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Types of Business Organisations


Types of Business Organisations

Identify the main features of sole traders

  • A business organisation owned and controlled by one person
    • Advantages;
      • Easy to set up. Few legal requirements needed
      • This businesses often require little capital
      • The owner receives all profits from the business
    • Disadvantages;
      • The owner had full-responsibility for running the day-to-day business. This means a lot of hard work and very long hours
      • The owner has unlimited liability
      • Sole traders often lack capital to buy new equipment or expand

Identify the main features of partnerships

  • A legal agreement between two or more people to jointly own, finance and run a business, sharing its profits and losses
    • Advantages;
      • Partnerships are easy to set up. Few legal requirements are needed
      • Partners bring new skills and ideas to the business
      • Limited partners have limited liability
    • Disadvantages;
      • Discussions between partners can slow down decision making
      • Problems can arise if one or more partners are lazy, inefficient or dishonest. Causing arguments
      • Most partners will have unlimited liability

Identify the main features of private and public limited companies

  • Also known as joint-stock companies or corporation because they sell stocks
  • People who invest in these shares become shareholders and receive a share of the profit after taxes are paid. This payment is called a dividend
  • Shareholders elect a board of directors with valuable skills to manage their company from day to day. In small companies the directors are the shareholders
  • Large corporations have thousands of shareholders and therefore hold an annual general meeting to discuss the business performance and changes.
  • There are two types of joint stock companies;
    • Private Limited companies; It only sells shares to private investors known to the existing shareholders
      • Advantages;
        • Shareholders can elect directors to manage the company on their behalf
        • Shareholders have limited liability
        • Good option for family businesses looking to raise capital
      • Disadvantages;
        • They are legally required to keep detailed financial statements of their income, profits and losses. Some countries require these details published
        • Large shareholders can outvote others on important decisions
        • Bad directors may run the company in their own interests rather than the best interests of the company‚Äôs shareholders
    • Public Limited companies; It sells shares though a stock exchange
      • Advantages;
        • The public sale of shares  thought the stock market can increase capital
        • Shareholders have limited liability
        • Advertisement for shares can be used
      • Disadvantages;
        • It can be very expensive to form
        • Annual reports need to be published
        • The original owner can lose control of the company unless they keep at least 51%

Identify the main features of franchises

  • An agreement by one company with another business organisation to permit the distribution of its goods or services using its trademark or brand name
  • Franchisor; The known company with powerful name and brand
    • Advantages;
      • Quick and easy way to expand the business
      • Franchisee are required to buy products from the franchisor
    • Disadvantages;
      • The franchisee keep the most of the profit they make
      • A franchisee that fails to maintain a good quality product can damage the reputation of the entire business
  • Franchisee; The company that buys the right
    • Advantages;
      • Selling established products reduces the risk of business failure
      • Banks are more willing to lend money
    • Disadvantages;
      • Fees and ongoing payments can be high
      • There may be regular monitoring from the franchisor

Identify the main features of joint ventures

  • A contractual agreement between two or more organisation to share the expertise, investments, costs and risks of running a new business project
    • Advantages;
      • Cost and risks can be shared
      • Each business in the joint venture gains knowledge, technologies and new skills
    • Disadvantages;
      • One of the businesses may disagree on important decisions
      • Profits are shared as well as ideas that could give a competitive advantage in the future

Identify the differences between unincorporated businesses and limited companies

  • Sole trader / Partnership
    • Unlimited liability
    • No legal requirements
    • Shared can not be sold
  • Limited Company
    • Limited Liability
    • Legal requirements
    • Shares can be sold

Identify the concepts of risk, ownership and limited liability

  • Limited liability; The legal responsibility of the owners of a business to repay its debts is limited to the amount of capital they invest in the business
  • Unlimited liability; The owners of a business are legally responsible for the full amounts of its debts

Identify the main features of business organizations in the public sector including public corporations

  • Public Corporations are business-like organisations created by the national or central government to;
    • Carry out a particular government function
    • Provide essential public services
    • Carry out commercial activities on behalf of the government (Trading Bodies)
  • Previously private sector organisations have been nationalized and are now controlled by the government.
    • Advantages;
      • They can safeguard the supply of essential services
      • They can safeguard nationally important industries
      • They can provide social services (public transport)
    • Disadvantages;
      • They may be managed and run inefficiently
      • They face little or no competition so quality of services may decrease

Governments may use them for political purposes (raising taxes)