Chapter 4

Types of Business Organizations

 Business
Organizations

Private sector Public sector

organizations organizations
Sole Trader
Partnerships
Private Limited
Companies
Public Limited
Companies
Franchises
Joint Ventures
01) Sole Trader
 Sole Trader is a business owned by one person. Owner is the ‘Sole Proprietor’
 Sole trader businesses are the most common type of business because, there are few legal
requirements to fulfil to open up a sole trader business (refer page 35)
 Advantages of being a sole trader – (refer
page 36)
 Comparatively very few legal regulations when setting up the business

 Can be your own boss when making decisions

 High level of independency such as having the ability to choose own holidays, hours of work, price for the
product, whom to employ

 Can create a close relationship with customers and cater them quickly to satisfy their personal demands
and needs

 Can consume or have the right to take the whole share of profit after paying all other expenses

 High secrecy of official details because, only the sole trader has the information
Disadvantages of being a sole trader – (refer page 36)

 No one to discuss the business matters and gain advises

 Not enough money or finance for expansion
 If the sole proprietor is ill no one will have the legal authority to take control of the business
 Business is unlikely to be benefited from economics of scale (to get economics of scale either the
production should be increased or lower the cost of production, when the organization is small,
comparatively production capacity will be lesser)
 Unlimited liability because business is not a separate legal entity in sole trader organizations
 Sole trader is an unincorporated business which they do not have a separate legal identity
 separate legal entity
An incorporated business – companies which have a separate legal
identity.

OWNER BUSINESS
These companies have limited liabilities as well as the company will exist even
after a death of one of the partners
 Not considered as separate legal entities
n unincorporated business – businesses which do not have a separate legal identity.

OWNER + BUSINESS
Unlimited Liabilities
Limited liability companies
The owner of the business do not have any personal responsibly of
debts and liabilities of the organization
Theliability of shareholders in a company is limited to only the
amount they invested on shares

Unlimited liability companies

The owner of the business have a personal responsibly of debts
and liabilities of the organization
Sole
proprietor’s liability is not limited for the investment they
made in to the business
 For whom we can recommend a sole trader
structure

For businesses need less

capital to operate

For businesses produce

For entrepreneurs setting personalized services for direct
up new businesses customers
02) Partnerships
Partnership is a form of business where 2
or more people (in Sri Lanka, maximum 20
members) agree to own and manage a
business together
• Partnership is generally formed through a
‘Partnership Agreement’
• Partnership agreement/ deed of partnership, is a
written legal agreement between business
partners.
 Advantages of a partnership
 More capital can be invested into the business
 Easy to get started
 Lot of ideas can be gained from partners
 Access to knowledge, skills and experience sharing
 Better decision making
 The responsibility of running the business is shared among group of partners
 Absences of one partner will not lead to major problems as there are other owners to look after the
business
 Easy access to profit. Partners are motivated to work hard to gain lot of profits
 Compared to limited companies, the secrecy of official details can be kept confidentially
Disadvantages of a partnership
 Unlimited liability – if the business failed, then the creditor have the ability to force the partners to sell
their own property to pay business debts
 The business has no independent legal status – If one of the partners died, then the partnership would end
 Partnership business is an unincorporated business which they do not have a separate legal identity
 Partners can disagree on business decisions and getting all of them to agree will take time
 Profits need be shared
 If one of the partners is inefficient or dishonest, then other partners also will suffer
 The amount of capital can be limited because, most countries have limit the number of partners up to 20,
this can minimize the business growth
When do partnerships are very much suitable???????

When people want to start a

business, but avoiding legal When partners are well-known
complications people such as family members o
friends

When some countries legal conditions only

allow professionals to form partnerships, not
a company
03) Private Limited Companies (Pvt) Ltd
• Private Limited Company names must end with ‘Limited’ or ‘Ltd’ as an
abbreviation.
• In some countries this title is amended to ‘Proprietary Limited’ or (Pvt) Ltd.
• Private limited companies are incorporated businesses; it is a separate legal
unit from its owners

separate legal
entities

OWNER BUSINESS
Since it is an incorporated business,

 The company can be separated from the owners and it

can be continued to exist even with a death of one of the
owners
 The company can make contracts and agreements as a
separate legal unit
 The company accounts can be kept separately from the
 Private limited companies are owned by shareholders but these companies cannot sell shares to general
public. The company can only offer shares to existing shareholders or to friends, relatives and personally
known people.

