1.

2 Types of business entities

Public & Private Sector
Private sector: comprises businesses owned and controlled by individuals or groups of individuals

Public sector: comprises organisations accountable to and controlled by central or local government (state)

Mixed economy: economic resources are owned and controlled by both private and public sectors

Free Market economy: economic resources owned largely by the private sector with very little state intervention

Command economy: economic resources owned, planned and controlled by the state

Privatisation

Privatisation: selling state-owned and controlled business organisations to investors in the private sector.
Main argument: use resources much more efficiently in the private sector as they are driven by a profit motive.
Against: Privatisation leads to job losses to cut costs.
Benefits: - Profit motive - Faster decisions than government - Sales brings state revenue
- Market forces allows to operate (if successful – expanding)
Limitations: - Strategic industries could be used as monopolies
- Competing with private firms – not beneficial for all

Public Corporations

Public corporation: A business enterprise owned & controlled by the state (national industry)

Public sector organisations do not have profit as a main aim.

Private Sector Businesses

Sole Trader

Sole Trader: one business in which one person provides the permanent finance and, in return, has full control of
the business and is able to keep all of the profits
The firms are normally small (like hairdressers in town) and only a few employees work there.
A sole trader has unlimited liability. If the business fails – property of the owner will be taken.

Benefits: - Easy to set up – no legal formalities- Owner has complete control

- Owner keeps all profits - Able to choose times and patterns of working

Drawbacks: - Unlimited liability - Difficult to raise additional capital

- Long hours - Lack of continuity (also no separate legal status)
Partnership
Partnership: a business formed by two or more people to carry on a business together with shared capital
investment and usually shared responsibilities
It is formed to overcome the drawbacks of a sole trader but it is important to choose the right partner.
The partnership still has unlimited liabilities.
Benefits: - shared decision making - access to additional capital
- loss shared between owners - shared ideas
- combining different skills
Drawbacks: - Unlimited liability - Profits are shared
- Cannot sell shares - conflicts in how to run the business

Limited companies
Characteristics:
1. Limited liability: the only loss a shareholder has if the company fails is the money he invested
- people buy shares – become shareholders (part-owners)
- complete control if they own more than 50% of the shares
Important effects: - people are prepared to finance company to expand
- Risk of not paying bills is now not at investors side anymore – its creditor
- Supplier is interested if company is weak

2. Legal personality
- company is having a legal identity
- when it comes to court, company goes to court (not sole trader)
3. Continuity
- dead of an owner leads not to break up

Share: a certificate confirming part ownership of a company and entitling the shareholder to dividends and
certain shareholder rights
Shareholders: individuals or institutions that buy/own shares in a limited company

1. Privately held company

A small to medium sized business that is owned by shareholders who are often members of the same family and
this company cannot sell shares to the public..

2. Publicly held company

A limited company, often a large business with the legal right to sell shares to the general public – share prices
are quoted on the national stock exchange.
- owner is not able anymore to control the business because of volume of shares
- at annual general meeting – shareholders appoint a board of directors who control the management
- shareholders want short-term profit, directors want long-term profit
 Other forms of Businesses
Cooperatives
Cooperative: a group of people acting together to meet the common needs and aspirations of its members,
sharing ownership and making decisions democratically
Features: - all members have one vote at important meetings
- profit shared equally

Benefits: - working together to solve problems, buying in bulk

- good motivation to work hard to earn more

Drawbacks: - poor management skills, capital shortage

- slow decision making as everyone is involved

Franchises

A business that uses the name, logo & trading system of an existing business.
Benefits: - low change of failing - training offered by franchiser - no advertising costs
- selected supplier - franchiser agrees not to open another branch in area
Limitations: - profit share with franchiser - franchiser licence fee can be expensive
- no choice of different suppliers - strict price rules

Joint Ventures

Two or more companies agree to work closely together on a particular project and create a separate business
division to do so.
Benefits: - costs & risks are shared - different strengths can be combined
Limitations: - style of management & culture can cause conflicts
- errors might lead to blaming each other

Micro-finance: Providing small capital sums to entrepreneurs.

