Unit 1.

2 Types of business entities

Version 2

Ahead for a better future

Unit content

Assessment
Content
objective
Distinction between private and the public sectors AO2
The main features of the following types of organizations:
• Sole traders
• Partnerships AO3
• Privately held companies
• Publicly held companies
The main features of the following types of for-profit social
enterprises:
• Private sector for-profit social enterprises AO3
• Public sector for-profit social enterprises
• Cooperatives
Unit content (continued)

Assessment
Content
objective
The main features of the following types of non-profit
social enterprises: AO3
• Non-governmental organizations (NGOs)
Private vs. public sectors

• Businesses can be Private sector

categorised into • Organizations owned and
private or public controlled by private individuals
sector organizations and businesses.
depending on: • Main aim - to make profit.
• who owns them.
• their main business
objective.
Public sector
• Most businesses are in • Organizations owned and
the private sector. controlled by the government.
• Main aim - to provide essential
goods and services.
Private sector

The private sector and its

markets play an important role
in the success of any economy
by:

• creating employment
• helping the development
and growth of the economy
• providing a wide variety of
goods and services

The private sector consists

of sole traders, partnerships, Source: Kognity
privately held companies
and publicly held companies.
Public sector

Organizations in the public

sector usually have the
provision of services to the
wider community as their
primary objective, funded
through taxes.

Businesses in the private

sector are usually driven by
the need to provide goods
and services to a more
limited group who can pay
for them, and they earn
profits as a result. Source: Kognity
Profit-based organizations

• These are revenue generating businesses

with profit objectives at the core of their
operations.
• Their goals are to:
• Make a profit.
• Reward the owners with profits from
the business.
• Return some of the profits back into the
business for capital growth.
Sole traders

• These businesses are owned by individuals

who own and run a personal business.
• This is the most common type of business
ownership as it is relatively easy to set up.
• Start-up capital is usually obtained from
personal savings and borrowing.
• Sole traders have unlimited liability.
 Unlimited vs. limited
liability

• When deciding on which

type of organization to set
up, an entrepreneur needs
to consider whether or not
to incorporate the business
to benefit from limited
liability.
• This video explains what it
means to have limited
liability (0:00 to 0:42).

https://youtu.be/ksdAC8CYF7A
Sole traders: Advantages
• It is the quickest and easiest type of business to set up. Sole traders can avoid complicated and
costly set-up procedures.

• The owner receives all of the profits if the business succeeds.

• Sole traders are likely to be highly motivated as the owners have a sense of achievement from
running their own business and can keep all of the profits made.

• The sole trader (owner) has complete control without having to consult with or be accountable to
others.

• Hence, decision-making is also swift as the owner does not have to consult anyone else and seek
their permission to execute a decision.

• The sole trader enjoys privacy as it only needs to publish its financial accounts to the tax authorities
(rather than to the general public like a publicly held company). For example, sole traders in Hong
Kong only need to submit paperwork for the Inland Revenue if their annual sales revenue exceed
HK$2m (around US$260,000). Similarly, sole proprietors in the UK are able to complete their own
business tax returns without the formal requirement of final accounts being externally audited.

• The owner can benefit from tax advantages. As a small business, many sole traders work from
home, so can claim tax concessions by using part of their home for business purposes.
 Sole traders: Disadvantages
• The finance to set up and run the business is generally provided by the owner (from personal savings) as s/he cannot
easily access external sources of finance.

• The sole trader accepts all the risks of owning and running their own business, including any losses made or even the
collapse of the organization.

• The workload for a sole trader can be extremely high. There is no one else to share ideas or to ask questions, so all
pressures, burdens and responsibilities fall on the owner. This means the sole trader often has to work very long hours.

• Legally, a sole trader is treated as the same legal entity as the business, i.e. it is an unincorporated business. This
means the sole trader has unlimited liability so is responsible for any debt owed to other individuals or organizations,
even if this requires the owner to pay the debts from their personal belongings and assets.

• There is a lack of continuity in the operations of the business if the owner is unwell, wishes to take a holiday or wants
to retire. The latter is a main reason why many sole trader businesses struggle to continue.

• As sole proprietorships are usually small businesses (such as a small convenience store owner), they are unlikely to be
able to gain any economies of scale, perhaps because they cannot buy their materials or stocks (inventory) in bulk.
This means sole traders pay more for their goods, their prices charged to customers also tend to be higher. By
contrast, larger business (such as supermarket chains) gain these cost-saving benefits, so are able to charge much
lower prices due to their ability to exploit economies of scale.

