Various types of business

1. SOLE TRADERS
Sole trader is the most common form of business organisation.
It is a business owned and operated by just one person
the owner is the sole proprietor
few legal requirements such as
The owner must register with, and send annual accounts to, the
Government Tax Office.
The name of the business is significant. In some countries the
name must be registered with the Registrar of Business Names.
(In UK, it is sufficient for the owner to put the business name on
all of the business’s documents and to put a notice in the main
office stating who owns the business).

2. SOLE TRADERS
 In some industries, the sole trader must observe laws which apply to all businesses
in that industry. These include health and safety laws and obtaining a licence, for
example, to sell alcohol or operate a taxi.
Advantages of being a sole trader
There were few legal regulations for him to worry about when he set up the
business.
 He is his own boss.He has complete control over his business and there is no need
to consult with or ask others before making decisions.
 He has the freedom to choose his own holidays, hours of work, prices to be
charged and whom to employ (if he finds that he cannot do all the work by himself).
 close contact with own customers, the personal satisfaction of knowing his regular
customers and the ability to respond quickly to their needs and demands.
an incentive to work hard as he is able to keep all of the profits, after he pays tax.
Sole proprietor does not have to share these profits.
 He does not have to give information about his business to anyone else – other
than the Tax Office.

3. DISADVANTAGES OF BEING A SOLE
TRADER
no one to discuss business matters with as I am the sole owner.
 I do not have the benefit of limited liability.
The business is not a separate legal unit
Unlimited liability
The sources of finance for a sole trader are limited to the owner’s savings, profits
made by the business and small bank loans.
 Banks are often reluctant to lend large amounts to such businesses
 business is likely to remain small because capital for expansion is so restricted.
 business is unlikely to benefit from economies of scale.
cannot offer much training or opportunities for my workers’ future careers.
 If sole proprietor ill then there is no one who will take control of the business.
 cannot pass on the business to my sons – when I die the business will legally not
exist any longer. This is because there is no continuity of the business after the
death of the owner.

4. PARTNERSHIP
A partnership is a group or association of at least two people who agree to own and
run a business together. In some countries, such as India, there is a maximum limit
of 20 people. The partners will contribute to the capital of the business, will usually
have a say in the running of the business and will share any profits made.
Partnership agreement or deed of partnership –it is a written agreement without
which, partners may disagree on who put most capital into the business or who is
entitled to more of the profits. will settle all of these matters.
Advantages of a partnership
More capital could now be invested into the business from partner’s savings and
this would allow expansion of the business.
The responsibilities of running the business were now shared.
 Absences and holidays did not lead to major problems as one of the partners was
always available.
 Partners motivated to work hard because they would both benefit from the profits.
In addition, any losses made by the business would now be shared by the partners.

5. DISADVANTAGES OF A PARTNERSHIP
The partners have unlimited liability
 No separate legal identity.
If one of the partners died, then the partnership would end. (Both sole traders
and partnerships are said to be unincorporated businesses because they do not
have a separate legal identity from the owners)
 Partners can disagree on business decisions and consulting all partners takes
time.
 If one of the partners is very inefficient or actually dishonest, then the other
partners could suffer by losing money in the business.
 Most countries limit the number of partners to 20 and this means that business
growth would be limited by the amount of capital that 20 people could invest.

6. SITUATIONS WHERE PARTNERSHIP IS
MOST SUITABLE
When people wished to form a business with others but wanted to avoid legal
complications
Where the professional body, such as medicine and the law in some countries,
only allowed professional people to form a partnership, not a company
Where the partners are well known to each other, possibly in the same family,
and want a simple means of involving several of them in the running of the
business.

8. LIMITED PARTNERSHIPS
In some countries it is possible to create a Limited Liability Partnership.
The abbreviation for this new form of legal structure is LLP.
It offers partners limited liability but shares in such businesses cannot be bought
and sold.
This type of partnership is a separate legal unit which still exists after a partner’s
death, unlike ordinary partnerships that end with the death of one of the partners.

