1.2_TYPES_OF_BUSINESS_ENTITIES (6)

1.2 Types of Business Entities

Types of Economic Sectors

• Public Sector: Organizations accountable to and owned by central or local government.

• Private Sector: Comprises businesses owned and controlled by individuals or groups of individuals.

Public Sector

• Definition: Organizations that are owned by the government.

Private Sector

• Definition: Comprises businesses owned and controlled by individuals or groups.

Profit Calculation

• Total Revenue: $120,000

• Total Costs: $75,000

• Total Profit: $45,000

Legal Structure of Business Organizations

• Diluted Control: Various structures lead to differing levels of control and ownership.

Private Sector Structures

• Sole Trader

• Partnerships

• Private Limited Company (Ltd)

• Public Limited Company (PLC)

• Co-operatives

Sole Trader

• Definition: An individual owning and controlling their own business.

• Legal Distinction: No legal distinction between business and owner.

Sole Trader: Main Features

• Ownership & Control: One person owns and manages.

• Management: Owner or hired people; management isn’t required.

• Capital: Usually from personal savings or borrowings.

• Legal Status: Unincorporated.

• Liability: Unlimited liability for debts.

Unlimited Liability

• Definition: The owner is liable for all debts; personal assets may be sold to cover debts.

Sole Trader: Advantages

1. Few legal formalities to set up.

2. Profits belong solely to the owner.

3. Independence in business decisions.

4. Close ties with customers provide competitive advantage.

5. Privacy - no requirement for financial statements.

Sole Trader: Disadvantages

1. Unlimited liability poses risk.

2. Limited sources of finance.

3. Strong competition in the market.

4. Potential ineffectiveness.

5. Lack of continuity; business may be unstable upon owner’s death.

Partnership

• Definition: Two or more partners conducting business together with the aim of making a profit.

Partnership: Main Features

• Ownership & Control: Between two to twenty-one partners.

• Management: Partners manage, including sleeping/silent partners.

• Capital: Derived from savings, loans, or retained profits.

• Legal Status: Usually unlimited liability except for sleeping partners.

• Legal Contract: Requires a deed of partnership.

Partnership: Advantages

1. Set up with few legal formalities.

2. All profits belonging to partners.

3. Independence and collaboration among partners.

Partnership: Disadvantages

1. Unlimited liability for debts.

2. Limited sources of financing compared to corporations.

3. Profits shared, reducing individual gains.

4. Conflicts may arise between partners.

5. Lacks continuity with partner changes or death.

Company/Corporation

• Definition: A business entity established for profit, registered according to regulations.

Company Main Features

• Ownership: Shareholders hold stakes.

• Management: Managed by a board of directors.

• Capital: Requires initial capital for establishment.

Company: Main Features (Continued)

• Source of Finance:

  • Share capital (especially through IPO, PLC only)

  • Retained profits

  • Loans and bonds

• Legal Status: Incorporated as a separate legal entity.

• Liability: Limited liability protects shareholders.

Limited Liability

• Definition: Owners can only lose the amount they invested; personal assets are protected.

Share Capital

• Definition: Money raised from selling shares, enabled by the initial public offering.

• Example: If a company has a share capital of $100,000 and a share face value of $10, there are 10,000 shares total.

Types of Companies

• Private Limited Company (Ltd): Shares can only be sold to friends and family.

• Public Limited Company (PLC): Able to sell shares to the public on stock exchanges.

Memorandum of Association

• Definition: Contains fundamental company details such as the name, purpose, registered address, and initial share capital.

Articles of Association

• Definition: Internal regulations of the company concerning rights and roles within the company, including board of directors and shareholders' powers.

Companies: Advantages

1. Access to diverse financing sources.

2. Limited liability for owners.

3. Continuity in operations.

4. Economies of scale are possible with larger operations.

5. Possibility of business expansion.

6. Established organizational structures.

Companies: Disadvantages

1. Complex and costly setup processes.

2. Risk of losing partial or total control (especially in PLCs).

3. Higher expenses related to bookkeeping and compliance.

4. Possibility of hostile takeovers in a PLC.

5. Legal obligations and reduced privacy.

Social Enterprise

• Definition: Operates to advance a social purpose sustainably while generating revenue and reinvesting profits into the business.

Traditional Business Models vs. Social Enterprises

• Traditional Charity: Primarily generates for social benefit, often lacking financial sustainability.

• Traditional Business: Focused on financial profit.

• Social Enterprise: Balances social impact with financial return, aiming for measurable impact in society.

For-Profit Social Enterprise

• Definition: Similar to a social enterprise but often includes profit distribution to owners while maintaining a primary social mission.

For-Profit Social Enterprises Must:

1. Define a clear social/environmental mission.

2. Operate independently of government control and earn majority income through trading.

3. Reinvest or donate at least half of profits towards their mission.

4. Operate transparently, showing social impacts clearly.

Public Sector Companies

• Definition: Companies owned by the government involved in commercial activities to generate profits for societal benefit.

Private-Public Partnerships (PPPs)

• Definition: Collaborative ventures between government and private companies to provide services or develop infrastructure.

Cooperative

• Definition: A firm owned and managed by a group of users for mutual benefit; employs a one-member, one-vote principle for governance.

Cooperative Main Features

• Ownership: Based on democratic management principles with equal votes.

• Management: Control shared among members.

• Capital: Funded by contributions from members.

Cooperative Advantages

1. Easy to establish.

2. Democratic management fosters involvement.

3. Stability due to member commitment.

4. Potential economic benefits for members.

5. Motivated workforce due to shared ownership.

Cooperative Disadvantages

1. Complex and time-consuming decision-making processes.

2. Challenges in attracting new members.

3. Insufficient capital may hinder growth.

Examples of Cooperatives

• Credit Unions: Provide financial services to members.

• Housing Cooperatives: Offer housing solutions for members.

• Workers’ Cooperatives: Owned and operated by employees.

• Producer Cooperatives: Gathers resources from producers for joint production.

• Consumer Cooperatives: Serve members who are partial owners of the business.

Non-Profit Social Enterprise

• Definition: Similar to social enterprises, but focuses less on profit; aims primarily at social service.

Non-Profit Social Enterprise: Advantages

1. Provide support to individuals/causes in need.

2. Foster community spirit and philanthropy.

3. Exempt from paying taxes.

Non-Profit Social Enterprise: Disadvantages

1. Irregular funding creates instability.

2. Compliance with strict regulations.

3. Control can be diluted among multiple stakeholders.

Charity

• Definition: Non-profit organizations designed to collect donations for societal benefit.

Non-Governmental Organization (NGO)

• Definition: Citizen-based organizations operating independently of governmental control, aimed at delivering resources or serving a political/social purpose.