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1.4 Types of Business Organisation

There are two types of questions which are normally asked: short answer knowledge questions about features of different types of business organisation and longer questions focused on analysis and evaluation of changing from one type of business organisation to another.

Past Paper Question Example  
Paper 1 (a) Identify two features of a private limited company.  
Feature 1:…………………………………………………………………………………………………………..  
Feature 2:………………………………………………………………………………………………………….. [2]    

 

 1.4.1 The Main Features of Different Forms of  Business Organisation

But let’s start by looking at the big picture and then put in the different types of business organisation.

As businesses move from sole trader to partnership to limited companies, they gain access to more capital.  But with more investors, there is a loss of control as investors want a say in how the business is run.

A sole trader is a business owned by one person who is responsible for all decisions, capital invested and risk. Therefore, the sole trader has complete control over how the business is run, but is limited to their own funds or loans in order to finance the business.

Sole Trader  
✅  Easy to set up ✅  Keeps all the profits ✅  Complete control over decisions ❌Unlimited Liability ❌Limited access to capital ❌Heavy workload and little support

If they want to grow, the next form of business organisation is a partnership. A partnership is where two or more people join together to set up a business. There is  shared decision making,  capital investment  and risk.

Partnership  
✅  Greater access to capital than sole trader ✅  Shared responsibility and additional expertise ✅  Complete control over decisions ❌Unlimited Liability   ❌May be disagreements among partners as all decisions must be agreed ❌Shared profits

If the partners start to further expand they can consider a private limited company. This will allow further capital investment, usually from friends and family, but less control in how the business is run, as the new investors will have an input into decision making.

Setting up a private limited company is more complicated and costly than starting a sole trader or partnership, but much more straight forward than a public limited company.

Private Limited Company
✅  Limited Liability ✅  Greater access to capital ✅  Complete control over decisions ❌Further loss of control to shareholders ❌Costly and time consuming to set up ❌Accounts are made public

The final step is changing to a public limited company. Much more capital can be raised as shares can be sold to members of the public, but shareholders also have a greater influence over decision making.

Setting up a public limited company is complicated, high cost, and time consuming. Public limited companies must publish financial information about their profits, so there is less privacy of the business operations.

Differences between unincorporated businesses and limited companies

An absolutely crucial separation between different types of business organisation occurs when a business changes from a partnership to a private limited company.

Sole Traders and Partnerships are unincorporated. This means in the eyes of the law there is no separation between the owners and the business. The owners and the businesses are one and the same.

If sole traders or partnerships go bankrupt there is unlimited liability.  Owners personal assets may be taken to pay for debts of the company. If a sole trader goes bankrupt and owes money to the bank, the bank can repossess the sole traders personal property to repay the loan.

Private Limited Companies and Public Limited Companies are incorporated, when a business becomes incorporated this creates a separate entity (or person) in the eyes of the law. The owners and the business are separated.

If Private Limited Companies and Public Limited Companies go bankrupt, there is limited liability. Owners personal assets may not be taken to pay for debts of the company. The owners will only lose the money they have invested in the company and nothing more.

Concepts of Ownership, Risk and Limited Liability

With sole traders and partnerships, there is no separation between ownership and management. Owners are also managers and control all decision making. There is unlimitedliability so higher risk.

Incorporated businesses have a separation between owners, who are called shareholders, as they all own a small slice or (share) of the company.

There is limitedliabilityso much lower risks for shareholders compared to being a sole trader or in a partnership.

Recommend and justify a suitable form of business organisation

There are some forms of business organisation which are more common for certain types of businesses.

Sole Traders are usually small businesses, independent shops or tradespeople like plumbers and electricians.

Partnerships are often professionals like lawyers, doctors, dentists.

Private Limited Companies are usually mid-sized firms and are often family owned,  for example George Smith and Sons Ltd.

Public Limited Companies are usually large companies that want to raise a lot of capital,  usually for expansion. Facebook, Apple, Walmart and Shell are some of the world’s largest public limited companies.

Past Paper Question Example  
Paper 2 (b) Explain one advantage and one disadvantage of Caroyln operating as a sole trader.                                                                                                                                                                              [8]

Other Types of Business Structure

⭐⭐⭐Top Tip ⭐⭐⭐
Businesses entering a joint venture or franchises agreement don’t change their business structure. A sole trader entering a franchise agreement with McDonalds will remain a sole trader and McDonalds will continue to operate as a public limited company.

Joint Ventures (or JVs as they are often known on the business news)  are when two companies work together on a specific project.

  • They share capital and risks. They benefit from each other’s expertise and split profits from the venture.
  • In return they will both take a share of the profits.

A great example of this is HULU. Disney and Comcast teamed up to create a streaming service to rival Netflix. They both shared capital and expertise (and contributed their content like movies and TV shows)

A Franchise is when a businessbuys the license to use another company’s logo and branding, and sell their products.

An entrepreneur entering a franchise agreement with Starbucks is called the franchisee, Starbucks is the franchisor.

Benefits and Limitations of a Franchise Agreement  for a Franchisee
✅  Access to popular products and loyal customer base,  so less risk of failure
✅  Franchisor responsible for marketing
✅ The franchisor can assist with setting up the business (training and support)
❌Must share profits with the franchisor
❌Must follow rules and regulations set by the franchisor  

It can appear quite often with a question asking if a new business owner should enter a franchise agreement. Your job is to see if franchising is a good fit for the business in question.

⭐⭐⭐Top Tip ⭐⭐⭐  
Consider if franchising is a good “fit” for the objectives of the business in the question? This will help you justify your decision.

Franchising can be a good option if the business owner in the question can afford the higher investment costs and is willing to share profits. It also can suit entrepreneurs with less business experience as marketing is provided by the franchisor and support and guidance is usually available from the franchisor. The franchise has a proven business model and a ready-made customer base so there is a higher chance of success.

It is less suitable if an entrepreneur or business owners want independence to make their own decisions on what products to sell, and how to run the business.

Business organisations in the public sector

Finally we reach business organisations in the public sector, for example public corporations. They are government owned organisations set up to provide service to the public, rather than make a profit.

A good example is the BBC in the UK,  it’s aim is not to make a profit but to educate and entertain the citizens of the United Kingdom.

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