Types of Business Organizations
Written by Elin Thomas
Sole Trader
A business organization owned and controlled by one person, this business can have employees but only the individual owner invests and owns the business. These companies are usually small (e.g. hairdressers, butchers, etc) and have a small number of employees. Owners are relying on their own savings, bank loans, or loans from friends and family to fund their business.
Advantages
It is easier to have good customer loyalty as there is only one person for the customers to form a good relationship with.
Quick decision making as the sole trader has full control over the business.
All profits go to the singular owner.
There are fewer legal formalities such as publishing annual financial accounts than with a larger business, making it quick and easy to set up.
Disadvantages
The sole trader is not legally separate from the business as an investor and is therefore liable to personal property being seized if it comes to it.
There is no one to take over the business if the sole trader passes away/retires.
All risks are accountable to one person.
The investment in the business will be low as it is only coming from the sole trader (banks will be cautious of lending to them as it is seen as risky).
Partnerships
A legal agreement between two or more people to own, finance, and run a business jointly and to share all profits. For example, lawyers, doctor and dental practices, etc. Set up by the deed of partnership document – this sets out the terms of the partnership (e.g. how much each partner invests in the partnership and what roles they will have).
Types of Partners
Working partner: A partner who contributes capital to the business and takes an active part in its management.
Sleeping partner: A partner who invests but is not involved in the day-to-day running of a partnership.
Nominal partner: A partner who does not contribute capital or take an active part in the management – their only purpose is to allow the business to use their name.
Limited partner: A partner whose liability is limited to his invested capital only. They cannot take part in the management but can inspect the accounts and receive profit.
Partner in profit only: A partner who provides capital and is also responsible to third parties like other partners, they do not get a share in its loss only profits.
Secret partner: Some people become a partner, but their membership is kept secret from outsiders. Their liability is unlimited and liable for the losses of the business.
Partner by disposal or holding out: When a person is not a partner but poses himself as a partner in words or in writing. They are liable to an outsider who deals with the firm on the presumption of that person being a partner in the business though is not a partner and doesn’t contribute anything to the business.
Minor Partner: They cannot enter a contract according to the act so cannot be made partner in the real sense of the term. Can be taken as a partner with the consent of all partners, their personal property is not at risk, but they can share in partnership property and profits. They can’t actively help manage the firm.
Retired or outgoing partner: A partner who is retired but liable to any debts which were incurred before their retirement.
Incoming partner: A partner who comes in after the firm is established, is only liable to debts and profits after he joins and invests capital.
Quasi partner: One who is no longer a partner of business but has left their capital in the business as a loan. They receive interest on it as long as it is not paid off.
Advantages
There are fewer legal formalities such as publishing annual financial accounts than with a larger business, making it quick and easy to set up – only a partnership agreement/deed.
More people to invest than just a sole trader.
There are a wider skill set and range of ideas that can help the business innovate and grow.
Disadvantages
The partners are not legally separate from the business as investors and are therefore liable to personal property being seized if it comes to it.
The investment in the business will be still low compared to larger businesses as it is only coming from the partners.
There is no one to take over their part of the business if a partner passes away/retires.
There can be conflicting ideas between partners, delaying decision making.
Joint Stock Companies
These companies can sell shares/stocks to people who become shareholders. Shareholders receive dividends – shares of the profits. Shareholders are only at risk if the business fails or leaves debts. For a firm to be considered a joint-stock company it needs to grow larger than 20 partners.
Types of joint-stock companies
Incorporated companies: The companies have a separate legal identity from their owners, so owners have limited liability.
Unincorporated companies: The owners don’t have a separate legal identity from their businesses, making them more liable. The company will continue even if its owners pass away/retire. A board of directors (a group of people who jointly supervise the activities of a business) is elected by the shareholders and they manage and run the company (directors can be people with a high percentage of shares, but not always). The higher percentage of shares a shareholder has the more power over decisions it has.
Private Limited Companies: Shares are only to be sold to friends and family of existing shareholders (e.g. John Lewis).
Public Limited Companies: Shares can be sold to anyone through stock exchanges (e.g. Microsoft) – must have a capital of at least £50,000, 2 shareholders, 2 directors, and a qualified company secretary.
Advantages
Limited liability as the company and shareholders are legally separate – the max an investor can lose is what they invested.
Public Limited Companies attract investors by making a prospectus to advertise their shares – this will raise lots of capital and allow the business to quickly grow.
Disadvantages
Private Limited Companies can only raise so much capital as share selling is selective.
It is legally required to post financial accounts and reports which can be costly and can expose more sensitive company information.
In order to be listed on the stock exchange, Public Limited Companies must complete many legal documents and investigations – this is costly and time-consuming.
All joint-stock companies must hold an Annual General Meeting (AGM), where shareholders are invited to receive information about the company’s performance etc. This is very costly for those companies with thousands of shareholders.
Decision making can be slow as a result of there being so many people’s conflicting opinions – especially in Public Limited Companies.
Franchises
Where the owner of a business (the franchisor) grants a license to another person/business (the franchisee) to use their business idea (e.g. McDonald’s)
Advantages for Franchisee
The business is already established so there is a low risk of failure.
There is a secure supply of raw materials from the franchisor.
Managerial and technical support is offered by the franchisor.
Disadvantages for Franchisee
Fees must be paid to the franchisor as well as them getting a cut of the profits, reducing total profits for the franchisee.
The franchisee must pay the costs of setting up the business and advertising it locally.
They don’t have full control over the business and must abide by the franchisor’s rules.
Advantages for Franchisor
The franchise deals with day to day business.
The franchisee can market the business to the local area better.
Expands the business quickly and at a low cost.
The franchisor gets an income from the franchise (cut of profits and fees).
Expands skill sets and ideas to encourage innovation in the business
Disadvantages for Franchisor
The franchisor loses some control in the running of the business.
Not all profits from the franchise go to the franchisor.
The franchisee may not have the skills the franchisor does.
Must provide raw materials and support etc to the franchise.
The reputation of the business name is being put in the franchisee’s hands.
Joint Ventures
An agreement between two or more businesses to collaborate on a project (e.g. Google and NASA creating Google Earth).
Advantages
A range of knowledge, perspective, and skill set.
Fewer costs and less risk to each business.
Increase in the market potential to all businesses.
Disadvantages
Their reputations are heavily reliant on one another.
Slow decision-making as a result of different values/cultures.
Governmental organizations
Government-owned and run businesses that exist to provide a service for the population and communities (e.g. the NHS). They’re usually paid by taxes. These companies are aiming to provide the population with merit goods which are usually underprovided by the free-market sector at an affordable price for everyone. In addition to that, government-owned companies keep many people employed, therefore providing them with wages and stimulating the economy.
Advantages
Some services may be deemed too essential to be privately owned (e.g. water).
This can rescue businesses when they are failing.
Provides essential services to all.
Reduces waste.
Disadvantages
Profit is not the objective so productivity may be lower.
Little incentive to improve as there is no competition.
Could be used by governments to gain popularity among voters.
Inefficiency.