9. PRIVATE LIMITED COMPANIES
A company is a separate legal unit from its owners – it is an incorporated
business. This means that:
 a company exists separately from the owners and will continue to exist if one of
the owners should die
 a company can make contracts or legal agreements
 company accounts are kept separate from the accounts of the owners.
Companies are jointly owned by the people who have invested in the business.
 These people buy shares in the company and they are therefore called
shareholders.
These shareholders appoint directors to run the business.
In a private limited company, the directors are usually the most important or
majority shareholders

10. ADVANTAGES OF A PRIVATE LIMITED
COMPANY
Shares can be sold to a large number of people likely to be friends or relatives
The sale of shares could lead to much larger sums of capital to invest in the business than
the two original partners could manage to raise themselves. The business could therefore
expand more rapidly.
 All shareholders have limited liability. It means that if the company failed with debts
owing to creditors, the shareholders could not be forced to sell their possessions to pay the
debts. The shareholders could only lose their original investment in the shares – their
liability is limited to the original investment.
 Shareholders in a company have less risk than sole traders and partners. Limited liability
encourages people to buy shares, knowing that the amount they pay is the maximum they
could lose if the business is unsuccessful.
It is important that the people and other businesses that deal with a private limited
company know that it is not a sole trader or a partnership. Creditors, for example, need to
be aware that if the business does fail, then they cannot take the owners to court to
demand payment from their savings.
For this reason all private limited company names must end with ‘Limited’ or ‘Ltd’ as an
abbreviation. In some countries, although not the UK, this title is amended to ‘Proprietary

11. DISADVANTAGES OF A PRIVATE LIMITED
COMPANY
There are significant legal matters which have to be dealt with before a company can
be formed. In particular, two important forms or documents have to be sent to the
Registrar of Companies.
 The Articles of Association – this contains the rules under which the company will
be managed – the rights and duties of all of the directors; rules concerning the
election of directors and the holding of official meetings; and the procedure to be
followed for the issuing of shares.
The Memorandum of Association – this contains very important information about
the company and the directors. The official name and the address of the registered
offices of the company must be stated. The objectives of the company must be
stated as well as the number of shares to be bought by each of the directors.
 Both of these documents are intended to make sure that companies are correctly
run and to reassure shareholders about the purpose and structure of the company.
Once these documents have been received by the Registrar of Companies, a
Certificate of Incorporation will be issued to allow the company to start trading.


12. DISADVANTAGES OF A PRIVATE LIMITED
COMPANY
The shares in a private limited company cannot be sold or transferred to anyone
else without the agreement of the other shareholders. This rule can make some
people reluctant to invest in such a company because they may not be able to sell
their shares quickly if they require their investment back.
 The accounts of a company are less secret than for either a sole trader or a
partnership. Each year the latest accounts must be sent to the Registrar of
Companies and members of the public can inspect them.
 Most importantly for rapidly expanding businesses, the company cannot offer
its shares to the general public. Therefore it will not be possible to raise really
large sums of capital to invest back into the business

13. SUITABILITY OF PRIVATE LIMITED
COMPANIES
family businesses or partnerships when the owners wished to expand them further
and wanted to reduce the risk to their own capital. Allows more capital to be raised

14. PUBLIC LIMITED COMPANIES
This form of business organisation is most suitable for very large businesses.
Most large, well-known businesses are public limited companies as they have been
able to raise the capital to expand nationally or even internationally.
Advantages of a public limited company
 This form of business organisation still offers limited liability to shareholders.
 It is an incorporated business and has a separate legal identity to the owners or
shareholders.
Its accounts are kept separately from those of the owners and there is continuity
should one of the shareholders die.
There is now the opportunity to raise very large capital sums to invest in the
business. There is no limit to the number of shareholders a public limited company
can have.
 There is no restriction on the buying, selling or transfer of shares.
 A business trading as a public limited company usually has high status and should
find it easier to attract suppliers prepared to sell goods on credit and banks willing
to lend to it than other types of businesses

