Compiled by: Shubhanshi Gaudani Friday, 19 May 2017

1. Understanding Business Activity

1.4 Types of Business Organisation

Business Studies, CIE IGCSE (0450)

1.4.1 Main Features of different types of Organisation

• SOLE TRADERS, PARTNERSHIPS, PRIVATE AND PUBLIC LIMITED
COMPANIES, FRANCHISES, AND JOINT VENTURES.

• Sole Trader: A business that is owned and controlled by just one person who takes
all risks and receives all the profits.

Advantages Disadvantages

Easy to set up the business Unlimited Liability for business debts, risk losing
personal belongings.

Makes all the decisions and has complete control Difficult to raise funds and expand business

Set up with small amount of start-up capital. Owners have lack of essential business skills Ex.
(Startup Capital: The finance needed, when first Financial Management causing business failure.
setting up a business.)

Owner keeps all the profit Difficult to compete with larger firms in the industry

Be their own boss, and make their own decisions Sole traders have to work very long hours to make
Ex. How many hours to work. a living.

If sole trader retires or dies, business no longer

exists.

• Partnerships: A business formed by two or more people who will usually share the
responsibility for the day-to-day running of the business. Partners usually invest
capital in the business and share the profits.

Advantages Disadvantages

Greater access to finance than sole traders. (More Unlimited Liability for debts of business; may have
than 1 person investing) to use personal wealth.

Decision-Making is shared leading to better Partners must share profits

decisions

Reduces workload for individual owners (shared) If one partner leaves, business ceases to exist
(has to be reformed if others want to continue)

Easy to set-up. (partners sign a ‘Deed of Business decisions bind all partners, even if they
Partnership’) don’t agree.

Are fairly small businesses; find it difficult to raise

additional finance to expand business.

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• Unincorporated Business: A business that does not have a separate legal identity
separate from its owners. The owners have unlimited liability for business debts, with
their personal belongings at stake.

• Unlimited Liability: If an unincorporated business fails, then the owners might have
to use their personal wealth to finance any business debts.

• Private and Public Limited Companies:

• Private: Often a small to medium sized company; owned by shareholders who
have limited liability. The company cannot sell its shares to the general public.

• Public: Often a large company; owned by shareholders who have limited liability.
The company can sell its shares to the general public.

• Same Features:
• Legal documents (Articles of Association, and Memorandum of Association) must
be completed when setting up business.

• Shareholders invest capital by purchasing shares.

• Ordinary shareholders are owners of company.
• Shareholders have limited liability (if company fails they risk losing value of
shares)

• Business continues even if one shareholder dies.

• Company can raise finance by selling shares.
• Profits belong to ordinary shareholders; shared by dividends.
• Shareholders vote on major decisions of company.
• End of year financial statements should be submitted to correct authorities.
Company’s financial accounts are available for public.

• Differences:
Feature Private Limited Public Limited

Owners Small no. of shareholders (family Large no. of shareholders

or friends of members) (general public)

Size Fairly small Very large companies

Sale of Shares by company Sold privately often to friends & to general Public and other
family organisations

Sale of Shares by Often difficult (to be sold to Quick and easy to sell (can be
Shareholders privately with agreement of other offered to general public).
shareholders)

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Feature Private Limited Public Limited

Control Only a few shareholders. One Thousands of shareholders.

shareholder has over 51% of Board of directors appointed by
shares, and has control over shareholders at AGM control
major decisions. major decisions.

Raising additional capital Though successful, difficult to If successful, then can raise very
through share issue raise capital as shares can’t be large sums, quite easily through
sold to public sale of additional shares.

Borrowing Finance Easier to raise finance than Can raise large sums at good
unincorporated businesses. rates of interest, due to good
reputation and valuable
collateral.

• Limited liability: The shareholders in a limited liability company which fails only risk
losing the amount they have invested in the company and not any of their personal
wealth.

• Ordinary Shareholders: The owners of a limited company.

• Dividend: A payment, out of profits, to shareholders as a reward for their investment.
• Collateral: Non-current assets offered as security against borrowing.
• Disadvantages of Public Limited Companies (NOT shared by Private limited):
• Legal formalities of setting it up are very costly.
• Director’s decisions are sometimes influenced by major investors to satisfy their
own objectives.

• Company is always at risk of takeover by another company, because its shares

can be easily bought and sold.

• Legal requirements for publication of information about company is much stricter

than it is for private limited companies.

• Franchise: A business system where entrepreneurs (franchisee) buy the right to use
the name, logo, and product of an existing business (franchisor).

Advantages Disadvantages

Less chance of business failure, as product and Initial cost of buying franchise is very expensive
brand are already well established.

Franchisor provides with training and advice to Franchisor will take % of revenue or profits of
franchisee (part of Franchise agreement) franchisee every year

Franchisor will finance promotion of brand through Strict controls over what franchisee is allowed to
national advertising do with product, price and store layout

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Advantages Disadvantages

Franchisor will already have checked quality of Franchisee will still have to pay for any local
suppliers so franchisee is guaranteed quality promotion if they decide to do.
supplies.

• Joint Venture: two or more businesses agree to work together on a project and set
up a separate business for this purpose.

Advantages Disadvantages

Reduces risks for each business and cuts costs Any mistake will damage reputation of all firms in
joint venture(even if they didn’t cause any mistake)

Each business brings different expertise Businesses may have different styles of leadership
and business cultures making decision making
difficult.

Market and product knowledge can be shared to

benefit of both.

• DIFFERENCES BETWEEN INCORPORATED AND UNINCORPORATED

BUSINESSES

Incorporated Unincorporated

Separate legal identity from its owners doesn’t have a separate legal identity from its
owners

The company not shareholders are legally Owners have unlimited liability - legally responsible
responsible for business activities. Limited liability for business’s activities.

Ex. Limited Company Ex. Sole traders and Partnerships

• RISK, OWNERSHIP AND LIMITED LIABILITY

• Owners/businesses of unincorporated businesses are at a greater legal and financial
risk than incorporated business as:

Unincorporated Business Incorporated Business

Have same legal identity Business and owners are separate legal entities.

Owners have unlimited liability Owners have limited liability

• CHOOSING TYPE OF BUSINESS ORGANISATION

• Depends on many different factors, mainly influenced by:
• Number of Owners
• The Owner’s role in management of the business
• The attitude towards financial risk

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• How quickly owners want to start operating their business
• The potential size of their business (based on market size or owner’s choice)

• BUSINESS ORGANISATIONS IN THE PUBLIC SECTOR EX. PUBLIC

CORPORATIONS

• Owned and controlled by the state

• Financed mainly through taxation
• Have social objectives rather than profit objectives
• Services are often provided at free or low price
• Ex. Air India, ONGC (Oil & Natural Gas Corporation - India), LIC (Life Insurance
Company)