 Private limited companies cannot trade their shares on public exchanges (in Sri Lanka, Colombo Stock
exchange) or initial public offering.

 Private limited companies are jointly owned by people who have invested in the business. These people
buy shares in the company and they are called shareholders. They are the owners of a limited company

 Shareholders appoint directors among them to run the business

 Generally, people who owns majority of shares get nominated to become directors
Advantages of a private limited company – refer page 39 & 40

 Compared to sole trader and partnership, can gain higher capital from shareholders

 All shareholders have limited liability

if the company failed with owing money to creditors, the shareholders do not have to sell their personal
assets to pay for company debtors.

Shareholders in a company have less risk than sole traders and partners.

Limited liability encourages people to buy shares, because they know that the amount they invest is the
maximum they could lose if the business is unsuccessful.
 Less risk – if shareholders will lose money due to a business failure , they will only lose their
original investment.

 Until the people who started the business sell too many shares to others, original owners will
have a control over the business
Disadvantages of a private limited company

1) The shares cannot be sold or transferred to anyone else without taking approval from the other
shareholders

Therefore some people are reluctant to invest on Private Limited Companies because, whenever they want
they cannot sell the shares soon and take their investment back. It will be a long procedure

2) High legal formalities

There are significant legal matters which have to be dealt with before a company formed. In particular, two
important forms or documents have to be sent to the ‘Registrar of Companies’
Two important forms or documents to be filled before starting up a Private Limited
Company

The Article of Association

Contains,
• The rules under which the company will manage
• Rights and duties of all the directors
• Rules for selection of directors through an election
• How official meetings can be organized
• Procedure to be followed when issuing of shares

The Memorandum of Association

Contains,
• Important information about the company and its directors
• Official name and the address of the registered company
• Objectives of the company
• Number of shares bought by each of the directors

 Once these documents have been received by the Registrar of Companies, a

Certificate of Incorporation will be issued by allowing the company to start trading
3) Less secrecy of company accounts
Each year the latest accounts must be sent to the Registrar of Companies and members who own shares
can inspect them

4) Cannot sell shares to general public

Shares of private limited companies cannot be sold to general public, therefore it will not be able to raise
large amount of capital back into the business
04) Public Limited Companies
Public Limited Companies are businesses owned by shareholders and they can sell its shares to the
general public as well as shares can be tradable on the Stock Exchange
This form of business organizations are most
suitable for very large businesses

Most large, well-known businesses are public

limited companies as they have been able to raise
the capital to expand nationally or even
internationally.
 Remember,
1) Public limited companies are not in the public sector industry, these companies are owned and controlled
private owners.
2) Titles given to Private Limited Companies & Public Limited Companies

Private Limited Companies Public Limited Companies

In UK Fashion World Limited Fashion World plc

Fashion World Ltd

South Africa and some Fashion World Proprietary Fashion World Limited

other countries Limited

Fashion World (Pty)

 Advantages of a public limited company (PLC) –
 Limited liability

 Incorporated business has a separate legal identity

Its accounts are kept separately from those of the owners and there is a continuity even though after a death
of any shareholder

 Have the opportunity to raise very large capital sums to invest in the business.

There is no limit to the number of shareholders a public limited company can have

 No restrictions on buying, selling or transferring of shares

 Public limited companies usually have a high status; therefore banks willingly lend money, suppliers and
distributors provide products and services on credit
Disadvantages of a public limited company (PLC)

 High legal formalities

Forming such companies are quite complicated and time-consuming

 More legal regulations

There are many regulations and control over these companies in order to protect shareholders. These
include the ‘Publication of Accounts’, which anyone can ask to see

 ‘Share offering process’ to public is quite expensive (refer page 43)

 Less control over the business and lower level of confidentiality

Even though the company can gain more capital from offering shares to general public, original owners of
the business may lose control over the business when it ‘goes public’
ontrol and ownership in a public limited company
In all sole trader businesses and partnerships
the owners have control over how their
business is run
They take all the decisions and try to make
the business achieve the aim that they set.