15. DISADVANTAGES OF A PUBLIC LIMITED
COMPANY
The legal formalities of forming such a company are quite complicated and time-
consuming.
 There are many more regulations and controls over public limited companies in
order to try to protect the interests of the shareholders. These include the
publication of accounts, which anyone can ask to see.
 Selling shares to the public is expensive. The directors will often ask a specialist
merchant bank to help them in this process. It will charge a commission for its
services. The publication and printing of thousands of copies of the prospectus is
an additional cost.
 There is a very real danger that although the original owners of the business
might become rich by selling shares in their business, they may lose control over it
when it ‘goes public’. This is an important point which we will investigate further.

16. CONTROL AND OWNERSHIP IN A PUBLIC
LIMITED COMPANY
There are often thousands of shareholders – even millions in the case of the
largest companies.
It is impossible for all these people to be involved in taking decisions – although
they are all invited to attend the Annual General Meeting (AGM).
The only decision that shareholders can have a real impact on at the AGM is the
election of professional managers as company directors.
Directors are given the responsibility of running the business and taking
decisions. They will only meet with the other shareholders at the annual AGM.
The directors cannot possibly control all of the business by themselves so they
appoint other managers, who may not be shareholders at all, to take day-today
decisions.
Control and ownership in a public limited company So, the shareholders own, but
the directors and managers control. Sometimes, this is called the divorce between
ownership and control.
These could be increased status, growth of the business to justify higher

19. OTHER PRIVATE SECTOR BUSINESS
ORGANISATIONS
Franchising : The franchisor is a business with a product or service idea that it
does not want to sell to consumers directly. Instead, it appoints franchisees to use
the idea or product and to sell it to consumers. Two of the best known
international examples of a franchise are McDonald’s restaurants and The Body
Shop.

21. JOINT VENTURES
A joint venture is when two or more businesses agree to start a new project
together, sharing the capital, the risks and the profits.

22. BUSINESS ORGANISATIONS IN THE
PUBLIC SECTOR
The term ‘public sector’ includes all businesses owned by the government/state and
local government, and public services such as hospitals, schools, fire services and
government departments
Public corporations
Public corporations are owned by the government but it does not directly operate
the businesses. Government ministers appoint a Board of Directors, who will be
given the responsibility of managing the business. The government will, however,
make clear what the objectives of the business should be. The directors are
expected to run the corporation according to these objectives.

23. ADVANTAGES OF PUBLIC
CORPORATIONS
Some industries are considered so important that government ownership is
thought to be essential. These include water supply and electricity generation in
many countries.
If industries are controlled by monopolies because it would be wasteful to have
competitors – two sets of railway lines to a certain town, for example – then
these natural monopolies are often owned by the government. It is argued that
this will ensure consumers are not taken advantage of by privately owned
monopolists.
If an important business is failing and likely to collapse, the government can step
in to nationalise it. This will keep the business open and secure jobs.
Important public services, such as TV and radio broadcasting, are often in the
public sector. Non-profitable but important programmes can still be made
available to the public.

24. DISADVANTAGES OF PUBLIC
CORPORATIONS
There are no private shareholders to insist on high profits and efficiency. The
profit motive might not be as powerful as in private sector industries.
Government subsidies can lead to inefficiency as managers will always think that
the government will help them if the business makes a loss. It may also be unfair
if the public corporation receives a subsidy but private firms in the same industry
do not.
 Often there is no close competition to the public corporations. There is
therefore a lack of incentive to increase consumer choice, increase efficiency or
even improve customer service.
 Governments can use these businesses for political reasons, for example, to
create more jobs just before an election. This prevents the public corporations
being operated like other profit-making businesses.

25. OTHER PUBLIC SECTOR
ENTERPRISES
Local government authorities or municipalities usually operate some trading
activities.
Some of these services are free to the user and paid for out of local taxes, such
as street lighting and schools.
Other services are charged for and expected to break even at least. These might
include street markets, swimming pools and theatres.
If they do not cover their costs, a local government subsidy is usually provided.
In order to cut costs and reduce the burden on local taxpayers, an increasing
range of services is now being privatised, so reducing the role of local
government in providing goods and services.

