Types of business organizations

Types of business organization

The main types of business organization in the private sector in the UK are:

1. sole traders
2. partnerships
3. companies
4. franchises.

The sole trader

The sole trader is the most common form of business ownership and is found in a wide range
of activities (e.g. window cleaning, plumbing, electrical work, busking). In the UK about 20
percent of sole traders operate in the construction industry, a further 20 percent in retailing,
and about 10 percent in finance, and 10 percent in catering.
No complicated paperwork is required to set up a sole trader business. Decisions can be made
quickly and close contact can be kept with customers and employees. All profits go to the sole
trader, who also has the satisfaction of building up his or her own business.
But there are disadvantages. As a sole trader you have to make all the decisions yourself, and
you may have to work long hours (what do you do if you are ill or want a holiday?) You do
not have limited liability, and you have to provide all the finance yourself. As a sole trader
you need to be a jack-of-all-trades, and just because you are a good hairdresser does not
necessarily mean you have a head for business strategy.

The partnership

An ordinary partnership can have between two and twenty partners. However, the Partnership
Act of 2002 has made it legal for some forms of partnership e.g. big accountancy firms to
have more partners who also enjoy limited liability. People in business partnerships can share
skills and the workload, and it may be easier to raise the capital needed. For example, a group
of doctors are able to pool knowledge about different diseases, and two or three doctors
working together may be able to operate a 24 hour service. When one of the doctors is ill or
goes on holiday, the business can cope.
Partnerships are usually set up by writing out a deed of partnership which is witnessed by a
solicitor and sets out the important details such as how the profits and losses will be shared.
Partnerships are particularly common in professional services e.g. accountants, solicitors,
vets.

Companies

A company is owned by shareholders who appoint Directors to give direction to the business.
The Chief Executive is the senior official within the company with responsibility for making
major decisions. Specialist managers will be appointed to run the company on behalf of the
Board.
A company is a legal body in its own right with an existence that is separate in law from its
owners. The company will thus be sued and can sue in its own name.
Shareholders put funds into the company by buying shares. New shares are often sold in face
values of £1 per share but this does not have to be the case.
Limited liability is a form of business protection for company shareholders (and some limited
partners). For these individuals the maximums sum they can lose from a business venture
which they have contributed going bust is the sum of money that they have invested in the
company - this is the limit of their liability.
Every company must register with the Registrar of Companies, and must have an official
address.
Private companies have Ltd after their name. They are typically smaller than public
companies although some like Portakabin and Mars are very large. Shares in a private
company can only be bought and sold with permission of the Board of Directors.
Shareholders have limited liability.
A public company like Cadbury-Schweppes or BT can sell shares to the public and to
financial institutions and have their shares traded on the Stock Exchange. The main advantage
is that large amounts of capital can be raised very quickly. One disadvantage is that control of
a business can be lost by the original shareholders if large quantities of shares are purchased
as part of a takeover bid. In order to create a public company the directors must apply to the
Stock Exchange Council, which will carefully check the accounts.

Franchising

In the United States almost half of all retail sales are made through firms operating under the
franchise system like McDonald's which has a brand franchise. Franchising is becoming
increasingly popular in this country.
Franchising is really the 'hiring out' or licensing of the use of 'good ideas' to other companies.
A franchise grants permission to sell a product and trade under a certain name in a particular
area. If I have a good idea, I can sell you a licence to trade and carry out a business using my
idea in your area. The person taking out the franchise puts down a sum of money as capital
and is issued with equipment by the franchising company. The firm selling the franchise is
called the franchisor and a person paying for the franchise is called the franchisee.
Where materials are an important part of the business (e.g. confectionary, pizza bases, hair
salons) the franchisee must buy an agreed percentage of supplies from the franchisor, who
thus makes a profit on these supplies as well as ensuring the quality of the final product. The
franchisor also takes a percentage of the sales of the business, without having to risk capital or
become involved in the day-to-day management.
The franchisee benefits from trading under a well-known name and enjoys a local monopoly.
Training is usually arranged by the franchisor. The franchisee is his or her own boss and takes
most of the profits.

Business Organizations

Definition
A business organization may be defined as a single individual or group of persons who have pooled
their resources in order to provide goods and services to make a profit.

Types of Business Organizations

1. Sole trader
2.Partnership
3.Cooperatives
4 Private Limited Companies
5.Public Limited Companies
6.Multinationals
7.Conglomerates
8.Franchises
9. State Corporations/Nationalized Industries

Sole Trader
This is a business owned by one person who provides capital for the business and usually directs and
supervises its activities. The owner takes responsibility for the total debt of the business with
unlimited liability; i.e. he is solely responsible for all debts, moneys owed, losses, etc. of the business.
The opposite is also true; i.e. all the profits go to the owner.