• Since access to external finance is difficult for most sold traders (because they represent a high degree of risk),
expansion of the business is difficult.
Partnerships

• Partnerships are owned by two or more

persons (known as partners).
• At least one partner must have unlimited
liability.
• Start-up finance is raised mostly by
personal funds which are pooled together by
the partners.
• A legal document known as a deed of
partnership is drawn up to formalise
agreements such as how profits and losses
are to be shared between partners.
Partnerships

https://youtu.be/s8vXZTB3618
 Partnerships: Advantages

• Partnerships can raise far more finance than sole traders, especially as there can be up to 20 partners
(subject to the laws in different countries) in the business. Silent partners (also known as sleeping
partners) can provide additional capital without having any role in the actual running of the business.

• Having partners enables the firm to benefit from having more ideas and different skills and expertise.

• Unlike a sole trader, partners can share the burden of their workload and responsibilities.

• Hence, unlike a sole trader, partnerships benefit from continuity as the partnership can remain in
operation if a partner is unwell or wants to go on a family vacation.

• Partnerships can benefit from specialization and the division of labour. For example, a law firm might
have partners who specialize in different specialisms, such as criminal law, civil law, business law and tax
law.

• As with sole traders, business affairs of a partnership are kept confidential, so only the tax authorities
need to know about the financial position of the partnership.
 Partnerships: Disadvantages
• As the business has more than one owner, this can easily lead to disagreements and conflict
between the owners, which can seriously damage the running of the partnership.

• Decision making is slower than with sole traders because there are more owners involved. This
can also lead to disagreements and conflicts between the owners

• Unlike with a sole trade, the profits made by a partnership must be shared between all the
owners.

• In general, partners have unlimited liability so are liable for any debts, fines, penalties or law
suits against the business, even if this these were caused by another partner in the firm.
However, sleeping partners are exempt from unlimited liability.
• Compared to limited liability companies, access to finance is restricted to the finances available
from the different partners in the firm. There is no maximum number of owners in limited
liability companies, so they can raise finance through their shareholders.

• There is no continuity if a partner decides to leave the firm or if one of the partners die. This is
because such cases would void the Deed of Partnership. There would be a time delay in setting
up a new partnership agreement.
Limited liability companies

• These are businesses owned by their

shareholders.
• Shareholders have invested money to
provide capital for a company.
• Companies are incorporated businesses.
• In the eyes of the law, the companies
are treated as a legal entities separate
from its owners.
• This means they have limited liability.
• There are two types of companies – private
held and publicly held companies.
Video about corporations

Note that the IB syllabus does not

https://youtu.be/XC_PIy6iL08 require you to know about bond
markets.
Privately held companies

• A privately held company’s shares are

owned by friends and/or family.
• These shares cannot be traded publicly on
the stock exchange.
• Shareholders can only sell their shares if
they have prior permission from other
shareholders.
• Typically, privately held companies are also
family businesses.

Mars, Aldi, and IKEA are all family

businesses incorporated into privately
held companies
Privately held companies
Advantages

• The advantages of establishing a business as a privately held companies as a type of for-profit

(commercial) organization include the following points:

• There is better control of a privately rather than publicly held company, as shares in a privately
held company cannot be bought or sold without the agreement of existing shareholders.

• Significantly more finance can be raised compared with a sole trader (one owner) or a partnership
(up to 20 owners).

• Privately held companies have greater privacy compared to publicly held companies; the latter
must make their final accounts available to the general public.

• Shareholders have limited liability, so cannot lose more than what they invest in the company.
Owners are protected against any misconduct or misjudgments of those who run the company.

• Unlike a sole trader or partnership, a privately held company can enjoy continuity in the event of
the death of a major shareholder.
Privately held companies
Disadvantages

• Privately held companies can only sell their shares to family, friends, and employees, with
the approval of the majority of existing shareholders. This can make it difficult to buy and
sell shares in the company.

• They are more expensive to operate than a sole trader or partnership. For example, there
are higher legal fees and auditing fees (for checking and approving of the financial
accounts).

• A privately held company can become a target for a takeover by a larger company which
purchases a majority stake, although other owners have to agree to the sale of the
company.
Publicly held companies

• A publicly held company can sell shares on

the stock exchange.
• Shares are held by the general public.
• No prior permission by other shareholders is
required for a shareholder to sell their
shares.