Microfinance: the provision of very small loans by specialist finance businesses, usually not traditional
commercial banks

Public-Private Partnership (PPP)

Public–private partnership (PPP): involvement of the private sector, in the form of management expertise
and/or financial investment, public sector projects aimed at benefiting the public
 - Government-funded – these are privately managed schemes. In this type of venture, the government
provides all or part of the funding, but the organisation is managed by a private business that uses
private sector methods and techniques to control it as efficiently as possible.
- Private sector-funded – these are government or state-managed schemes. In this type of venture, which
often involves large sums of capital investment, the government is released from the financial burden of
finding taxpayers’ money to pay for the project. Once the assets have been paid for and constructed,
they are then managed and controlled by a government department, which pays rent or a leasing charge
to the private sector business that constructed the project.
- Government-directed but with private sector finance and management – this type of PPP encourages
both private sector funding and some private sector management control of public projects. (example: a
new London hospital has been built using private sector finance – it is leased to the state-controlled
health authority which manages and controls the hospital’s health services)

For-profit social enterprises - Social Enterprise

Social Enterprise: a business with mainly social objectives that reinvests most of its profits into benefiting
society rather than maximising returns to owners.

Social enterprises are not charities. The surplus made by a social enterprise will be used to benefit society. Most
social enterprises have the following features:
- Directly produce goods or provide services
- Social aims and use of ethical ways to achieving them
- They need to make a surplus or profit to survive
Social enterprises often have three main aims. These are called the triple bottom line.

Triple bottom line: the three objectives of social enterprises: economic, social and environmental.

1. Economic: make a profit to reinvest back into the business

2. Social: provide jobs
3. Environmental: protect the environment
Non-profit social enterprises

Non-profit organisation: any organisation that has aims other than making and distributing profit and which is
usually governed by a voluntary board

Non-governmental organisation (NGO): a legally constituted body with no participation or representation of

any government which has a specific aim and purpose, e.g. supporting disadvantaged groups in developing
countries or advocating the protection of human rights

Examples of NGOs include the following:

- Amnesty International is a worldwide campaigning movement that works to promote internationally
recognised human rights for all. It undertakes research and action focused on preventing and ending
grave abuses of human rights to physical and mental integrity, freedom of conscience and expression,
and freedom from discrimination.
- Article 19 is a human rights organisation with a specific mandate and focus on the defence and
promotion of freedom of expression and freedom of information worldwide.

Charities

Charities: an organisation set up to raise money to help people in need or to support causes that require funding

Typical of activities accepted as being for ‘charitable purposes’:

1. Prevention or relief of poverty
2. Advancement of education
3. Advancement of religion
4. Advancement of health or the saving of lives
5. Advancement of citizenship or community development
6. Advancement of the arts, culture, heritage or science
7. Advancement of human rights conflict resolution or reconciliation, promotion of religious equality/diversity
8. Advancement of environmental protection or improvement
9. Relief of those in need, by reason of youth, age, ill health, disability, financial hardship or other disadvantage
10. Advancement of animal welfare.

Advantages of non-profit social enterprises (NGO’s and charities)

- Non-profit social enterprises exist for the benefit of local communities and societies
- Non-profit organizations are exempt from paying corporate and profits taxes.
- Many NPOs also qualify for government assistance in the form of grants and/or subsidies
- There can be a positive impact on employees and donors who feel that the non-profit enterprise is
pursuing a socially meaningful ambition.

Disadvantages of non-profit social enterprises (NGO’s and charities)

- There are strict guidelines and restrictions that non-profit social enterprises must follow; not all trading
activities are permitted.
- NPOs depend on the goodwill of the general public and donors to fund their operations. As a result,
business survival is often difficult for many smaller, less-known non-profit social enterprises.
- There is a lack of financial and cost control because, unlike in a for-profit organization, managers at
NPOs are not expected to earn a profit for their owners or shareholders.
- As a non-profit organization, the wages and remuneration of workers are often lower than in
commercial, for-profit organizations