Advantages
— It can be easily and quickly formed.
— The sole trader accounts only to himself or herself.
— The sole trader makes decisions quickly because he/she has no one to consult.
— All profits belong to the sole trader.
— The sole trader can enjoy a personal relationship with his/her customers.
— He/She has access to a government small-business loan.
— A sole trader is usually flexible and can enter or exit the firm easily according to changes in the
market.
— A sole trader can progress or grow into a large company.

Disadvantages
— A sole trader assumes all the risks and losses himself or herself.
— It is not easy to obtain loans from a bank.
— In assuming all responsibilities the sole trader has long working hours.
— A sole trader has unlimited liability.
— If the sole trader’s business is disrupted, his/her customers may turn to another competitor.
— Usually, a sole trader’s business dies with the owner.

Partnership
A partnership occurs when 2 or more (up to 20) persons carry on business in common with a view to
making profits. The partners usually provide the capital and direct and supervise the activities of the
business.

All partners have the right to take part in the general management of the business.

— Sleeping or silent partners do not play an active role in the day-to-day operations of the business.
Partners may have either limited or unlimited liability.
— A limited partner is only responsible for debts of the firm to the extent of the capital he invested.
— Unlimited partners are responsible for the total debt of the business; (collectively and
individually).

Advantages
— As with a sole trader, a partnership is easy to form with little legal formalities.
— More capital can be raised by the combined resources of a number of partners.
— Specialization in management is possible as each partner may participate in the field in which he
has experience and training.
— In a partnership, the work load can be shared among the partners. This makes it possible for a
partner to take a vacation, and, on the death of a partner, the remaining partners can continued to
run the business on their own or they may find a new partner.
— There is still the incentive to succeed and there is also close contact with employees and
customers.
— A partnership is usually flexible and partners can join or leave the firm easily according to changes
in their market.
— A partnership can progress or grow into a large company.

Disadvantages
— All the partners stand to lose if on partner makes a mistake.
— Capital is still limited.
— Except in the case of a limited partnership, there is still unlimited liability if the business fails.
— There is the risk of disagreement and quarrelling among partners.
— At least 1 partner must have unlimited liability.

Cooperatives
A co-operative is an association of persons who have voluntarily joined together to achieve a
common goal through the formation of democratically controlled organisation, making equitable
contributions to the capital required and accepting a fair share of the risks and benefits of the
business.
Co-operatives have a great deal of freedom to draw up their own by laws, but there are certain
principles and practices that distinguish them from private business, to which they must adhere.
(i) Open (voluntary) membership, without discrimination, once persons are willing to accept the
responsibility of membership.
(ii) Democratic control – Co-operative affairs should be administered by persons elected or
appointed in a manner agreed by the members and accountable to them.
(iii) Limited interest on capital invested – Share capital should receive only a strict limited rate of
interest, if any.
(iv) Profit sharing – The economic benefits resulting from the operations of the co-op belong to the
members and should be distributed fairly.

In addition to these principles, co-ops should:

— make provision for the education of their members, officers, employees and the general public;
— actively co-operate in every way possible, with other co-ops at local, regional and international
levels so as to serve the best interest of their members and their communities.

Advantages
— There is a guaranteed market for members.
— Little or no advertising costs are incurred.
— There is no profiteering.
— There is a democratic form of management.
— Employment is created within the organisation.

Disadvantages
— Management may be poor and inexperienced.
— Conflict may arise when members are both employers and employees.
— Lack of capital may cause problems.
— Co-operatives may be unable to attract skilled professionals.
— Capital base is limited.

Private Limited Companies

These often consist of not less than 2 persons and more than 50. A private company must have the
word limited (Ltd) included in its name. The shares in this type of company cannot be offered to the
public for sale. (The company is usually owned and operated by family members.)

Advantages
— Privacy is retained.
— There is limited liability.
— Continuity is ensured – the death of a shareholder does not affect the company.
— It enjoys benefits such as specialized or expertise help, flexibility, etc.

Disadvantages
— Shares are not freely transferable without the director’s consent.
— The amount of capital is limited and growth is slow.
— It is vulnerable to changes in demand., the minimum
— The entrepreneurial pool is restricted to family members and close friends.
— Such companies are not known as innovators or for research and development.

