Section 1

Understanding
business activity
 Chapter 4

Types of business organization

 Sole Trader
Business owned and operated by a
single person.

Important Partnership
definitions Group of two people or more that
agree to run a business together.

Private limited company

Has private shareholders that is a
separate legal entity from business
 Public limited company
Shares are sold to the public and
shareholders have separate legal status

Important Franchise
definitions Business based on the use of a brand,
ideas and method of existing business

Joint Venture
When two companies start a new project
together, sharing capital, risks and profits
 Sole
Trader
 Advantages of Disadvantages of
sole traders sole traders
1. Few legal requirements
1. No second opinions
2. You are your own boss
2. Unlimited liability = Can lose
3. Choice of work hours
4. Close contact with customers personal assets
5. Direct profit incentive
3. Lack of capital
6. No need to share
4. Continuity problems
information of the business
Partnerships
 Advantages of Disadvantages of
partnerships partnerships
1. More capital
1. No limited liability. Business fail =
2. Management is shared
lose personal assets
3. More motivated owners
means more profits + shared 2. Partnership ends if partner dies
losses
3. Partners disagree + time wasted

4. If one partner is lazy, all suffer

Private limited
company
 Advantages of Disadvantages of
PLC PLC
1. Shares can be sold = more
1. Lots of legal requirements
capital to invest
2. Shares not sold to public, needs
2. Shareholders have limited
approval from all shareholders
liability = no loss of personal
3. Financial records are less secret
assets
4. Takes longer to raise capital than
3. Can keep control if not selling
public company
too many shares
Public limited
company
 Advantages of Disadvantages of
Public companies Public companies
1. Shares can be sold to public =
1. The most legal requirements
much more capital to invest
2. Shareholders have limited 2. Loads of regulations, like public
liability = no loss of personal access to finances
assets
3. Selling shares to public can be
3. High status = more investors
expensive to administer
4. Separate legal entity and death
4. Could lose control of company
of shareholder has no impact
Franchising
 Advantages of Disadvantages of
franchisor franchisor
1. Franchisee buys a licence from
1. Poor management of one outlet
franchisor
2. Faster expansion opportunity affects all franchises
3. Management of outlet is 2. Franchisee keeps outlet profits
responsibility of franchisee
4. All products must be bought
from franchisor
 Advantages of Disadvantages of
franchisee franchisee
1. Chance of business failure is 1. Less independence than own
reduced business
2. Franchisor pays for advertising 2. May be unable to make decisions
3. All supplies obtained from same to suit local area
source
3. Licence fee must be paid to
4. Fewer decisions to make
franchisor and possible % of
5. Training provided by franchisor
turnover
6. Banks more willing to lend
Joint venture
 Advantages of Disadvantages of
Joint ventures Joint ventures
1. Costs are shared
1. If successful, profits are
2. Local knowledge when
shared
other company is already
based in other country 2. Disagreements can occur
3. Risks are shared
3. Different management styles
 Public
corporations
 Advantages of Disadvantages of
Public corporations Public corporations
1. Some industries are
1. No private shareholders to
essential
demand efficiency
2. Government monopolies
are better than private 2. No close competition
3. Government can
3. Political agendas
nationalize failing business