Business chapter 4: Types of business organisation

Sole trader

A business that is owned and controlled by one person who takes all the risks and receives all the profit.

Advantages of sole trader

• Quick and easy to set up a business

• The sole trader makes all the decisions for the business.

• Owner keeps all the profit.

• Business is set up with a small amount of start up capital.

Partnership

A business formed by two or more people who will share responsibility for the day-to-day running of the business.

Disadvantages of sole trader

• Unlimited liability.

• May not raise funds to expand business.

• May not have business skills to run a business.

• May have to work long hours.

Advantages of partnership

• Have greater access to finance than sole traders.

• Shared decision making.

• Shared management and workload.

• It is easy to set up.

Disadvantages of partnership

• Unlimited liability.

• Share of profits.

• Difficult to raise finance.

• Business won’t exist if one partner leaves.

Start-up capital

Finance needed when first setting up a business.

Unincorporated businesses

A business that does not have legal identity separate from its owners.

Unlimited liability

If an unincorporated business fails, the owner might have to use their personal wealth to finance any business debts.

Shareholder

Person or organisation who owns shares in a limited company.

Private limited company

Small to medium sized company owned by shareholders who have limited liability.

Public limited company

A large company owned by shareholders who have limited liability.

Limited liability

The shareholders in a limited company which fails only risk losing the amount they invested in.

Dividend

A payment to shareholders out of profits.

Collateral

Non-current assets offered as security against borrowing.

How is a private limited company different to a public limited company?

• Small number of shareholders.

• Small in business size.

• Sales of shares can only be sold privately.

• Difficult to raise finance because of low-value assets such as collateral.

Franchise

Business system where entrepreneurs buy the right to use the name, logo and product of an existing business.

Advantages of franchise

• Lower risk of business failure since brand is well established.

• The franchisor provides training to the franchisee as apart of the franchise agreement.

• The franchisor will finance promotion of the brand.

Disadvantages of franchises

• Expensive.

• The franchisor will take a percentage of the revenue made by the franchisee.

• Strict rules on the product, pricing and store layout.

Joint venture

Two or more business agree to work on a project and set up a separate business for this purpose.

Advantages of joint venture

• It reduces the risk for each business and cuts the cost.

• Each business brings different expertise to the joint venture.

• Market and product knowledge could be shared to the business.

Disadvantages of joint venture

• Any mistakes could damage the reputation of all firms in a joint venture.

• The businesses may have different styles of leadership.

the type of business organisation to choose from depends on what?

• Number of owners?

• Does the owner want to manage the business directly?

• Is the business unincorporated or incorporated?

• How quickly does the business need to be set up?

• What is the size of the business?

Public corporation

Business organisation owned and controlled by the state.

Examples of private sector businesses

• Sole trader.

• Partnership.

• Franchise.

• Joint veinture.

• Limited companies (Private and public)