the daily running of the company.
All companies must hold an Annual General Meeting (AGM); allow all owners to
vote in the running of business:
➢ shareholders vote on resolutions and the re-election of the BOD.
➢ Shareholders ask questions to the chief executive officer, directors, and the
chairperson.
➢ Shareholders approve the previous year’s financial accounts after the directors
present the annual report.
Advantages:
o Raising finance: companies can raise large amounts of capital by selling shares.
o Limited liability: easier to attract investors due to lower risks.
o Continuity: can continue to operate as a separate legal entity, even with a
change of owners.
o Tax benefits: companies benefit from a wider range of allowances and tax-
deductible costs.
o Economies of scale: due to larger size, companies can benefit from economies of
scale.
o Productivity: can hire directors and specialist managers to run the firm as there
is no need for the owners to be involved in the daily running of the business.
Disadvantages:
o Communication problems: services and relationships can become impersonal
to customers and employees.
o Added complexities: more expensive and bureaucratic.
o Compliance costs: complying with the rules and regulations of being a
company adds to its running costs.
 o Disclosure of information: financial data must be provided to all shareholders.
Time-consuming and expensive as auditors must be hired, and annual reports
must be published and distributed.
o Bureaucracy: more bureaucracy involved in setting up and running a
company.
o Loss of control: potential threat of a takeover by a rival company that
purchases a majority stake in the business.

Before limited liability companies can begin trading, 2 documents must be produced and
submitted: (MA & AA)

1. Memorandum of association: brief; outlining fundamental details such as the

trading name of the company, main purpose, registered business address and the
amount of share capital invested.
2. Articles of association/ articles of incorporation: longer; stipulating the internal
regulations, company procedures, rights, roles and power of the BOD and
shareholders. Procedures of AMG, process of appointments of directors and profit
distribution.
Once authorities are satisfied and an application fee is paid, a certificate of
incorporation is issued to the company, allowing the business to start trading as a limited
liability company.

4. Publicly held companies: they can advertise and sell their shares to the general public via
a stock exchange. Flotation is the term used to describe when a publicly held company first
sells all or part of its business to external investors. The process is known as Initial public
offering.

• Social enterprises are revenue-generating businesses with social objectives at the core
of their operations. Can be operated as a non-profit organisation/ for-profit company.
• Main goals of social enterprises:
1. Achieve social objectives.
2. Earn revenue more than their costs.
• Main benefits of social enterprises:
1. Use any financial surplus to benefit others beyond personal rewards for
shareholders and owners.
2. Create employment opportunities; improving the economic and social landscape
of local communities.
3. Are run transparently, providing tangible benefits
• 3 main types of social enterprises:
1. Private sector companies: private sector for-profit social enterprises produce
goods/ provide services in the same way as for-profit commercial organisations.
They reinvest/ donate any surplus to create a positive social change. Aims:
➢ Economic aims: to earn a profit and to reinvest the surplus back in the business.
➢ Social aims: provide benefits to people in society, such as job opportunities in
the local community and support the less-advantaged members of society.
➢ Environmental aims: to protect the planet by operating in environmentally
friendly and sustainably responsible ways.

2. Public sector companies: public sector for-profit social enterprises are state-owned
enterprises run commercially. They are formed and owned by the government
wholly or partially. They help to raise government revenues yet provide essential
services that may be inefficient and undesirable if left solely to the private sector.

3. Cooperatives: are for-profit social enterprises owned and run by their members,
such as employees or customers, with the common goal of creating value for their
members by operating in a socially responsible way. 3 main types of cooperatives,
all are democratically owned and controlled:
➢ Consumer cooperatives: owned by customers who buy the goods/ services
from cooperatives for personal use. Example: childcare, food, healthcare
➢ Worker cooperatives: set up, owned, and organised by their employee
members. Example: production, manufacturing, printers, café
➢ Producer cooperatives: cooperatives that join and support each other to
process/ market their products, enabling all members to benefit from bulk
purchase discounts. Example: farmer cooperatives are the most common.
Advantages:
➢ Incentives to work: employees have a stake in the cooperative; enhance
productivity
➢ Decision-making power: employees have a say in how the business runs.
➢ Social benefits: cooperatives are run on socially responsible principles. Create
social gains that can be enjoyed by the wider community.
➢ Public support: people want to help them succeed because they believe in the
cause the cooperative stands for.
Disadvantages:

➢ Disincentive effects: ineffective managers and employees as cooperatives do

not pay high salaries and bonuses.
➢ Limited sources of finance: most of them cannot raise funds through a stock
exchange.
 ➢ Slower decision-making: all members of the cooperative work in a democratic
way and are involved in the decision-making process.
➢ Limited promotional opportunities: fewer opportunities for employees to
progress in their professional careers.

• Non-profit social enterprises are businesses run in a commercial-like manner but

without profit being the main goal.
• Non-governmental organisations are private sector not-for-profit social enterprises
that operate for the benefit of others rather than primarily aiming to earn a profit.
There are 2 main types of NGOs:
i) Operational NGOs are established from a given objective or purpose.
ii) Advocacy NGOs take a more aggressive approach to promote or defends a
particular cause, striving to raise awareness and support through direct action.