CHAPTER 4: TYPES OF BUSINESS ORGANISATION

Main features of different forms of business organization

Unincorporated Business – A business that does not have a separate legal identity from its
owner(s) e.g. If the business is sued, the owner is responsible and may need to cover the cost
with their own personal money.
Incorporated Business – Business that has a separate legal identity from its owner(s) e.g. If
the business goes bankrupt, the owners won’t be held responsible and only lose the money
they invested.
Unlimited Liability – (Owners are held liable for the business. If the business goes in debt,
the owner needs to pay back with their own money.
Limited Liability – (Opposite of Unlimited liability, if a business fails, the owners only lose
what they invested)

Sole Trader/Sole Proprietorship

A business organization owned and controlled by one person. Sole traders can employ other
workers, but only he/she invests and owns the business.

Advantages:
• Easy to set up: there are very few legal formalities involved in starting and running a
sole proprietorship. A less amount of capital is enough by sole traders to start the
business. There is no need to publish annual financial accounts.
• Full control: the sole trader has full control over the business. Decision-making is
quick and easy, since there are no other owners to discuss matters with.
• Sole trader receives all profit: Since there is only one owner, he/she will receive all of
the profits the company generates.
• Personal: since it is a small form of business, the owner can easily create and maintain
contact with customers, which will increase customer loyalty to the business and also let
the owner know about consumer wants and preferences.

Disadvantages:
• Unlimited liability: if the business has bills/debts left unpaid, legal actions will be
taken against the investors, where their even personal property can be seized, if their
investments don’t meet the unpaid amount. This is because the business and the
investors are the legally not separate (unincorporated).
• Full responsibility: Since there is only one owner, the sole owner has to undertake all
running activities. He/she doesn’t have anyone to share his responsibilities with. This
workload and risks are fully concentrated on him/her.
• Lack of capital: As only one owner/investor is there, the amount of capital invested in
the business will be very low. This can restrict growth and expansion of the business.
Their only sources of finance will be personal savings or borrowing or bank loans
(though banks will be reluctant to lend to sole traders since it is risky).
• Lack of continuity: If the owner dies or retires, the business dies with him/her.

Partnerships
A partnership is a legal agreement between two or more (usually, up to twenty) people to
own, finance and run a business jointly and to share all profits.

Advantages:
• Easy to set up: Similar to sole traders, very few legal formalities are required to start a
partnership business. A partnership agreement/ partnership deed is a legal document
that all partners have to sign, which forms the partnership. There is no need to publish
annual financial accounts.
• Partners can provide new skills and ideas: The partners may have some skills and
ideas that can be used by the business to improve business profits.
• More capital investments: Partners can invest more capital than what a sole trade only
by himself could.

Disadvantages:
• Conflicts: arguments may occur between partners while making decisions. This will
delay decision-making.
• Unlimited liability: similar to sole traders, partners too have unlimited liability- their
personal items are at risk if business goes bankrupt
• Lack of capital: smaller capital investments as compared to large companies.
• No continuity: if an owner retires or dies, the business also dies with them.

Joint-stock companies
These companies can sell shares, unlike partnerships and sole traders, to raise capital. Other
people can buy these shares (stocks) and become a shareholder (owner) of the company.
Therefore they are jointly owned by the people who have bough it’s stocks. These
shareholders then receive dividends (part of the profit; a return on investment).
The shareholders in companies have limited liabilities. That is, only their individual
investments are at risk if the business fails or leaves debts. If the company owes money, it can
be sued and taken to court, but it’s shareholders cannot. The companies have a separate legal
identity from their owners, which is why the owners have a limited liability. These companies
are incorporated.
(When they’re unincorporated, shareholders have unlimited liability and don’t have a separate
legal identity from their business).
Companies also enjoys continuity, unlike partnerships and sole traders. That is, the business
will continue even if one of it’s owners retire or die.
Shareholders will elect a board of directors to manage and run the company in it’s day-today
activities. In small companies, the shareholders with the highest percentage of shares
invested are directors, but directors don’t have to be shareholders. The more shares a
shareholder has, the more their voting power.
These are two types of companies:
Private Limited Companies: One or more owners who can sell its’ shares to only the people
known by the existing shareholders (family and friends). Example: Ikea.
Public Limited Companies: Two or more owners who can sell its’ shares to any
individual/organization in the general public through stock exchanges.

