1.

UNDERSTANDING BUSINESS ACTIVITY

1.4 Types of Business Organisations

Sole Trader/Sole Proprietorship

A business organization owned and controlled by one person. Sole
traders can employ other workers, but only he/she invests and owns the
business.

Advantages:
∙ Easy to set up: there are very few legal formalities involved in starting

and running a sole proprietorship. A less amount of capital is enough

by sole traders to start the business. There is no need to publish
annual financial accounts.
∙ Full control: the sole trader has full control over the business. Decision-

making is quick and easy, since there are no other owners to discuss
matters with.
∙ Sole trader receives all profit: Since there is only one owner, he/she

will receive all of the profits the company generates.

∙ Personal: since it is a small form of business, the owner can easily

create and maintain contact with customers, which will increase

customer loyalty to the business and also let the owner know about
consumer wants and preferences.

Disadvantages:
∙ Unlimited liability: if the business has bills/debts left unpaid, legal
actions will be taken against the investors, where their even personal
property can be seized, if their investments don’t meet the unpaid

1
amount. This is because the business and the investors are the legally
 not separate (unincorporated).
∙ Full responsibility: Since there is only one owner, the sole owner has
to undertake all running activities. He/she doesn’t have anyone to
share his responsibilities with. This workload and risks are fully
concentrated on him/her.
∙ Lack of capital: As only one owner/investor is there, the amount of
capital invested in the business will be very low. This can restrict
growth and expansion of the business. Their only sources of finance
will be personal savings or borrowing or bank loans (though banks
will be reluctant to lend to sole traders since it is risky).
∙ Lack of continuity: If the owner dies or retires, the business dies with
him/her.

Partnerships

A partnership is a legal agreement between two or more (usually, up to

twenty) people to own, finance and run a business jointly and to share
all profits.

Advantages:
∙ Easy to set up: Similar to sole traders, very few legal formalities are

required to start a partnership business. A partnership agreement/

partnership deed is a legal document that all partners have to sign,
which forms the partnership. There is no need to publish annual
financial accounts.
∙ Partners can provide new skills and ideas: The partners may have

some skills and ideas that can be used by the business to improve
business profits.
∙ More capital investments: Partners can invest more capital than what

a sole trade only by himself could.

Disadvantages:
∙ Conflicts: arguments may occur between partners while making

decisions. This will delay decision-making.

∙ Unlimited liability: similar to sole traders, partners too have unlimited

liability- their personal items are at risk if business goes bankrupt

∙ Lack of capital: smaller capital investments as compared to large

companies.
 2
∙ No continuity: if an owner retires or dies, the business also dies with
them.

Limited (also known as Joint-stock) companies

∙ These companies can sell shares, unlike partnerships and sole traders,
to raise capital. Other people can buy these shares (stocks) and
become a shareholder (owner) of the company.
∙ Therefore they are jointly-owned by the people who have bought it’s

stocks. These shareholders then receive dividends (part of the profit;

a return on investment).
∙ The shareholders in companies have limited liabilities. That is, only

their individual investments are at risk if the business fails or leaves

debts. If the company owes money, it can be sued and taken to court,
but it’s shareholders cannot.
∙ The companies have a separate legal identity from their owners, which

is why the owners have a limited liability. These companies are

incorporated.
(When they’re unincorporated, shareholders have limited liability and
don’t have a separate legal identity from their business). ∙ Companies
also enjoys continuity, unlike partnerships and sole traders. That is, the
business will continue even if one of it’s owners retire or die.
∙ Shareholders will elect a board of directors to manage and run the

company in its day-to-day activities.

In small companies, the shareholders with the highest percentage of
shares invested are directors, but directors don’t have to be
shareholders. The more shares a shareholder has, the more their
voting power.

Types of limited companies

∙ Private Limited Companies: One or more owners who can sell its’
shares to only the people known by the existing shareholders (family
and friends). Example: Ikea.

∙ Public Limited Companies: Two or more owners who can sell its’
shares to any individual/organization in the general public through
stock exchanges (stock market). Example: Telekom Malaysia.
Advantages:

∙ Limited Liability: this is because, the company and the shareholders

have separate legal identities.
∙ Raise huge amounts of capital: selling shares to other people
(especially in Public Ltd. Co.s), raises a huge amount of capital, which
is why companies are large.
∙ Public Ltd. Companies can advertise their shares, in the form of a
prospectus, which tells interested individuals about the business, it’s
activities, profits, board of directors, shares on sale, share prices etc.
This will attract investors.

Disadvantages:
∙ Required to disclose financial information: Sometimes, private limited
companies are required by law to publish their financial statements
annually, while for public limited companies, it is legally compulsory
to publish all accounts and reports. All the writing, printing and
publishing of such details can prove to be very expensive, and other
competing companies could use it to learn the company secrets.
∙ Private Limited Companies cannot sell shares to the public. Their
shares can only be sold to people they know with the agreement of
other shareholders. Transfer of shares is restricted here. This will
raise lesser capital than Public Ltd. Companies.
∙ Public Ltd. Companies require a lot of legal documents and

investigations before it can be listed on the stock exchange. ∙ Public and

Private Limited Companies must also hold an Annual General Meeting
(AGM), where all shareholders are informed about the performance of
the company and company decisions, vote on strategic decisions and
elect board of directors. This is very expensive to set up, especially if
there are thousands of shareholders. ∙ Public Ltd. Companies may have
managerial problems: since they are very large, they become very
difficult to manage. Communication problems may occur which will slow
down decision-making. ∙ In Public Ltd. Companies, there may be a
separation of ownership and control: The shareholders can lose control
of the company when other large shareholders outvote them or when
board of directors control company decisions.

4
Summary of types of business organisations

Franchises
∙ The owner of a business (the franchisor) grants a licence to another
person or business (the franchisee) to use their business idea – often
in a specific geographical area.
∙ Fast food companies such as McDonald’s and Subway operate around
the globe through lots of franchises in different countries.
 5
Joint Ventures
∙ Joint venture is an agreement between two or more businesses to
work together on a project.
∙ The foreign business will work with a domestic business in the same
industry. Eg: Google Earth is a joint venture/project between Google
and NASA.

Advantages
∙ Reduces risks and cuts costs

∙ Each business brings different expertise to the joint venture ∙ The

market potential for all the businesses in the joint venture is increased
∙ Market and product knowledge can be shared to the benefit of the
businesses

Disadvantages
∙ Any mistakes made will reflect on all parties in the joint venture,
which may damage their reputations
∙ The decision-making process may be ineffective due to different
business culture or different styles of leadership

Public Sector Corporations

Public sector corporations are businesses owned by the government
and run by directors appointed by the government. They usually provide
essentials services like water, electricity, health services etc.
The government provides the capital to run these corporations in the
form of subsidies (grants). The UK’s National Health Service (NHS) is an
example.
Public corporations aim to:
∙ to keep prices low so everybody can afford the service.

∙ to keep people employed.

∙ to offer a service to the public everywhere.

Advantages:
∙ Some businesses are considered too important to be owned by an
individual. (electricity, water, airline)
∙ Other businesses, considered natural monopolies, are controlled by
the government. (electricity, water)
∙ Reduces waste in an industry. (e.g. two railway lines in one city)

∙ Rescue important businesses when they are failing through

nationalisation
∙ Provide essential services to the people

Drawbacks:
∙ Motivation might not be as high because profit is not an objective ∙
Subsidies lead to inefficiency. It is also considered unfair for private
businesses
∙ There is normally no competition to public corporations, so there is no
incentive to improve
∙ Businesses could be run for government popularity