Chapter-4 Types of Business Organisation
Business organisations: the private sector
There are several main forms of business organisation in the private sector. These are:
» sole traders
» partnerships
» private limited companies » public limited companies » franchises
» joint ventures.
Sole Trader-
It is a business owned and operated by just one person – the owner is the sole proprietor.
| Advantage | Disadvantage |
|---|---|
| Easy to set up, do not require a lot of money to set up | Capital is usually provided by owner, hard to get capital to expand firm |
| They are their own boss, has the freedom to choose their own holidays, work hours, prices, who to employ | They have unlimited liability (responsible for any debts of the business, bank can take away possessions to pay back) |
| Close relationship with customers | Business is likely to remain small |
| Does not have to share profits | No one to discuss business matters with |
| Does not have to give information about the business | They are unincorporated (business has same identity as the owner). So, business ends when owner dies |
Partnerships
- is a group or association of at least two people who agree to own and run a business together.
| Advantage | Disadvantage |
|---|---|
| Easy to set up, do not require a lot of money | More capital invested (more expansion) |
| Capital is usually provided by partners | Partners have unlimited liability |
| Partners are motivated because any losses are shared by the partners | Partners can disagree on decisions. If one of the partners is inefficient, they all lose money |
| Responsibilities are shared (focused on different parts of business) | They are unincorporated. If one of the partner dies, the partnership ends |
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Private Limited Company (LTD)
***-***a company exists separately from the owners and will continue to exist if one of the owners should die
Company must be owned by at least 2 shareholders \n o Ashareholder buys shares of an LTD company which
represent part ownership of the company \n oDividend is the amount of profit each shareholder gets
Shares are sold privately to friends and family
Has separate identity from owners, incorporated, so
company accounts are separate from the owners’Must have: Articles of Association and Memorandum of Association
• Article of Association – must contain the RULESin which the company will be managed. Contains:o Rules for shareholder meetings \n o List of directors and their jobs \n o Voting rights of shareholders \n o Details of how accounts are recorded
• Memorandum of Association– must contain important information about the company: \n o Company name, address \n o What the business does
| Advantages | Disadvantages |
|---|---|
| Shares can be sold to lots of people. More capital to expand | Difficult to set up (legal formalities). |
| Owners are able to keep control of company as long as they don’t sell too many shares | Shares are difficult transfer. Requires other shareholders to agree |
| All shareholders have limited liability (bank can only take amount of money invested) | Accounts are less secret than other forms of business |
| Company continue after a shareholders died | Company cannot offers shares to the public |
Public Limited Company (PLC)
businesses owned by shareholders but they can sell shares to the public and their shares are trade able on the Stock Exchange.
| Advantages (in addition to those in LTDs) | Disadvantages |
|---|---|
| Opportunity to raise high capital sums | Difficult to set up (legal formalities) & accounts are even more public |
| No restriction of buying, selling or transferring shares | Danger of business being taken over due to public shares |
| Selling shares to public is |
Joint Venture
A joint venture is when two or more businesses start a project together sharing capital risks, and profits
| Advantage | Disadvantage |
|---|---|
| Risks are shared | Different methods of running business |
| Shared knowledge of two businesses | Profits have to be shared if project is successful |
| Costs are shared, good for expensive projects | Might have disagreements over important decisions Different methods of running business |