Section 1 : Understanding Business Activity

1.4 Types of business organisation

Let’s learn about: Chapter Objectives
• Sole traders & partnerships
• Private and public limited companies
• Franchises & joint ventures
• Unincorporated and incorporated businesses
• Public sector organisations

IGCSE 2
Forms of business organisation
The legal structure defines the organization

IGCSE 3
 Liability
An individual’s liability is what that individual can be held legally responsible for. A business’s liabilities are the
financial debts which it must pay at some time in the future

▪ An unincorporated business does ▪ An incorporated business has its own

not have a separate legal identity to legal identity and can sue or own
its business owners. This means that assets in its own right. This means they
the owners have unlimited liability. have limited liability.

▪ If a business fails and the person who ▪ If a business fails, shareholders who
owns the business has unlimited have limited liability only risk losing
liability, he/she can be held the amount they invested in shares –
responsible for debts run up by the they can not be required to pay the
business and could lose his/her company’s debts with any of their
personal assets (property/savings) to personal assets (property/savings).
pay off the debts.
▪ Shareholders in public and private
▪ Sole traders & partnerships have limited companies have limited
unlimited liability liability

IGCSE 4
Sole trader
A business owned and controlled by one person, who takes all the risks and
receives all of the profits

Pros:
▪ Easy to set up: very few legal formalities, no need to publish annual financial accounts
▪ Full control: Decision-making is quick and easy Start-up capital: the finance needed
when first setting up a business
▪ Start-up capital: May require only small amount of it
▪ Sole trader receives all profit

Cons:
▪ Unlimited liability: responsible for any debts and could lose personal assets to pay them
▪ Fund-raising for expansion may be difficult
▪ Difficult to compete with larger companies in the same industry
▪ Owner may lack essential business skills
▪ Owner may have to work long hours
▪ If sole trader retires or dies the business ends

IGCSE 5
Partnership
A business formed by two or more people who will usually share responsibility for
the day-to-day running of the business. Partners usually invest capital in the
business and will share profits

Pros:
▪ More access to finance
The legal agreement between partners that
▪ Shared decision making sets the rights and obligations of each partner
▪ Easy to set up Deed of Partnership
▪ Shared management and workload

Cons:
▪ Unlimited liability: responsible for any debts and could lose personal assets to pay them
▪ Profits shared between partners
▪ If a partner leaves, the business ceases to exist and needs to be reformed with a new
Deed of Partnership to continue trading
▪ Business decisions are binding on all partners – even if a partner doesn’t agree
▪ Relatively difficult to raise finance

IGCSE 6
Sole trader vs. Partnership

Identify the main similarities and

differences between sole
traders and partnerships:

• What features do they both

share?
• What are the main areas
where they are different?
• How do you think this might
affect how they operate?

Activity 4.1 (p. 48)

IGCSE 7
Private & public limited companies
▪ A limited company is an incorporated business with its own legal identity. The
ownership of a limited company is divided up into equal parts called shares. Whoever
owns one or more of these is called a shareholder.

▪ Private limited companies (LTD): often a small to medium-sized company,

owned by shareholders who have limited liability. The company can not sell its
shares to the general public (IKEA, Virgin Atlantic)

▪ Public limited companies (PLC): often a large company, owned by

shareholders who have limited liability. The company can sell its shares to the
general public (BP, Marks & Spencer, H&M) in Stock Exchange

Shared features:
▪ Legal documents for setting-up
▪ Shareholders invest their capital and buy shares
Dividend: a payment, out of profits,
▪ Ordinary shareholders are the owners to shareholders as a reward to their
▪ Limited liability investment
▪ The business exists even if one or more shareholders die
▪ Fund raising by selling shares
▪ Profit belongs to the ordinary shareholders
▪ Profit is shared between the shareholders through the payment of dividend
▪ Shareholders vote on major decisions
▪ End year financial statements need to be produced and submitted the authorities
IGCSE 8
Private & public limited companies
Private limited companies (LTD)
Pros:
▪ Limited liability of shareholders: if the business fails shareholders can only lose the value of their shares
(personal assets are not at risk)
▪ Business continuity: the company can continue to trade if a shareholder dies
▪ Able to raise more finance than a smaller business
Cons:
▪ A legal agreement is required
▪ Expensive to set up and takes time
▪ It is not easy to raise finance as they cannot sell shares to the public. Shares can only be sold to people they
know with the agreement of other shareholders; transfer of shares is restricted here
▪ May have difficulties raising finance through borrowing against assets as business is usually small

Public limited companies (PLC)