Advantages:
• Limited Liability: this is because, the company and the shareholders have separate
legal identities.
• Raise huge amounts of capital: selling shares to other people (especially in Public Ltd.
Co.s), raises a huge amount of capital, which is why companies are large.

• Public Ltd. Companies can advertise their shares, in the form of a prospectus, which
tells interested individuals about the business, it’s activities, profits, board of directors,
shares on sale, share prices etc. This will attract investors.

Disadvantages:
• Required to disclose financial information: Sometimes, private limited companies are
required by law to publish their financial statements annually, while for public limited
companies, it is legally compulsory to publish all accounts and reports. All the writing,
printing and publishing of such details can prove to be very expensive, and other
competing companies could use it to learn the company secrets.
• Private Limited Companies cannot sell shares to the public. Their shares can only be
sold to people they know with the agreement of other shareholders. Transfer of shares is
restricted here. This will raise lesser capital than Public Ltd. Companies.
• Public Ltd: Companies require a lot of legal documents and investigations before it
can be listed on the stock exchange.
• Public and Private Limited Companies must also hold an Annual General Meeting
(AGM), where all shareholders are informed about the performance of the company
and company decisions, vote on strategic decisions and elect board of directors. This is
very expensive to set up, especially if there are thousands of shareholders.
• Public Ltd Companies may have managerial problems: since they are very large,
they become very difficult to manage. Communication problems may occur which will
slow down decision-making.
• In Public Ltd Companies, 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.

A summary of everything learned until now, in this section, in case you’re getting
confused:
Franchises

Franchise:
o A business that distributes the products and uses the brand names, logos, and strategies of an
existing successful business
o Many well-known international businesses use franchising to expand into new overseas
markets → combine large, well-known brand name + local knowledge of franchisees.
Joint Ventures:
Joint venture is an agreement between two or more businesses to work together on a
project. The foreign business will work with a domestic business in the same industry.
Eg: Google Earth is a joint venture/project between Google and NASA.

Advantages
• Reduces risks and cuts costs
• Each business brings different expertise to the joint venture
• The market potential for all the businesses in the joint venture is increased
• Market and product knowledge can be shared to the benefit of the businesses

Disadvantages
• Any mistakes made will reflect on all parties in the joint venture, which may damage
their reputations
• The decision-making process may be ineffective due to different business culture or
different styles of leadership

Public Sector Corporations

Business-like organisations owned by the state / central government
o Separate legal entity from government and board of directors (BOD)
o Government: sets objectives and appoints BOD to manage the business. BOD: manages the
business according to objectives set by government.
o Financing:
▪ Corporations providing essential services – may be subsidised by the
government so the essential services are affordable to everyone regardless of income, e.g.
postal services, water and electricity
▪ Profitable public corporations – run like a business, and
their profits may be used for themselves through reinvestment OR by the government (to
pay for public expenditure)

o Purpose:
▪ Carry out government functions, e.g. central bank
▪ Provide essential public services, e.g. public hospitals
▪ Carry out commercial activities on behalf of government, e.g.state-owned airlines

Advantages:
• Some businesses are considered too important to be owned by an individual.
(electricity, water, airline)
• Other businesses, considered natural monopolies, are controlled by the government.
(electricity, water)
• Reduces waste in an industry. (e.g. two railway lines in one city)
• Rescue important businesses when they are failing through nationalisation
• Provide essential services to the people
Drawbacks:
• Motivation might not be as high because profit is not an objective
• Subsidies lead to inefficiency. It is also considered unfair for private businesses
• There is normally no competition to public corporations, so there is no incentive to
improve
• Businesses could be run for government popularity