1.4 Types of business organisation

1.4.1 The main features of different forms of business organisation:

• Sole traders, partnerships, private and public limited companies, franchises and joint ventures
• Differences between unincorporated businesses and limited companies
• Concepts of risk, ownership and limited liability
• Recommend and justify a suitable form of business organisation to owners/management in a given situation
• Business organisations in the public sector, e.g. public corporations

Sole Traders: Individuals running businesses alone, having full control and responsibility for profits and liabilities, often found in small enterprises.

Advantages:

Full Control: Sole traders have complete autonomy over decision-making and business operations.
Simplicity: Minimal regulatory requirements and straightforward tax filings.

Disadvantages:

Unlimited Liability: Personal assets are at risk as there’s no legal separation between business and owner.
Limited Resources: Sole traders may face limitations in raising capital or resources compared to larger entities.

I have explained this topic in the below lesson, you will find it very useful.

Partnerships: Business structures involving two or more individuals sharing responsibilities, profits, and liabilities, typically with shared decision-making and legal obligations.

Advantages:

1. Shared Responsibility: Partnerships distribute workload and resources among multiple individuals.
2. Diverse Skills: Partners bring varied expertise and perspectives, enriching business strategies.

Disadvantages:

1. Shared Liability: Each partner’s actions can impact others’ finances, as all share unlimited liability.
2. Potential Conflicts: Disagreements among partners can arise, affecting decision-making and relationships.

Private Limited Companies: Entities with limited liability, owned privately by shareholders, limiting shares trade and often catering to smaller operations.

Advantages:

1. Limited Liability: Shareholders’ personal assets are protected from business debts.
2. Capital Raising: Easier access to capital through shares without the complexity of public listings.

Disadvantages:

1. Compliance Demands: More regulatory requirements and administrative burdens compared to sole traders or partnerships.
2. Limited Growth: Restrictions on share trading can limit avenues for expansion or investment.

Public Limited Companies: Companies with publicly traded shares, allowing for raising capital from the public, subject to stringent regulations and broader ownership.

Advantages:

1. Access to Capital Markets: Ability to raise substantial funds from the public by selling shares.
2. Growth Potential: Broader ownership can attract larger investments for expansion.

Disadvantages:

1. Regulatory Stringency: Stringent regulations and reporting requirements from regulatory bodies.
2. Shareholder Pressure: Subject to shareholder demands and expectations, impacting decision-making.

Franchises: Businesses operating under a parent company’s brand and business model, paying royalties, receiving support, and adhering to set standards.

Joint Ventures: Collaborative partnerships between two or more entities to pursue a specific project or venture, sharing risks, resources, and profits temporarily.

Advantages:

1. Shared Resources: Pooling of expertise, resources, and risk-sharing between partners.
2. Flexibility: Temporary partnerships allow for specific project focus without long-term commitments.

Disadvantages:

1. Conflict Potential: Differences in goals or strategies among partners may lead to disputes.
2. Shared Risk: Each party shares the risks, potentially impacting individual entities.

You will find the below lesson very useful.

Unincorporated businesses, like sole traders or partnerships, lack a separate legal status from their owners and offer no limited liability. Owners are personally liable for debts.

Limited companies, distinct legal entities, provide limited liability to shareholders. They face more regulations, file separate taxes, and require formalities.

Shareholders’ liability is usually confined to their investment. Unincorporated businesses offer more direct control but entail personal risk, while limited companies shield personal assets but have more formalities and governance. Choosing between them involves weighing liability protection, taxation, continuity, and governance preferences.

Risk involves the uncertainty of potential losses or adverse outcomes in business. Ownership signifies control and possession of assets or entities. Limited liability is a legal principle in certain business structures, like limited companies, safeguarding owners’ personal assets from business debts or liabilities. It restricts shareholders’ financial risk to their investment, shielding personal belongings in case of business failure.