Types of business organizations Flashcards
Sole trader
is a business owned by one person
Legal regulations to set up a sole trader business
- The owner must register with, and send annual accounts to, the government tax office
- The name of the business might be registered with the registrar of business names.
- Needs to co-operate laws such as health and safety, license and etc.
Advantages of being a sole trader
- Few legal requirements needed to set up the business
- Owner is in full control, and all decision are up to him to make
- Freedom to choose your own holidays, hours of work and prices
- Close relationship with their customers, personal satisfaction of customers, and quick to provide them with goods and services
- Since all the profit made is completely to the owner, it motivates them to work hard towards the business
- Complete secrecy of the business matters
Limited liability
means that the liability of shareholders in a company is limited to only the amount they invested
Unlimited liability
means that the owners of a business can be held responsible for the debts of the business they own. Their liability is not limited to the investment they made in the business.
Disadvantages of being a sole trader
- No one to discuss the business matters
- No limited liability present, so all the debts that the business may own is solely the owners responsibility. So because of unlimited liability, the owner could be forced to sell their own possession to pay the debts to the creditors.
- Limited money to expand the business, all the capital must be invested by the owner, and banks are hesitant to give loans to small businesses due to high rate of business failure.
- If the owner is ill, there is no one to take control of the business, and cannot be passed on to anyone else as the business no longer exists when the owner dies.
Partnerships
is a form of business in which two or more people agree to jointly own a business.
A partnership agreement
is a written and legal agreement between business partners. It is not essential for partners to have such an agreement but it is always recommended.
Advantages of partnership
- More capital could be invested into the business from the partners savings as well, which would help expansion of the business
- The responsibilities of running the business is shared between the partners, so absences and holidays doesn’t effect the running of the business much
- Both partners would work hard as they both get a portion of the profit.
Disadvantages of Partnership
- No limited liability, creditors could force them to sell own possession to pay debts.
- if one partner dies, the partnership ends (unicooperated business)
- Disagreements of decisions can occur between the partners
- If one partner is inefficient or dishonest, both of them would suffer from losses.
Unicooperated business
is one that does not have a separate legal identity. (Sole traders and Partnerships)
Private limited business
are businesses owned by shareholders but they cannot sell their shares to the public.
Incorporated business
are companies that have separate legal statues from their owners
Shareholders
are the owners of a limited company. They buy shares which represent part of ownership of the business
Advantages of private limited companies
- Shares can be sold to a large number of people, but not the public, it can be the owners relatives or friends. This would mean more capital is invested into the business so it has a higher chance of expansion.
- All shareholders have limited liability, which means none of the shareholders could be forced to sell their own possessions to pay the business debts. The shareholders could only lose their original investment made to the business. They have a lower risk than sole traders and partnerships.
- The owners can keep the business under their control as long as they do not sell too many shares.
disadvantages of private limited companies
- Lots of legal requirements before setting up the business (Articles of association, Memorandum of associations).
- The shares could not be sold or transferred to anyone else without the agreement of the other shareholders, which would make people hesitant to invest into such companies, as they wouldn’t be able to get their investment back, without the agreement of all the others.
- The business accounts are less secret
- The company cannot sell its shares to the general public, so unable to raise large sums of capital.
Public limited companies
are businesses owned by shareholders but they can sell shares to the general public.
Advantages of Public limited companies
- Offers limited liability
- Incorporated business
- Since able to sell shares to public, very large capital could be raised to invest in the business
- No restriction of buying, selling or transfer of shares
- High statues so, can attract suppliers to sell goods.
Disadvantages of Public limited companies
- Lots of legal requirements before setting up the business and time consuming
- Selling shares to the public is expensive
- There is real danger to the owner, as anyone would be able to buy him out, and he might lose control over it when it goes public.
Annual General meeting (AGM)
is a legal requirement for all the companies. Shareholders may attend and vote on who they want to be on the board of directors for the coming year.
Dividends
are payments made to the shareholder form the profit (after tax) of a company. They are the returns to the shareholders for investing in the company.
Franchise
is a business based upon the use of the brand names, promotional logos and trading methods of an existing successful business. The franchisee buys this license to operate this business from the franchisor.
Advantages (To the franchisor)
- The franchisee buys a license from the franchisor to use the brand name
- Expansion of the business is much faster than if the franchisor had to finance all outlets
- The management of the outlets is the responsibility of the franchisee
- All products must be from the franchisor
Advantages (To the franchisee)
- The chances of business failure are much reduced
- The franchisor pays for ads
- All supplies obtained from a central source
- There are fewer decisions to make then with an independent business – prices, store layout and products will be decided by the franchisor
- Banks are often willing to lend to franchisees due to relatively low risk
Disadvantages (To the franchisor)
- Poor management of one franchised outlet could lead to bad reputation for the whole business
- The franchisee keeps profits from the outlet
Disadvantages (To the franchisee)
- Less independence
- may be unable to make decisions that would suit the local area
- License must be paid to the franchisor and a percentage of the annual turnover
Joint Ventures
is where two or more businesses start a new project together, sharing capital, risks and profits
Advantages of joint ventures
- Sharing of costs (ex: new airplane)
- Local knowledge when one company is already based in the country
- Risks are shared
Disadvantages of joint ventures
- If the new project is successful, profits have to be shared
- Disagreements over decisions could occur
- Different ways of running a business (different cultures)
Public Corporation
is a business in the public sector that is owned and controlled by the government.
Advantages of public corporations
- Important industries such as electricity and water supply are considered to have government ownership as an essential
- if industries are controlled by monopolies (ex: two trains to the same town from same place)
- If important business is falling, the government nationalises it
- Services such as TV and radio broadcasting, are often in the public sector. it can be made to the public even though they are non-profit
disadvantages of public corporations
- No proper motivation like a private sector business as no shareholders to insist on high profits and efficiency
- Managers will be dependent on the government for business losses.
- No competition in public corporations, so intensive to increase efficiency, customer choice.
- Government can use these businesses for political reasons, for example to create more jobs just before an election.
