Updated: Jul 2
There are four (4) types of business organization
Private Limited (Incorporated)
Public Limited (Incorporated)
Forms of business organisation
Sole traders are businesses owned and fully controlled by a single owner. Therefore, they are usually small businesses that do not need a lot of capital to operate its business. It is easy to set up and does not need to publish any financial accounts. As the only owner, the sole trader must ensure that the business generates revenue, or it will not receive any income as it receives all profits and bear all losses. As the business and owner are not separate entities, the owner has unlimited liability, making the owner at risk of bankruptcy should the owner be unable to repay its debts. Many small businesses start as sole trader before it becomes incorporated, unless the owner wants it to remain small.
A partnership is a legal agreement between 2 or more individuals to operate a business. Partners earn their share of profits from the amount of work and responsibility they put into the business. As the business grow, a partnership tends to include more partners with more skills, as more responsibility and workload can be shared, and more capital can be raised. This may sometimes lead to disagreements in decision-making.
Like sole traders, partnerships are not incorporated, as such, their business are not separate entities, making all partners having unlimited liability. However, should the partnership register as a limited liability partnership, all partners will have limited liability.
Limited Companies (Incorporated businesses)
Private and public limited companies are incorporated, as such they are known as corporations that have to follow company regulations and rules that may be different in different countries. As corporations issue shares to be bought by investors to be shareholders, they are separate entities. As such, shareholders or owners have limited liability. Profits of the business are distributed as dividends to shareholders according to the amount of shares owned by investors.
Limited companies must publish their financial accounts in a financial report. The organisation is managed by a board of directors that are appointed by the shareholders during the annual general meeting (AGM), that must be held every year. The more shares an investor have, the more votes the investors have to decide on important business decisions such as whether to takeover another business or appoint directors.
A private limited corporation have limited number of shareholders, but a public limited corporation have an unlimited number of shareholders. Shares issued by a public limited corporation are traded in stock exchanges to enable the public to invest in these companies, while investors must be invited by existing shareholders of a company to buy shares issued by a private limited corporation.
A public limited corporation can therefore raise large amount of capital easily and quickly, but are subjected to many financial regulations.
Joint ventures from when there is a contractual agreement between two or more business organizations to perform business activities. These usually involve sharing of capital, expertises, management, cost and profits. These forms of ventures are popular with businesses who require large investment to expand their business to other countries, as they are able to share the risk of business failure. However, should there be disagreements or miscommunication, the joint venture may fail and result in losses to all parties.
Franchises enable businesses to operate using the trademark of a well-known brand. An example of a very successful franchise is McDonalds. In a franchise business model, a franchisee obtains a licence or agreement from the franchisor to sell products and services using the franchisor's brand name. In return, the franchisor will provide training, equipment and other assistance such as promotion & branding, to ensure that the business operation is standardized across all outlets, providing similar quality of product and service.
This gives an advantage to owners (franchisee), as their business are less likely to fail with the assistance of the franchisor. However, franchise licences may be expensive and may need to be paid annually or franchisee share revenue/profits.
A social enterprise is private sector business organisation setup with a social and environmental objective. It aims to increase profits to be reinvested to expand its business activities in order to improve the social welfare of the society. It can operate in any form of business organisation type.
Public corporations are owned by the government. They are usually non-profit oriented and are set up to provide public services and carry out government functions. These organisations could be administrative departments, ministries or offices of government authorities responsible for implementing government policies such as taxes, development projects and social welfare. Some public corporations may carry out commercial activities and may use a private sector business organisation type to operate, but are controlled by the state as the largest shareholder.
PAST YEAR QUESTIONS
State two types of business organisation (2 marks) May/June 2020/11
Define ‘sole trader’. (2 marks) Oct/Nov 2020/11
What is meant by 'sole trader'? (2 marks) Oct/Nov 2018/13
Identify two features of a sole trader (2 marks) Oct/Nov 2021/11
Identify two features of a sole trader business (2 marks) May/June 2019/13
What is meant by 'public corporation'? (2 marks) Oct/Nov 19/12
What is meant by 'limited liability'? (2 marks) Oct/Nov 2019/13
What is meant by limited company? (2 marks) Oct/Nov 2018/12
Define ‘limited company’. (2 marks) Oct/Nov 2022/13
Define ‘limited liability’. (2 marks) Feb/Mar 2021/12
Define ‘private limited company’. (2 marks) Oct/Nov 2021/13
Define ‘public limited company’. (2 marks) May/June 2022/11
Define ‘partnership’. (2 marks) May/June 2021/13
Identify two features of a public limited company. (2 marks) Oct/Nov 2021/12
Identify two financial statements a public limited company is legally required to publish each year. (2 marks) May/June 2022/11
What is meant by 'franchise'? (2 marks) Oct/Nov 2019/12, Oct/Nov 2018/13
Outline, with reference to TYA, the difference between a limited company and an unincorporated business (4 marks) Oct/Nov 2022/12