Chapter-4

Types of business organization

 Main topics in this chapter
I. Business organizations in the private sector
II. Advantages and disadvantages of the private
business organization
III. Business organizations in the public sector
 .
Business organizations in the private sector

• There are several main forms of business

organization in the private sector. These are:
1. sole traders
2. partnerships
3. private limited companies
4. public limited companies
5. franchises
6. joint ventures
 1. Sole Traders
• Sole trader is a business owned and operated
by just one person – the owner is the sole
proprietor.
 Advantages of being a sole trader
• There were few legal regulations for start up.
• The sole proprietor has complete control over his
business.
• The sole proprietor has the freedom to choose his own.
holidays, hours of work, prices to be charged and whom
to employ.
• The proprietor has the personal satisfaction of knowing
his regular customers and the ability to respond quickly
to their needs and demands.
• The proprietor has an incentive to work hard as he is able
to keep all of the profits, after he pays tax.
• The proprietor does not have to give information about
his business to anyone else – other than the Tax Office.
 Disadvantages of being a sole trader
• The proprietor have no one to discuss business matters.
• The proprietor do not have the benefit of limited liability.
• The sources of finance for a sole trader are limited to the
owner’s savings, profits made by the business and small
bank loans.
• Sole trader remain small because capital for expansion is
so restricted.
• If proprietor ill, there is no one who will take control of
the business for me.
 2. Partnerships
• A partnership is a group or association of at
least two people who agree to own and run a
business together.
• There is need to create a written agreement
with a partner called a partnership agreement.
Without this document, partners may disagree
on who put most capital into the business or
who is entitled to more of the profits.
 Advantages of a partnership
• More additional capital could now be invested
into the partnership.
• The responsibilities of running the business
were now shared.
• Both partners were motivated to work hard
because they would both benefit from the
profits.
 Disadvantages of a partnership
• The partners did not have limited liability.
• The business did not have a separate legal identity. If
one of the partners died, then the partnership would
end.
• Partners can disagree on business decisions and
consulting all partners takes time.
• If one of the partners is very inefficient or actually
dishonest, then the other partners could suffer by
losing money in the business.
• Most countries limit the number of partners to 20 and
this means that business growth would be limited.
 Limited partnerships
• In some countries it is possible to create a
Limited Liability Partnership.
• The abbreviation for this new form of legal
structure is LLP.
• It offers partners limited liability but shares in
such businesses cannot be bought and sold.
This type of partnership is a separate legal unit
which still exists after a partner’s death
 3. Private limited companies
• A company is a separate legal unit from its owners – it is an
incorporated business.
• A company exists separately from the owners and will continue to
exist if one of the owners should die.
• A company can make contracts or legal agreements
• A company accounts are kept separate from the accounts of the
owners.
• Companies are jointly owned by the people who have invested in the
business. These people buy shares in the company and they are called
shareholders.
• These shareholders appoint directors to run the business. In a private
limited company, the directors are usually the most important or
majority shareholders.
 Advantages of a private limited company
• Shares can be sold to a large number of people (in some
countries there is a maximum number). These would be
likely to be friends or relatives. The business could
therefore expand more rapidly.
• All shareholders have limited liability. This is an
important advantage. It means that if the company
failed with debts owing to creditors, the shareholders
could not be forced to sell their possessions to pay the
debts.
• The people who started the are able to keep control of it
as long as they do not sell too many shares to other
people.
 Disadvantages of a private limited
company
• There are significant legal matters which have to be dealt with before a
company can be formed. In particular, two important forms or
documents have to be sent to the Registrar of Companies (The Articles
of Association and The Memorandum of Association
• Both of these documents are intended to make sure that companies are
correctly run and to reassure shareholders about the purpose and
structure of the company.
• The shares in a private limited company cannot be sold or transferred
to anyone else without the agreement of the other shareholders.
• The accounts of a company are less secret than for either a sole trader
or a partnership. Each year the latest accounts must be sent to the
Registrar of Companies and members of the public can inspect them.
• Most importantly for rapidly expanding businesses, the company
cannot offer its shares to the general public. Therefore it will not be
possible to raise really large sums of capital to invest back into the
business.
 4.Public limited companies
• This form of business organization is most
suitable for very large businesses. Most large,
well-known businesses are public limited
companies as they have been able to raise the
capital to expand nationally or even
internationally.
 Advantages of a public limited company
• This form of business organization still offers limited liability to
shareholders.
• It is an incorporated business and has a separate legal identity to
the owners or shareholders. Its accounts are kept separately from
those of the owners.
• There is now the opportunity to raise very large capital sums to
invest in the business.
• There is no restriction on the buying, selling or transfer of shares.
• A business trading as a public limited company usually has high
status and should find it easier to attract suppliers prepared to sell
goods on credit and banks willing to lend to it than other types of
businesses.
Disadvantages of a public limited company