Pros:
▪ Limited liability of shareholders
▪ Business continuity
▪ Better access to capital as it can raise finance through share sales and borrowing from lenders
▪ Business is often established and well known, leading to positive brand image that helps marketing and sales
as well as borrowing
Cons:
▪ Required to disclose financial information. Accounts and reports must be published to be visible to others
(legal requirement for published information is stricter than for private limited companies)
▪ Legal formalities to set it up & investigations before it can be listed on the stock exchange are expensive
▪ Annual General Meeting (AGM) can be very expensive to set up, esp. if there are thousands of share/ers
▪ Can have managerial problems since they are very large, they become very difficult to manage
▪ 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

IGCSE 9
In a graph

IGCSE 10
Franchises (1/3)

IGCSE 11
Franchises (2/3)
A business system where entrepreneurs buy the right to use the name, logo &
product of an existing business. The franchisor is the key firm with the successful
product or service and the franchisee is the new business set up within the
franchisor guidelines

Pros – for franchisee:

▪ Less chance of business failure as brand established with wide-spread brand recognition
▪ Business training and advice offered to franchisee by franchisor
▪ National or even international promotion is financed by the franchisor
▪ Franchisor does quality checks on suppliers, so franchisee doesn’t have to
▪ Franchisee has a certain level of independence to make decisions
Cons – for franchisee :
▪ The initial cost of buying into a franchise can be expensive
▪ The franchisor takes a percentage of revenue or profits made by the franchisee
▪ There are strict controls on what the franchisee can do with the product, pricing and store
layout
▪ The franchisee pays for local promotion
▪ If the franchisor goes out of business so does the franchisee

IGCSE 12
Franchises (3/3)
Pros – for 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

Cons – for franchisor:

▪ 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

Franchising FAQs | McDonald's (mcdonalds.com)

2021 Franchise 500 Ranking (entrepreneur.com)
Top 50 Franchise Failures You Need To Know - Vetted Biz

IGCSE 13
Joint ventures
Two or more businesses agree to work together on a project and set up a separate
business for this purpose
Pros:
▪ Shared risks = reduced risks for each business, and splitted costs
▪ Each business brings different expertise to the joint venture
▪ Market and product knowledge is shared to the benefit of the businesses
Cons:
▪ Mistakes made could damage the reputations of all businesses involved, even if thy were
not the cause of the mistake
▪ Decision making may be difficult due to differences in leadership, management and
culture between the different businesses in the joint venture

Famous joint ventures:

1. Novartis & GSK Consumer Healthcare Joint Venture

2. Vodafone & Telefónica agreed to share their mobile network
3. BMW and Toyota co-operate on research into hydrogen fuel cells
4. Google and NASA developing Google Earth
5. Hollywood studios combining to fight internet piracy

IGCSE 14
Choosing the type of business organization
Setting an unincorporated business is easier than an incorporated one

Factors to consider
• Number of owners
• Owners role in the
management of the business
• Attitude towards financial risk
• Time to start the operations
• Potential size

IGCSE 15
Activity: Which type of business?
For each of the following situations, select a suitable type of business organisation. Give reasons for the
choices that you make.

1. Gino wants to set up a delivery business. He wants to be in charge of all decisions.

2. Fatima works in an office. She has always wanted to open a book shop. She is happy to work with
others, but she would like some independence about how the business works.
3. Tim owns a small but successful plumbing and heating business. He has been trading for six years.
He is keen to expand, but needs new sources of finance if he is to grow.
4. Well-established private limited business needs funds to build new high-tech factory.
5. Large retail business wants to expand into new markets overseas. Management is worried that they
have no local knowledge.

IGCSE 16
 Class
Public corporations Can we think of some examples? discussion:

A business organisation that is owned and controlled by the state

Features:
▪ They are owned and controlled by the state
▪ They are financed mainly through taxation
▪ In many countries, they have social objectives rather than profit objectives
▪ The services and products of public corporations are often free or at a low price

Pros:
▪ Public corporations ensure certain products and services are available to the public,
regardless of individual finance
▪ Public corporations can also offer certain products and services to domestic
businesses at a cost that ensures domestic businesses succeed
▪ Increasing the output of public corporations can be used to help a country’s economy
Cons:
▪ It is not easy to manage and control them
▪ No incentive for producing goods and services of high quality, as they do not have to face
either bankruptcy or competition
▪ If they have losses, then they need subsidies which have to be paid for through taxes

IGCSE 17
• The right choice for the business structure is
dependent to specific factors having to do with the
ownership, financial risk, potential size Summarize
• Setting an unincorporated business is easier and
quicker than an incorporated one, which explains why
sole traders and partnerships are the most popular
form of businesses in many countries

IGCSE 18
Private & public limited companies

▪ If a shareholder owns more than

50% of shares (i.e./ 51%+)
he/she has control over major
decisions

▪ If a shareholder owns more than

50% of shares (i.e./ 51%) he/she
has deciding vote on decisions
such as who will be on Board of
Directors

Collateral: Non-current assets offered as

security against borrowing

Activity 4.2 (p. 50) IGCSE 19

• Discuss

Homework

IGCSE 20
Questions?

IGCSE 21