This is also the case in most private limited

companies which have relatively few
shareholders
But, the directors are often the majority shareholders so
they can ensure that their decisions are passed at all
With a public limited company the situation is
very different

In public limited companies there can be

thousands of shareholders, even millions in
larger companies
Therefore it is impossible for all these people to be
involve in taking decisions, although they are invited to
attend the ‘Annual General Meeting (AGM)

Even though all shareholders attend the AGM, only decision

that a shareholder can make within the AGM is, to vote for
the election which is held to chose Board of Directors
Directors appoint other managers, who are not
shareholders at all, to make day-to-day
decisions

So, the shareholders own, but the directors

and managers control. (this is called, divorce
between ownership and control)
Shareholders will gain ‘dividends’ in return for
their invested money.

What are dividends?

Dividends are payments made to shareholders from profits
after tax of a company. Dividends are the return of
shareholders for their investment

If Directors are not operating the company

appropriately, shareholders have the ability to
replace the directors at the next AGM

But, doing this would give the company a very

bad publicity and causes the business to be
unstable as the new directors may be
Best known international examples of franchise
 McDonald’s is the world’s leading global foodservice retailer with over 35,000 locations in over 100
countries.
Advantages of having a franchising business from the point of view of ‘FRANCHSOR AND
FRANCHISEE’
Advantages to franchisor Advantages to the franchisee
The franchisee buy the licence paying a higher The chance of business failure are much reduced because a
amount to use the ‘BRAND NAME’ well-known product is being sold

Expansion of the franchised business to other The franchisor pays for advertising
countries is more faster and with relatively lower
cost
The management of the outlet is the responsibility All supplies are obtained from a central source or franchisor
of the franchisee not the franchisor

All products sold must be obtained from the There are very few decisions to make compared to a normal
franchisor independent business
- Prices
- Store layout
- Product range

Will decide by the franchisor

Training for staff and training for management is provided by
the franchisor

Banks are often willing to lend money franchisees due to low

risk and high status
Disadvantages of having a franchising business from the point of view of ‘FRANCHSOR AND
FRANCHISEE’
Disadvantages to franchisor Disadvantages to the franchisee

Poor management of one franchised Relatively less independency when operating as

outlet could lead to bad reputation a franchised business
for the entire business

Franchisee will keep profits gain from May be unable to make decisions that would
the outlet suit the local area
Eg: franchisee cannot decide to add products
to the product range as their wish

Huge amount should pay to gain licence

(licence fee) and possibly a percentage of the
annual turnover too
 Franchisor contributes,
Original Training
Use of
idea
brand name
Advertising
and
products
Franchisee contributes,
Management
Capital Enterprise
06) Joint Ventures
A joint venture is when two or more
businesses agree to start a new project
together, sharing the capital and the
profit.
 One of the India’s
largest business
World’s largest retail
groups
business

Walmart wanted to enter the Indian market. But, they did not open up their own
stores in Indian market because they had little knowledge of Indian market and Indian
consumers.
Walmart setup a joint venture with Bharti Enterprise, one of the Indian’s largest
business group.
Advantages of a joint venture Disadvantages of a joint venture

Sharing of cost – this is very If the new project is successful,

important for expensive product the profits have to be shared
manufactures with the joint venture partner

Local knowledge when joint Disagreements over important

venture company is already based decisions might occur
in the country

Risk is shared among both parties The two joint venture partners
might have different ways of
running a business and culture
Business organizations in the public sector

Public corporations
A public corporation is a business in the
public sector that is owned and controlled
by the government
Advantages of public corporations (refer page 48)

 To provide essential services for general public

Eg: medical services, water supply, transpiration

 To manage and control monopolies in industries

 When government owns an monopoly in an industry, it might be wasteful for a private owner to
enter into that industry. Even though they enter the natural monopolies will often own by the
government

 If an important business is failing and likely to collapse, the government can step in to nationalise
that business. This will keep the business open and secure jobs of employees
Disadvantages of public corporations (refer page 48)
 There is no private shareholders to insist on high profits and efficiency. The profit motive might not be as
powerful as in private sector industries

 Government subsides can lead to inefficiency as managers will always think that the government will help
them if the business makes a loss. It may also be unfair if the public corporations receives a subsidy but
private firms in the same industry do not

 Often there is no close competition to the public corporations, the efficiency level, customer services and
consumer choices are very low

 Governments can use these businesses for political reasons and this prevents the public corporations begin
operated like other profit making businesses

Eg: to create jobs just because an election

 Other public sector enterprises

Local governments authorities or municipalities usually operate some trading activities

 Some of the services are free to the user and paid for out of local taxes

 Street lighting

 Schools

 Some services are charged and provide at a nominal price to cover-up the cost

 Street markets

 swimming pools

 Theatres