Chapter 4 - Types of business organisation

Sole trader

a type of business structure in which the business is owned by one person

Limited liability

the obligation of owners/shareholders for the debts of the business is restricted to the amount invested. Personal possessions are not at risk

Unlimited liability

the owners of a business can be held responsible for the debts of the business they own. Their liability is not limited to the investment they made in the business.

Partnership

the business is jointly owned by two or more people

Partnership agreement

the written and legal agreement between business partners

Unincorporated business

a business without separate legal identity from its owners e.g. sole trader and partnership

Incorporated business

a business with separate legal identity from its owners e.g a limited company

Shareholders

the owners of a limited company

Annual general meeting

a legal requirement for all companies where shareholders could attend and vote on who they want to be on the Board of Directors for the coming year

Dividends

payments made to shareholder from the profits (after tax) of a company

Joint venture

two or more businesses start a new project together sharing capital, risk and profits

Franchise

a business based upon the use of the brand names promotional logos and trading methods of an existing successful business

Public corporation

a business, in the public sector, that is owned by the state

Types of unincorporated firms

1. Sole trader
2. Partnerships

Types of incorporated firms

1. Private limited companies
2. Public limited companies

Benefits of sole traders

1. Easy to set up
2. Owner is in complete control
3. No sharing profits
4. Close to customers
5. Incentive to work hard

Drawbacks of sole traders

1. Unlimited liability
2. Limited access to capital
3. No-one to share decision-making and responsibilities with
4. No continuity - when the owner dies, so does the business

Benefits of partnerships

1. More capital
2. Responsibilities are shared
3. Access to more skills than sole trader
4. More ideas

Drawbacks of partnerships

1. Unlimited liability
2. Limited access to capital
3. No continuity - if one owner leaves/dies, the partnership must be dissolved
4. Have to share profits
5. Disagreements

Benefits of private limited companies

1. Access to more capital (than unlimited company)
2. Control over who buys shares/less risk of takeover than PLC
3. Continuity of existence
4. Separate legal identity
5. Limited liability

Drawbacks of private limited companies

1. Can only sell shares to friends and family
2. Shareholders may expect dividends
3. Have to publish (some) financial accounts
4. Legal formalities to set up and run

Benefits of public limited companies

1. Limited liability
2. Separate legal identify
3. Can sell shares to the general public without restrictions
4. Can raise very large sums of capital
5. High status

Drawbacks of public limited companies

1. Quite complicated legal formalities
2. Many regulations and controls including publication of accounts
3. Selling shares to the public is expensive
4. Danger the original owners may lose control if too many shares are issued/risk of takeover
5. Divorce of ownership from control

Benefits of buying a franchise

1. Recognised brand, reducing the chances of
business failure
2. The franchisor pays for advertising
3. Don't need to find suppliers saving
4. Training provided by the franchisor
5. Banks more willing to lend

Drawbacks of buying a franchise

1. Can be expensive
2. Royalties have to be paid
3. Less independence in decision making

Benefits of selling a franchise

1. Can expand more quickly
2. Earn a portion of the profits
3. Franchisee pays a licence fee
4. Franchisee is responsible for day-to-day management
5. All products must be obtained from the franchisor
6. Franchisee shares the risk with franchisor

Drawbacks of selling a franchise

1. Wrong decision or poor management by one
franchisee can damage reputation for whole business
2. Franchisor may have to provide training and support
3. Don't get to keep all the profit

Benefits of joint ventures

1. Access to new markets
2.Sharing knowledge/ expertise
3.Share costs / Increased capital
4.Risks are shared

Drawbacks of joint ventures

1. Disagreements over important decisions might occur
2. Have to share profit

Difference between private and public sector firms

1. (not) owned by the government
2. Different objectives e.g. profit for private sector and providing a service for public sector
3. investment from the shareholders whereas public sector investment by the government