Types of business organisation

Last time

Before we start: last time, in Measuring business size and why businesses grow or stay small, you learned these points. Here they are again on one card. Keep them in mind, because today builds on them.

Who owns the business?

A fruit seller, a law firm of three partners, and a huge listed company are all businesses. But they are owned in different ways, and that changes who takes the risk and who gets the profit. This lesson goes through each type, and the one idea that runs through them all: liability.

Unlimited and limited liability

Unlimited liability means the owners are personally responsible for all the business's debts. They could lose their house and savings. Limited liability means owners can lose only the money they invested in the business, not their personal possessions. A business with limited liability is a separate legal unit, or incorporated: it can sue and be sued in its own name.

The sole trader

A sole trader is a business owned and controlled by one person, though it may employ others. Advantages: easy and cheap to set up, the owner keeps all the profit, makes all the decisions, and keeps the accounts private. Disadvantages: unlimited liability, hard to raise finance, long hours, and no one to share the work or ideas with.

The partnership

A partnership is owned by two or more people who share the capital, the work and the profits, usually under a partnership agreement. Advantages: more capital than a sole trader, shared work and skills, and shared losses. Disadvantages: usually unlimited liability, disagreements between partners, and profits shared. The business may end if a partner leaves.

Private limited company

A private limited company is owned by shareholders, often family and friends. Its shares cannot be sold to the general public. Advantages: limited liability, more capital from selling shares, and the business continues if a shareholder dies. Disadvantages: legal paperwork to set up, accounts must be published, and shareholders cannot easily sell their shares.

Public limited company

A public limited company can sell its shares to the general public on the stock exchange. Advantages: limited liability and the chance to raise very large amounts of capital. Disadvantages: costly to set up, accounts are public, and control can be lost if someone buys many shares. Ownership and control are separated.

The four main types

Here are the four main types compared on the points examiners ask about.

Franchises

A franchise is when a franchisor sells the right to use its brand, products and methods to a franchisee, for a fee and a share of revenue. For the franchisee: a known brand, training and support, so less risk of failure. But fees, little freedom, and profits shared. For the franchisor: fast growth with others' money. But risk to the brand if a franchisee is poor.

Joint ventures

A joint venture is when two or more businesses agree to work together on a project, sharing the costs, risks and profits. Benefits: shared costs and risks, and each brings its own skills or local knowledge, useful when entering a foreign market. Drawbacks: profits are shared, and the partners may disagree.

Public sector businesses

Public corporations are businesses owned by the government, such as a state railway or power company. They aim to provide a service, keep prices affordable, and protect jobs, not only to make profit. But they may be less efficient without the profit motive, and may need government money.

Choosing a type

A small owner who wants control and privacy, with little risk, may choose to be a sole trader. If the owner needs more capital and wants to protect personal assets, a private limited company is better. So the best type depends on the size of the business, the finance needed, and how much risk the owners will accept.

Mistakes that lose marks

Mistake one: saying a private limited company sells shares to the public. Only a plc can. Mistake two: defining limited liability as the business having limited debts. Mistake three: an advantages-versus-disadvantages question answered with no final judgement. The fix: liability defined exactly, the right share rules, and a justified judgement.

The full-marks tip

The full-marks tip: define limited liability as owners losing only what they invested. For a do-you-think question, weigh both sides for the business in the case, then decide.

On one card

So, on one card: types of business organisation. Keep it for revision.