Public Limited Companies

Like the private joint stock company, the minimum number of persons is 2. However, there is no limit
as to the number of persons that can be a in a public company. It must have the words public limited
company (PLC) at the end of its name. This company can offer shares and debentures for sale to the
general public.

Advantages
— There is easy access to capital for expansion.
— They enjoy economies of scale.
— Specialists or experts are hired to run the company.
— The PLC is independent of its owners.
— Risk is spread over many shareholders.

Disadvantages
— The objectives of the managers may be different from shareholders (owners).
— Small powerful groups, e.g. insurance companies, may dominate the company.
— Over-expansion can lead to diseconomies of scale.
— Workers feel left out in decision-making.
— Accounts must be submitted annually to the Department of Trade for inspection.

Multinational Corporations
A multinational firm is one which owns controls and operates enterprises in several countries at the
same time in order to increase market share and improve overall profits. The parent company makes
all the decisions which are carried out by the management of the subsidiary companies.

Advantages
— Multinationals provide much-needed investment in Caribbean economies.
— They provide foreign expertise and train local workers.
— They allow access to already-existing markets.
— They are a valuable source of taxation, revenue and foreign exchange.
— They create employment.
— They encourage positive work ethics.

Disadvantages
— Multinationals extract raw materials but do not add value locally.
— The welfare of the economy is not a concern of a multinational.
— They transfer profits to home countries.
— They may change the culture of a country.
— They bargain for tax holidays and ‘sweetheart deals’ in exchange for investment.
Conglomerates
A conglomerate is simply a group of companies each operating in different industries and sectors of
an economy.

Advantages
— There is strength and security in numbers; hence risk of failure is spread.
— Companies can draw on each other’s resources leading to economies of scale.
— There is much interaction between members in terms of staffing, promotions, etc.
— Successful companies help to make up for companies that perform below expectations.

Disadvantages
— Because of the diversity of interests, analysis of the group’s companies is difficult.
— Some managers may resent control outside of their own company.
— There may be friction between lines of authority.

Franchises
A franchise is a right sold by one person or firm (called a franchisor). It is another form of cooperation
between a big firm and a sole trader. In franchising, a well-known company allows someone to buy
the right to use their trade names.

Franchising offers a 'ready-made' business opportunity for those with some capital who are willing to
work hard.

The potential entrepreneur (the franchisee) pays to use the name, products or services of the major
company which receives a lump sum and a share of the profits of the business (sometimes called
royalties).

The franchisee receives the majority of profits, but must also meet most of any loses. In addition to
allowing use of their name, products, techniques or services, franchisors usually provide an extensive
marketing back-up in return for the money they receive.

Examples: KFC, Popeye's, Pizza Hut, Burger King, Coca-cola.

Role of the Franchisor:

- develops a big-name brand
- has years of experience in how to run a business
- provides advice, know-how and equipment
- develops advertising materials and marketing campaigns
- keeps a close eye on the business to make sure standards are met.

Role of the Franchisee:

- pays an initial start up fee
- pays royalties, which are often from 2% to 10% of sales
- rents or buys a building and employs staff
- takes care of paperwork and pays taxes
- buys signs and equipment from the franchisor
- pays a contribution to advertising costs

Legalities:
- the franchisor and franchisee are separate companies
each must register as a company and keep the rules for company operation
a franchise license and a contract govern the relations between franchisor and franchisee

State Corporations/Nationalized Industries

These are corporations or industries that are owned, controlled and managed by the government or
state. The main aim of the public corporation is to provide specific goods and/ or services that meet
the need of the country, at a reasonable price.

Main Features
1. There are no private shareholders; government owns 100%.
2. The government appoints the controlling board
3. A government minister is usually responsible for seeing that the corporation is acting within the
policy requirements laid down by Parliament.

NB: Any profits made by a public corporation must be used for capital investment, the lowering of
prices, the raising of wages, etc.

Advantages
— State corporations provide vital services at reasonable prices, e.g. water, electricity and postal
services.
— They enjoy economies of scale resulting in low cost of production.
— Their profits are distributed to the population.
— They safeguard jobs rather than engage in retrenchment.
— They have regards for the environment and working conditions of workers.

Disadvantages
— Losses by the companies are usually born by the taxpayer.
— State corporations and nationalized industries are not usually run efficiently, often due to political
interference.
— The lack of a profit motive causes losses due to tax management.
— There is often a lack of proper accountability.
— Too much red tape in management decisions causes unnecessary delays.
— National issues are given preference over local ones.

Comparison of Business Organisations