Types of business

organisations
Topic 4
w/sir Saad
When we talk about types of business organisation they exist

in two sectors. The private sector and the public sector.

Private sector business organisations:

Sole trader:
It is a business owned And controlled/run by one person, One
person provides the finance and takes the risk. The owner is
the sole proprietor. One of the reasons why this is so famous is
Only a few legal requirements to set it up. Moreover, the owner

has unlimited liability.

Note:
A business has unlimited liability when it is not a separate
legal unit and does not have a separate legal identity which is
separate from the owners. Having unlimited liability means
that if a business cannot pay its debt then the people who the
business owes money to, the creditors, can force the business to
sell all of the owners possessions/personal assets such as cars
house etc in order to pay for the debt.

Note:
A sole trader can employ other people, but there is only one
person who owns the business.
Advantages Disadvantages
• It is easy to set up since it has very • There is unlimited liability.
few legal formalities. • The owner has no one to discuss the
• We have full control over the business related problems with
business, we are free to run the brainstorm new new ideas.
business as we see fit. • The business lacks continuity,
• There is no profit sharing. Since since the business does not have a
the owner is the only one in the separate legal status, when the
business profits do not need to be owner dies the business comes to

shared. an end.

• The owner enjoys complete • As the owner is the only person

flexibility to work for however long providing the finance sometimes
he wants and is free to take as he can be short of finances to

many holidays as he likes. expand the business.

• The owner can establish personal • Limited sources of finance

contact with the customers and be meaning limited growth meaning
aware of their changing cannot take benefit from

preferences. economies of scale.

Partnership:
Partnership is a form of business in which two or more people
agree to jointly own a business. In some countries the limit is
from 2 to 20 partners. These individual individuals invest
capital and usually share responsibilities of running the
business. A partnership has unlimited liability, lacks
continuity and lacks separate legal status.
Partnerships can be easily set up through verbal agreements.
A partnership agreement is the written and legal agreement
between business partners. It is not essential for partners to
have such an agreement but it is always recommended as it
might settle any disputes About who put the most capital into
the business or who is entitled to more of the profits. It
includes the following:
• Capital invested by each partner
• Responsibilities undertaken by each partner
• The way in which profit sharing would be done
• How long the partnership would last?
• Arrangements for holidays, retirement, and our new
partners could be added.
Advantages Disadvantages
• Partners can share the workload • Unlimited liability.
which can help in specialisation • Lack of continuity, since the
of different areas of business like business does not have a separate
marketing, operations, finance legal status meaning if one

etc. partner dies the business comes to

• The business gets additional an end. (Both sole traders and

capital since every partner invest partnerships are said to be

in the business, increasing the unincorporated businesses.)

chances for growth and • profits are shared which lead to

economies of scale. less returned per partner.

• Losses are shared between • there might be chances of

partners. This leads to spread of conflicts since partner might

risk. disagree on issues.

• The owners can discuss problems • A sole trader might lose control of

with each other and come up with decision making if he or she

innovative solutions. forms of partnership.

Limited partnerships:
In some countries, it is possible to create a limited liability
partnership. Also known as LLP. It offers partners limited
liability but shares in such business businesses cannot be
bought and sold. This type of partnership is a separate legal
unit which still exists after a partners death, unlike ordinary

partnership that ends with the death of one of the partners.

Incorporated businesses:
These are companies that have separate legal status from their
owners. This means:
• A company exists separately from the owners and will
continue to exist if one of the owners should die.
• A company can make contracts or legal agreements.
• Company accounts are kept separated from the accounts of

the owners.
 Sole trader immorporated Businesses
Partnership unlimitedliability

ABC NameSaad
Amt 50,000
Dividend

Private Limited companies:

These are businesses owned by shareholders but they cannot
sell shares to the general public. The owners are generally the
members of the same family for example Lahore grammar
school. These businesses are incorporated businesses therefore
have limited liability. The shareholders appoint directors to
run the business, the directors are usually the most important
or majority shareholders.

Shareholders are the owners of a limited company. They

buy shares which represent part ownership of the company.

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Advantages Disadvantages
• All the shareholders have limited • There are many legal formalities
liability. which have to be dealt with before
• Separate legal identity makes the the company can be formed such
owners and businesses separate. as the articles of association and
This means if a product is faulty the memorandum of association.
the company is sued not the • Limited potential to raise capital
owners. as they cannot sell shares on the
• The company has continuity stock exchange.
meaning the death of an owner • The account of a company are less
does not lead to the breakup of the secret than either a sole trader or a
business. partnership. Each year the latest
• We can raise capital from selling accounts must be sent to the
shares to friends and family. registrar of companies and
members of the public can inspect
them.

• Articles of association
This contains the rules under which the company will be
managed, the rights and the duties of all the directors rules
concerning the election of the directors and holding of official
meetings, moreover the procedure to be followed for the issuing
of shares.
• Memorandum of association
This contains very important information about the company
and the directors. The official name and the address of the
registered offices of the company must be stated. The
objectives of the company must be stated as well as the
number of shares to be bought by each of the directors.

