Module Overview: Business Organizations

At the end of this module, students should be able to:

 Understand the various types of business organizations that can be established.

 Appreciate the advantages and disadvantages of each type of business organization.

Introduction

A business activity involves any legal activity that can be owned by an individual or jointly by
two or more people. The goal of many business operations is to make a profit, whether in the
short or long term. Business activities are not confined to just retail trade but include
manufacturing, buying and selling, or providing services. Examples include banking, insurance,
retail trade, production of beer, tourism, transport services, etc.

Element 1.1: Types of Business Enterprises

Businesses can be owned in different forms, including:

 Sole Proprietorship: Owned by one person.

 Partnership: Owned by two or more people.

 Limited Liability Company (LLC): Can be private or public.

 Cooperative Societies: Owned and managed by the members.

 Government-Owned Enterprises: Owned by the state for the benefit of the public.

i) Sole Trader (Sole Proprietorship)

Definition
A sole trader is a business owned and managed by a single individual. The business could
involve activities like retail trade, farming, hairdressing, and consultancy.

Features of a Sole Proprietor:

 It is the simplest and most common form of business.

 The owner uses personal labor and may hire a few workers.

 It tends to be small in scale but not always.

Advantages of a Sole Trader:

1. Easy to Set Up & Manage: It is simple and cost-effective to start.

2. Small Capital Requirement: It is possible for many people to run this business due to
low capital requirements.

3. Quick Decision-Making: The owner makes decisions independently and quickly.

4. Personalized Service: Direct interaction with customers.

5. Owner Retains All Profits: Motivating the owner to work harder.

6. Privacy: Business affairs remain private, except for tax-related matters.

7. Satisfaction: The owner enjoys the independence of self-employment.

Disadvantages of a Sole Trader:

1. Unlimited Liability: The owner's personal assets are at risk if the business fails.

2. Dependence on Owner: The business may collapse if the owner dies or leaves.

3. Limited Access to Capital: Raising funds may be challenging, hindering expansion.

4. Small Scale: Limited capacity to grow or benefit from economies of scale.

5. No Employee Benefits: The owner lacks social security or retirement benefits.

6. Limited Resources: Limited capital restricts modernizing the business.

7. High Risk of Failure: Increased competition, especially from large-scale businesses.

ii) Partnerships
Definition
A partnership is a business owned by two or more individuals who share responsibilities, profits,
and liabilities. The partners draw up a partnership deed that outlines how the business will be
organized and managed.

Features of a Partnership:

 Requires between two and twenty people to form (professional partnerships can have
more).

 Partners contribute capital and share profits and losses.

 Each partner has control over the business, and decisions bind the entire partnership.

 Partnerships have no separate legal identity like a sole proprietorship.

Advantages of Partnerships:

1. Easy to Set Up: Requires minimal paperwork.

2. Division of Labor: Partners can specialize in different aspects of the business.

3. Increased Capital: More capital can be raised by pooling resources.

4. Shared Expenses: The financial burden and management are shared.

5. Continuity: The partnership continues if one partner leaves or dies.

6. Consultative Decision-Making: Multiple viewpoints lead to better decisions.

Disadvantages of Partnerships:

1. Unlimited Liability: Partners are personally liable for the debts of the business.

2. Disagreements: Decisions may be delayed due to conflicts among partners.

3. Limited Expansion: Difficulty in raising capital and expanding.

4. New Partnership Needed: Death or resignation of a partner may require forming a new
partnership.

5. Limited Membership: Partners are limited in number, restricting capital raising.

A private limited company is a separate legal entity, which means it has its own existence
independent of its shareholders.

Features of a Private Limited Company:

 Shares are not publicly traded; ownership is restricted.

 Shareholders have limited liability.

 The company is managed by a board of directors elected by shareholders.

 Capital is raised by selling shares to a limited number of people.

Advantages of a Private Limited Company:

1. Limited Liability: Shareholders' personal assets are protected.

2. Easy Capital Raising: Can raise more capital by issuing shares.

3. Continuity: The company continues even if a shareholder leaves.

4. Shareholders' Control: Shareholders have the power to control the company.

5. Formal Management: Directors oversee the operations.

Disadvantages of a Private Limited Company:

1. Legal Formalities: There are numerous legal requirements.

2. Limited Transferability of Shares: Share transfers require approval from other

3. Costly to Form: More expensive to establish than a sole proprietorship.

4. Auditing: Annual auditing and regulatory compliance is mandatory.

iv) Public Limited Companies

Features of Public Limited Companies:

 Shareholders can freely buy and sell shares on the stock exchange.

 It is a separate legal entity, and shareholders' liabilities are limited.

 Managed by a board of directors and a managing director.

Advantages of Public Limited Companies:

1. Separate Legal Entity: Shareholders' personal assets are not at risk.

2. Capital Raising: Can raise significant capital through public offerings of shares.

3. Easier Borrowing: Easier to borrow money from banks or other institutions.

4. Continuity: The company continues despite changes in ownership.

5. Economies of Scale: The company can buy in bulk and reduce costs.

Disadvantages of Public Limited Companies:

1. Costly Formation: It is expensive to set up and maintain.

2. Regulations: Must comply with strict regulations.

3. Bureaucracy: Decision-making can be slow due to multiple stakeholders.

4. Risk of Takeovers: Shares are publicly traded, making the company vulnerable to hostile
takeovers.

5. Little Secrecy: Annual reports and accounts must be publicly disclosed.

v) Cooperative Societies

Cooperative societies are owned and managed by their members, who also benefit from the
services provided. These societies are often focused on serving the interests of the members,
such as agricultural cooperatives or retail cooperatives.
Advantages of Cooperative Societies:

1. Lower Prices for Members: Dividends are shared among members based on their
purchases.

2. Democratic Control: Each member has one vote, regardless of their shareholding.

3. Community Focused: Cooperative societies often provide social benefits, such as

Disadvantages of Cooperative Societies:

1. Limited Capital: Capital raising is limited due to restrictions on the number of shares.

2. Inefficiency: Management may be poor, and decision-making can be slow.

3. Competition: Cooperative societies may struggle to compete with larger businesses.

This module provides an overview of the types of business organizations, their features,
advantages, and disadvantages, enabling students to analyze which structure is most appropriate
depending on business goals, resources, and risks involved.