Honda Motor Company, Ltd., The

Walt Disney Company, and
Facebook Inc. (Meta) are all
publicly held companies.
Publicly held companies
Advantages

• The advantages of establish a business as a publicly held company as a type of for-profit

(commercial) organization include the following points:

• Additional finance can be raised through a share issue (the process of subsequently selling more
shares in a company). Hence, it is easier for publicly held companies to obtain finance from a stock
exchange to fund its growth and evolution by selling additional share capital. In 2010, Brazil’s state
oil company Petrobras raised $70 billion, in the world’s largest share issue.

• It is also easier for large publicly held companies to borrow money from bank loans and mortgages,
due to their lower level of risk for financial lenders.

• As with privately held companies, the shareholders of publicly held companies enjoy limited
liability.

• Large publicly held companies get to enjoy the benefits of operating on a large scale, such as
opportunities to exploit economies of scale, market share, and market power.

• As with privately held companies, publicly held companies enjoy continuity even if a principal or
major shareholder leaves the organization or passes away.
Publicly held companies

Disadvantages

• There is a lack of privacy because the general public have access to the financial
accounts of publicly held companies.

• Publicly held companies are the most administratively difficult and expensive form of
commercial for-profit business to set up and run. For example, there are high costs of
complying with the rules and regulations of the stock market.

• As the general public can buy and sell share freely, there is always a potential threat
that a rival company will make a takeover bid.

• Large companies can suffer from diseconomies of scale. Being too large can cause
inefficiencies in the company, and hence higher average costs of production.
 Definition of Social Enterprise: Discrepancies

Definition of Social Enterprise by Muhammad Yunus (Grameen Bank)

A social enterprise is an organization created with the primary objective of solving a
social, environmental, health or similar problem, and with the parallel and
secondary objective of generating sufficient income to be sustainable over time;
Profit maximization and shareholder satisfaction, guiding principles of the traditional
capitalist enterprise, are outside this concept.

Definition of Social Enterprise by Deloitte

Discrepancies
A social enterprise is an organization whose mission combines increased revenue
and profits with the need to respect and support its environment and stakeholders. Follow what
the IBDP
Syllabus
Definition of Social Enterprise by the UN indicates!!!!
The pursuit of social progress, by removing barriers to inclusion, helping those
temporarily weakened or voiceless, and mitigating the undesirable side effects of
economic activity.

Definition of Social Enterprise by System B

The social enterprise is a company that contributes in a certain way to society and,
in turn, is profitable to generate business and obtain business success.
 A for-profit social enterprise uses commercial business practices in
For-profit social order to achieve social goals, such as improving the environment,
enterprises building better communities, and developing social well-being. Such
organizations do not focus on generating profits for their shareholders
but strive to build and improve communities.
• These are revenue
generating enterprises with
social objectives at the core
of their operations.
• Their aims are to:
• Make a surplus (i.e.
earn revenue greater
than costs incurred).
• Use the surplus for the
benefit of society.

What is social enterprise?

For-profit social
enterprises

• There are three main types of for-profit social enterprises covered in the IB
Business Management syllabus:

• Private sector companies

• Public sector companies
• Cooperatives

NOTE: The IB acknowledges that the legal definition of a social enterprise varies between
countries.
For-profit social
enterprises

* Traditional businesses may allocate some funds to corporate social responsibilities (CSR), it is not their
main or most important focus. Instead, the main drivers for such businesses is profit, growth, and
protecting shareholder value. A growing number of traditional businesses are reporting on the triple
bottom line to as part of their CSR and sustainability goals.
Private Sector for-profit
social enterprises

• These enterprises operate in a similar way to traditional for-profit businesses.

• They aim to make a surplus instead of relying on donations to achieve social aims.
• These firms produce goods and/or services and compete with similar businesses.
• They often use the triple bottom line as an accounting framework for ethical
business practices

• Social sustainability – PEOPLE

• Environmental sustainability – PLANET
• Economic sustainability – PROFIT
The Big Issue

Big Issue Group brings

together its media,
investment and service
initiatives under a shared
mission to create innovative
solutions through enterprise,
to unlock social and economic
opportunity for the 14.5m
people in the UK living in
poverty to earn, learn and
thrive.

What is The Big Issue?

