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

 

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 bough 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 it’s 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.

These are two types of 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 (see Economics: topic 3.1 – Money and Banking). Example: Verizon Communications.

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 divorce 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.

 

A summary of everything learned until now, in this section, in case you’re getting confused:

Capture

 

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.

  ADVANTAGES DISADVANTAGES
TO FRANCHISOR Rapid, low cost method of business expansion

Gets and income from franchisee in the form of franchise fees and royalties

Franchisee will better understand the local tastes and so can advertise and sell appropriately

Can access ideas and suggestions from franchisee

Franchisee will run the operations

Profits from the franchise needs to be shared with the franchisee

Loss of control over running of business

If one franchise fails, it can affect the reputation of the entire brand

Franchisee may not be as skilled

Need to supply raw material/product and provide support and training

TO FRANCHISEE An established brand and trademark, so chance of business failing is low

Franchisor will give technical and managerial support

Franchisor will supply the raw materials/products

Cost of setting up business

No full control over business- need to strictly follow franchisor’s standards and rules

Profits have to be shared with franchisor

Need to pay franchisor franchise fees and royalties

Need to advertise and promote the business in the region themselves

 

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

 

 

Notes submitted by Lintha

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21 thoughts on “1.4 – Types of Business Organizations

    1. These notes are tailored to the old syllabus – that might explain some of the ‘gaps’ in our notes. We are currently working on updated notes for the new syllabus!

      Like

    2. I really find this helpful and not just business studies but with my sciences too. It explains some tricky concepts well in a way that I can understand well. Thank you!

      Like

  1. I have just noticed a few potential errors…
    Thought of sharing-
    Isn’t Reliance Industries Limited a Public Limited Company??
    And, in the table at the end of the article, isn’t the symbol after the”2″ have to be “>” ??

    Like

    1. You’re right about Reliance. It is, in fact, a public limited company. I have changed the example to Ikea, which is a private limited company.
      As for the second point, ‘2>’ would mean 2 is the bigger number. To imply a no. of shareholders greater than two we would use either ‘>2’ or ‘2<’.

      Like

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