• Sole traders, partnerships, private and public limited companies, franchises and joint
ventures
• Differences between unincorporated businesses and limited companies
• Concepts of risk, ownership and limited liability
• Recommend and justify a suitable form of business organisation to
owner’s/management in a given situation
• Business organisations in the public sector, e.g. public corporations
Forms of Business Organisations Cont. 16-11-2023
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.
As an unincorporated business, sole traders and partners are not recognized in
law as having a legal identity separated from that of them – they are the
business and do not have legal personality. It means that if the products sold
by them are dangerous, either a sole trader or a partnership may be taken to
court.
As an incorporated business, a company is recognized in law as having a legal
identity separate from that of its owners. This means that if the products sold by a
company are found to be harmful, the company itself may be taken to court but not
the owners. A company can be sued and it can itself sue other people and other
companies in courts.
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 bought its 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 its owners retire or die.
Shareholders will elect a board of directors to manage and run the
company in its day-to-day 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:
a) 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.
b) Public Limited Companies:
This is where two or more owners can sell its’ shares to any
individual/organization in the general public through stock exchange.
Example: Verizon Communications.
A company whose shares can be sold on the stock exchange OR identifies
specific features of public limited company e.g. shares issued to and owned
by public/shares sold freely on the stock market.
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 content this far:
Franchises
The owner of a business (the franchisor) grants a license to another
person or business (the franchisee) to use their business idea – often in
a specific geographical area. Fast food companies such as McDonald’s and
Subway operate around the globe through lots of franchises in different
countries.
ADVANTAGES DISADVANTAGES
TO Rapid, low cost Profits from the
FRANCHISO method of business franchise needs to be
R expansion shared with the
Gets and income franchisee
from franchisee in Loss of control over
the form of franchise running of business
fees and royalties
If one franchise fails, it
Franchisee will better can affect the
understand the local reputation of the
tastes and so can entire brand
advertise and sell
appropriately Franchisee may not be
as skilled
Can access ideas and
suggestions from
franchisee Need to supply raw
material/product and
Franchisee will run provide support and
the operations training
Cost of setting up
business
No full control over
business- need to
strictly follow
franchisor’s standards
and rules
An established brand Profits have to be
and trademark, so shared with franchisor
chance of business
failing is low Need to pay franchisor
Franchisor will give franchise fees and
technical and royalties
managerial support
Need to advertise and
Franchisor will supply promote the business
TO the raw in the region
FRANCHISE materials/products themselves
E
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. E.g.: 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
Public sector corporations are businesses owned by the government and
run by directors appointed by the government. They usually provide
essentials services like water, electricity, health services etc. The
government provides the capital to run these corporations in the form of
subsidies (grants). The UK’s National Health Service (NHS) is an example.
The public sector refers to those activities that are owned and managed by the
government or its agencies (1). Expanding it simply implies that the government
play a larger role in the economy (such as employment in the sector increases) (1).
Public corporations aim to:
to keep prices low so everybody can afford the service.
to keep people employed.
to offer a service to the public everywhere.
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
Sample Topical questions and answers.
1. What is meant by a ‘limited company’?
A limited company is a business that has been incorporated and whose
owners have limited liability.
2. What is the difference between a limited company and an
unincorporated business?
• A limited company has separate legal identity so assets such as the factory
are owned by the business rather than the individual, whereas the owners
and the business are the same for an unincorporated business
• An unincorporated business has unlimited liability whereas the risk for
shareholders/owners of a limited company is limited to the amount invested
in the car business so they may be less concerned about the high fixed costs
• A limited company can sell shares whereas for an unincorporated business
it can be difficult to raise a large amount of finance
• A limited company has continuity
3. What is meant by a ‘sole trader’?
A business owned and controlled by one person OR ownership lies in the
hand of an individual.
4. What is meant by a ‘business partnership’?
Where two or more people jointly agree to own the business
Two or more people run / operate the business OR identifies a relevant
feature
5. Explain two possible reasons a trader may opt to start a business
partnership business.
• More capital can be raised - than if the business was a sole trader when
only one person would be providing capital
• Shared responsibilities of running the business – each partner can
specialise in one aspect of the business where they have expertise
• To share risks – if there are debts or losses these are shared between the
partners
• To share ideas/more ideas/help make decisions
• To share the workload/cover when one partner takes holidays or is
unavailable
6. What are the benefit of using franchise as a way of expanding retail business?
:• Franchisee pays fee to franchisor to use the brand name {k]so franchisor does not have to
raise as much capital [an]
• Can expand more quickly (than if franchisor had to finance all new outlets) [k]
• Franchisees are responsible for day-to-day management [k] so franchisor has time to focus on
more strategic objectives [an]
• Franchisee should have local knowledge [k] which could help increase sales/revenue [an]
• Franchisor receives a percentage of revenue/profits [k]
• Franchisor shares risks with franchisee [k]
• Brand/customer awareness increases [k]
• All products sold must be obtained from the franchisor [k
] • Wrong decision or poor management by one franchisee can damage reputation for whole
business [k] reducing sales/revenue [an]
• Franchisor may have to provide training and support [k] which will increase franchisors costs
[an]