Public Limited companies:

PSX
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. This form of
business organisation is most suitable for very large
businesses. Due to the fact that they are able to raise the capital
to expand nationally or even internationally.

Note:
Public limited companies are not in the public sector of the
industry they are owned and controlled by private
individuals.
Advantages Disadvantages
• All the shareholders have limited • The legal formalities of forming
liability. such a company are very
• Separate legal identity makes the complicated and time-consuming.
owners and businesses separate. • There is a danger that original
The company has continuity and owners might become rich by
the accounts of the owners and the selling shares in the business but
company are separate. they may lose control over it when
• There is opportunity to raise very it goes public. Any other company
large capital to invest in the can buy majority shares of your
business through selling shares to company and take control of it.
the public. There is no limit to the • Less secrecy over accounts as
number of shareholders a public accounts must be made public
limited company can have. every year.
• Generally PLCs are large • Can lead to potential diseconomies
businesses which have high status of scale. In this situation the
making it easier to attract average cost starts to increase due
suppliers and getting loans from to expansion. This can be because of
the banks. mismanagement, high capital cost
• Potential to gain economies of etc.
scale.
Control and ownership:
As a public limited company can have thousands or even
millions of shareholders it is impossible for all these people to be
involved in decision-making. They are invited to attend the
annual general meeting where there is an election and the
shareholders can appoint directors to run the company.
Shareholders earn dividends against their investment into the
business.

AGM:
An annual general meeting is 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.

Dividends:
These are payments made to shareholders from
the profits after tax of a company. They are
the returned to the shareholders or invested
in the company.
Franchising:
Franchising is a business based upon the use of brand names,
promotional logos and trading methods of an existing
successful business. The franchisee buys the license to operate
this business from the franchisor. examples of a franchise
might include McDonald’s, Subway, Pizza Hut, Baskin-
Robbins etc.

Franchisor The
brand owner
Advantages Disadvantages
• The franchisee buys a license • The Training of employees is paid
from the franchiser to use the for by the franchisor.
brand name. • The franchisor pay for the
• Expansion of the franchise nationwide advertisement
business is much faster than if campaigns.
the franchisor had to finance all • Poor management of one outlet
new outlets. could lead to a bad reputation for
• The management of the outlet is the whole business.
responsibility of the franchisee.
• All products sold must be
obtained from the franchisor.
 Franchisee The
buyer
Advantages Disadvantages
• The chances of failure are • Less less independence then with
reduced due to an already operating a non-franchised
established brand name of the business.
franchisor. • Expensive license fee needs to be
• The franchisor pays for paid to the franchisor.
advertising. • A percentage of annual turnover
• All supplies are obtained from a is to be paid to the franchisor.
central source, the franchisor.
• Banks are often willing to lend
to franchisees due to relatively
low risk.
• Can benefit from business
expertise and gain access to the
business network of the
franchisor.
Joint ventures:
A joint venture is where two or more businesses start a new
project together, sharing capital, risks and profits. These
companies maintain their original identities. for example, the
joint venture of Sony and Honda, Sony and Ericsson.

Advantages Disadvantages
• The costs are shared, which is • If the new project is successful,
very important for such then the profits have to be shared
expensive projects. with the joint venture partner.
• Provide both the companies a • Disagreements over important
chance to learn from each other’s decisions might occur.
expertise. • The partners might have different
• Risk of failure is also shared. ways of running a business,
• Local knowledge when joint different cultures.
venture company is already
based in the country you want to
expand in.
Public sector business organisations:
This sector includes all businesses owned by government/
state and local government, public services such as hospitals,
schools, fire services, and government departments are

included here.

Public corporations:
A public corporation is a business in the public sector that is
owned and controlled by the state. In order to operate the
business, the government appoints a board of directors who
manage the business on the guidelines and objectives drafted
out by the government. These businesses provide public
services as mentioned above in the definition of public sector
organisations.
Advantages Disadvantages
• Some industries are considered • As there is lack of a profit motive,
so important that the efficiency would fall. This intern
government ownership is leads manager to be inefficient
essential. These include water and rely on government subsidies
supply and electricity in case of losses.
generations in many countries. • There is lack of consumer choice
• Some industries are kept by the since the product is generally
government in form of natural made for the masses.
monopolies so that the consumers • Governments can use these
won’t be exploited if these were in businesses for political reasons,
the hands of private individuals. for example, to create more jobs
Such as railway and utility just before an election. This
provision. prevents the public operations
• If an important business is being operated like other profit
failing and likely to collapse, motive businesses.
the government can step into
nationalised. This will keep the
business open and secure jobs.
• Important services that might
not be profitable would still be
made available.

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Other public sector Enterprises:
The local government authorities usually operate some
trading activities. Some of these services are free to the user
and paid for out of local taxes, such as street lighting, public
schools, public hospitals etc. Other services are charged for and
expected to break even at least these might include swimming
pools, parks, theatres etc. If they do not cover their costs, a local
government subsidy is usually provided. Slowly and
gradually in order to cut cost and reduce the burden on local
taxpayers and increasing range of services are now being
privatised by doing so reducing the role of local governments
in providing goods and services.