• The legal formalities of forming such a company are

quite complicated and time-consuming.
• There are many more regulations and controls over
public limited companies in order to try to protect
the interests of the shareholders.
• Selling shares to the public is expensive.
• There is a very real danger that although the original
owners of the business might become rich by selling
shares in their business, they may lose control over it
when it ‘goes public’.
 5.Franchise
• The franchisor is a business with a product or
service idea that it does not want to sell to
consumers directly. Instead, it appoints
franchisees to use the idea or product and to
sell it to consumers
Advantages • The franchisee buys a licence • The chances of business
from the franchisor to use the failure are much reduced
brand name because a well-known product
is being sold

• Expansion of the franchised • The franchisor pays for

business is much faster than if advertising
the franchisor had to finance
all new outlets

• The management of the • All supplies are obtained

outlets is the responsibility of from a central source – the
the franchisee franchisor

• All products sold must be • There are fewer decisions to

obtained from the franchisor make than with an
independent business

• Training for staff and

management is provided by th
franchisor

• Banks are often willing to

lend to franchisees due to
relatively low risk
Disadvantages To the franchisor To the franchisee

• Poor management of one • Less independence than

franchised outlet could lead to with operating a non-
a bad reputation for the franchised business
whole business

• The franchisee keeps profits • May be unable to make

from the outlet decisions that would suit the
local area

• Licence fee must be paid to

the franchisor and possibly a
percentage of the annual
turnover
 6. Joint ventures
• A joint venture is when two or more
businesses agree to start a new project
together, sharing the capital, the risks and the
profits.
 Advantages of joint ventures
• Sharing of costs – very important for
expensive projects such as new aircraft
• Local knowledge when joint venture company
is already based in the country
• Risks are shared
 Disadvantages of joint ventures
• If the new project is successful, then the
profits have to be shared with the joint
venture partner
• Disagreements over important decisions might
occur
• The two joint venture partners might have
different ways of running a business –
different cultures
Business organizations in the public sector

• The public sector is a very important part of

the economy of all mixed economies. The term
‘public sector’ includes all businesses owned
by the government/state and local government,
and public services such as hospitals, schools,
fire services and government departments
 Public corporations
• Public corporations are owned by the
government but it does not directly operate the
businesses. Government ministers appoint a
Board of Directors, who will be given the
responsibility of managing the business. The
government will, however, make clear what
the objectives of the business should be. The
directors are expected to run the corporation
according to these objectives.
 Advantages of public corporations
• Some industries are considered so important that government
ownership is thought to be essential. These include water
supply and electricity generation in many countries.
• If industries are controlled by monopolies, these natural
monopolies are often owned by the government. It is argued
that this will ensure consumers are not taken advantage of by
privately owned monopolists.
• If an important business is failing and likely to collapse, the
government can step in to nationalize it. This will keep the
business open and secure jobs.
• Important public services, such as TV and radio broadcasting,
are often in the public sector. Non-profitable but important
programmes can still be made available to the public.
Disadvantages of public corporations
• There are no private shareholders to insist on high profits
and efficiency. The profit motive might not be as powerful
as in private sector industries.
• Government subsidies can lead to inefficiency as
managers will always think that the government will help
them if the business makes a loss.
• Often there is no close competition to the public
corporations. There is therefore a lack of incentive to
increase consumer choice, increase efficiency or even
improve customer service.
• Governments can use these businesses for political
reasons, for example, to create more jobs just before an
election.