26. BUSINESS OBJECTIVES AND
STAKEHOLDER OBJECTIVES
Need for and importance of business objectives
An objective is an aim or a target to work towards. All businesses should have
objectives. They help to make a business successful – although just setting an
objective does not ‘guarantee success’. There are many benefits of setting
objectives:
• They give workers and managers a clear target to work towards and this helps
motivate people. • Taking decisions will be focused on: ‘Will it help achieve our
objectives?’
• Clear and measurable objectives help unite the whole business towards the
same goal.
• Business managers can compare how the business has performed to their
objectives – to see if they have been successful or not.
So setting objectives is very important for all businesses – small or large, newly
formed or well established.

27. DIFFERENT BUSINESS OBJECTIVES
The most common objectives for businesses in the private sector are to achieve:
• business survival :When a business has recently been set up, or when the economy is moving into
recession, the objectives of the business will be more concerned with survival than anything else. New
competitors can also make a business feel less secure. The managers of a business threatened in this
way could decide to lower prices in order to survive, even though this would lower the profit on each
item sold.
• profit :Profits are needed to: pay a return to the owners of the business for the capital invested
and the risk taken and provide finance for further investment in the business.
• returns to shareholders Returns to shareholders are increased in two ways: • Increasing profit and
the share of profit paid to shareholders as dividends. • Increasing share price
• growth of the business The owners and managers of a business may aim for growth in the size of
the business – usually measured by value of sales or output – in order to:
• make jobs more secure if the business is larger
• increase the salaries and status of managers as the business expands
• open up new possibilities and help to spread the risks of the business by moving into new products
and new markets
• obtain a higher market share from growth in sales
• obtain cost advantages, called economies of scale, from business expansion.

28. Market share: If the total value of sales in a market is $100 million in one year and
Company A sold $20 million, then Company A’s market share is 20 per cent.
Increased market share gives a business:
• good publicity, as it could claim that it is becoming ‘the most popular’
• increased influence over suppliers, as they will be very keen to sell to a business
that is becoming relatively larger than others in the industry
• increased influence over customers

29. PROVIDING A SERVICE TO THE COMMUNITY – THE
OBJECTIVES OF SOCIAL ENTERPRISES
Social enterprises are operated by
 Private individuals in the private sector – but they do not just have profit as an
objective.
The people operating the social enterprise often set three objectives for their
business:
 Social: to provide jobs and support for disadvantaged groups in society, such as
the disabled or homeless.
 Environmental: to protect the environment.
 Financial: to make a profit to invest back into the social enterprise to expand the
social work that it performs.

30. WHY BUSINESS OBJECTIVES COULD
CHANGE
A business set up recently has survived for three years and the
owner now aims to work towards higher profit.
 A business has achieved higher market share and now has the
objective of earning higher returns for shareholders.
 A profit-making business operates in a country facing a serious
economic recession so now has the short-term objective of
survival.

31. THE MAIN INTERNAL AND EXTERNAL STAKEHOLDER
GROUPS AND THEIR OBJECTIVES
owners
 workers
 managers
 consumers
 government
 the whole community
 banks.
These groups are sometimes called the stakeholders of the business as they have an
interest in how the business is run. Some of these groups are internal to the
business – they work for it or own it – and others are external – they are groups
outside of the business.

34. OBJECTIVES OF PUBLIC SECTOR
BUSINESSES
Financial: Meet profit targets set by government – sometimes
the profit is reinvested back in the business and on other
occasions it is handed over to the government as the ‘owner’ of
the organisation.
Service: Provide a service to the public and meet quality targets
set by government. For example, health services and education
services will be expected to achieve targets laid down for them,
and state-owned train and postal services will have reliability and
punctuality targets.
Social: Protect or create employment in certain areas –
especially poor regions with few other business employers.