 Example: AUARA

AUARA is a mineral water

brand based on social and
environmental values. It
invests 100% of its dividends
in projects to bring drinking
water to people in need in
third world countries.
It is also the first water brand
in Europe to manufacture its
bottles with 100% recycled
material.

https://youtu.be/_PuTjiMNIWg
PUBLIC SECTOR for-profit
social enterprises

• These enterprises are state-owned to

operate in a commercial way.
• They help to raise government revenues to
provide essential services to society that
may be inefficient and undesirable if left
solely to the private sector.

Niagara Falls attracts about 13

million tourists each year. Ontario
Niagara Parks Commission was
established by the Canadian
government to manage the
Canadian side of Niagara Falls,
with a focus on reformed land use
and sustainable tourism.
Cooperatives

• Owners of cooperatives are called members.

• Members own and run cooperatives (i.e.
they are also employees of the
organization).
• Their aim is to create value for members by
operating in a socially responsible way.
• All employees have a vote to contribute to
decision-making.
• Any profits earned are shared between their
members.
 Mondragon Corporation

• Group of Spanish cooperatives and

companies, currently extended to
other parts of the world.

• It is the first business conglomerate

in turnover in the Basque Country
and the tenth in Spain.

• 98 cooperatives, 8 foundations, 1
mutual and 7 international
delegations, distributed in four areas:
finance, industry, distribution and
knowledge.

MONDRAGON Corporation
 Unió Nuts

• Unió Nuts is part of the Unió

Group, an entity made up of
186 cooperatives.
• The group was established in
1942 with the goal of
improving living conditions
for farmers and encouraging
rural development. Unió Nuts
offers high-quality
Mediterranean products with
a guarantee of origin.

https://youtu.be/_0_6go0vOjE
 La Fageda

• La Fageda is a consumer
cooperative originally
created in 1982 as a
worker cooperative. It
manages training, leisure
and sports activities, and
also services for all the
people in the organization,
such as the internal store
and the kitchen-dining
room.

https://youtu.be/QvxKSdgbNaM
Cooperatives

This video shows how the idea

of cooperatives came about,
following the industrial
revolution. It also covers the
functions of cooperatives.

https://youtu.be/f807DajFuMA
Types of Cooperatives
• Cooperatives are particular legal forms of social
enterprises: business owned and operated by its
members, who share any profits (they focus on
benefits for workers, training, community
development…).
• Cooperatives’ generally aim is to make some
profit, but maximizing profit is not their main aim.
• These members run the organization in their common
interest, using democratic governance.
• Cooperatives’ members have limited liability.
• Cooperatives can take many forms: workers’
cooperatives, financial cooperative, housing
cooperative, consumer cooperatives, production
cooperative.
• Cooperatives are common in sectors like
agriculture.
• Credit unions (financial
cooperative): lending money at a
lower interest rate than banks.
• Housing cooperative: provide
housing at a cheaper cost.
• Worker’s cooperative: business
whose priority is to provide
employment (often when a business
is about to fail). Little difference in
wages between workers and
managers.
• A producer cooperative: different
produces collaborate at some stages
(olive oil cooperatives).
• A consumer cooperative: provide
lower prices for consumer (as some
grocery stores, consumers become
‘members’).
 Activity
In teams select one the types of cooperatives and
find a representative one to work on the following:
1. General description and main characteristics of
being a cooperative based on what we have seen
in the syllabus but with a real example.
2. What type of goods/services do they offer?, size,
location,… (key information about their business).
3. Identify what makes them different from a
traditional business.
4. Prepare a 2-4 slide presentation to share with the
class.
• Credit unions (financial
cooperative): lending money at a
lower interest rate than banks.
• Housing cooperative: provide
housing at a cheaper cost.
• Worker’s cooperative: business
whose priority is to provide
employment (often when a business
is about to fail). Little difference in
wages between workers and
managers.
• A producer cooperative: different
produces collaborate at some stages
(olive oil cooperatives).
• A consumer cooperative: provide
lower prices for consumer (as some
grocery stores, consumers become
‘members’).
Cooperatives: Advantages
• Cooperatives are not difficult or expensive to set up.
• Cooperatives are tax exempt because the focus of the business is on serving the collective
interests of its member-owners and the community (such as home care associations for
the elderly).
• As all member shareholders are expected to help run the cooperative, it is more likely to
succeed.
• Similarly, as the owners have equal voting rights, the cooperative is more democratic so
the members feel equally important to the success of the business. This is likely to lead to
a harmonious working environment.
• There is an absence of pressure from external investors and shareholders, so the
member-owners of the cooperative can run the business that best suits their own
interests.
• As cooperatives strive to benefit their members and society, they often qualify for
government financial support.
• Unlike partnerships or sole traders, there is continuity in a cooperative should a key owner
leave the organization, for whatever reason.
Cooperatives: Disadvantages

• As cooperatives are not profit-driven, it can be difficult to attract investors, financiers

and member-shareholders.

• Similarly, employees and managers of cooperatives may lack the financial motivation
to excel, due to the absence of a profit motive.

• Most cooperatives have very limited sources of finance as their capital depends on the
amount contributed by their members.

• Most cooperatives are unable to hire a range of specialist managers to run the
business, due to the lack of financial rewards and sources of finance to remunerate
their senior staff. This can limit the success of the cooperative.

• A democratic culture is not always effective. Despite some members having more to
contribute to the organization and greater responsibilities, they only get one vote as
do all other members. This can be somewhat inefficient and perceived as unfair for
some members.
Non-governmental
organizations (NGOS)

A non-governmental organization (NGO) is a type of non-profit social enterprise

that operates in the private sector of the economy. Therefore, it is not part of
a government organization. Instead, it is operated a voluntary group to promote a
social cause, such as the protection of human and animal rights, protection of the
environment, and development aid. They operate at a local, national, or
international level and put pressure on governments to adopt policies in support of
their social cause.
They are usually funded by a combination of sources:
•Government grants or donations
•International organizations
•Charitable organizations
•Commercial businesses, as part of their corporate social responsibilities (CSR), and
•Private donors and philanthropists.
Non-governmental
organizations (NGOS)

Advantages of non-profit social enterprises (apply to both NGOs and charities):

• Non-profit social enterprises exist for the benefit of local communities and societies.
Examples include fundraising events and donations to meet social aims of a community.

• Non-profit organizations, including non-profit social enterprises, are exempt from paying
corporate and profits taxes.

• Many NPOs also qualify for government assistance in the form of grants and/or subsidies,
thereby reducing their costs of production.

• There can be a positive impact on employees and donors who feel that the non-profit
enterprise is pursuing a socially meaningful ambition.
Non-governmental
organizations (NGOS)
Disadvantages of non-profit social enterprises (apply to both NGOs and charities):

• There are strict guidelines and restrictions that non-profit social enterprises must follow;
not all trading activities are permitted. This is to ensure the general public is protected
against fraudulent activities by dishonest charities or non-governmental organizations.

• 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.

• In many cases, 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. Whilst it might be socially acceptable that the
managers at a bank or private law firm is paid an annual bonus, gets to travel on business
class and is offered a company car, the equivalent benefits for a person working for a
charity might be deemed to be rather unethical.
Non-governmental
organizations (NGOS)

Examples of non-governmental organizations include:

Oxfam, the Wikimedia Foundation, Amnesty International,
Doctors Without Borders, the World Wildlife Fund, and
World Vision International.

• Amnesty International
• Doctors Without Borders
• The International Organization for Standardization
(ISO)
• Oxfam
• Wikimedia Foundation
• World Vision International
• World Wildlife Fund
Doctors Without Bordres
Humanitarian Action

https://youtu.be/YC2HH19Pznc
Doctors Without Bordres
Humanitarian Action

https://youtu.be/8DFemg94ufU
Doctors Without Bordres
Humanitarian Action

From the videos of Doctors Without Borders (MSF) and:

1. Identify as many possible goods /services provided by MSF.
2. Go to www.msf.org/
3. and identify other goods and services that are provided by MSF.
4. Why are some of these goods and services underprovided by the public
sector in some countries?
Oxfam Intermón

https://youtu.be/Qgl96whdKug
Oxfam Intermón

https://youtu.be/X9_6e3GH5-U
Summary: Where do
businesses stand?

Businesses can be positioned along a continuum in the process of

moving towards greater social and environmental responsibility

Source: Kognity
 Activity
VIDEO. SEK Group: We are B Corp
Can we really ‘know’ if for-profit
organizations do not care about
society as much as non-profit
social enterprises?
CASE ANALYSIS:
B CORP CERTIFICATION

In teams of 4, analyze 1 certified

B Corporation and answer the Key Source: https://bcorporation.eu/
question sharing your findings and
conclusions with the class.