1. Easy to set up
There are relatively few legal requirements.
Types of Business Organisation
This chapter explains the main forms of business organisation. Students compare sole traders, partnerships, limited companies, franchises, joint ventures and public corporations by looking at ownership, control, liability, finance and suitability.
Sole tradersPartnershipsLimited companiesFranchisesJoint venturesPublic corporations
Topic 1: Main Forms and Sole Traders
This topic introduces the main private-sector forms of business organisation and then explains the simplest ownership structure: the sole trader.
1. Main Types of Business Organisation
The main private-sector forms are:
- Sole trader
- Partnership
- Private limited company
- Public limited company
- Franchise
- Joint venture.
2. Sole Trader
A sole trader is a business owned by one person.
The owner may employ workers, but there is still only one owner.
Advantages
2. Complete control
The owner makes decisions without consulting other owners.
3. Keeps all the profit
Profit does not have to be shared with other owners.
Disadvantages
1. Unlimited liability
The owner may have to use personal possessions to repay business debts.
2. Limited finance
Finance is mainly available from personal savings, retained profits and bank loans.
3. No continuity
The business legally ends if the owner dies.
Suitable for
Sole trader businesses are particularly suitable when:
- little start-up capital is required
- the owner wants complete control
- personal customer service is important.
Topic 2: Liability, Partnerships and Legal Identity
This topic explains the difference between limited and unlimited liability, then links liability to partnerships and unincorporated businesses.
3. Limited and Unlimited Liability
Unlimited Liability
Unlimited liability means the owner can be held personally responsible for the debts of the business.
If the business cannot pay its debts, personal possessions may have to be sold.
Sole traders and ordinary partnerships normally have unlimited liability.
Limited Liability
Limited liability means shareholders can only lose the amount they invested in the company.
Their personal possessions are protected if the company fails.
4. Partnership
A partnership is a business owned jointly by two or more people.
Partners normally:
- contribute capital
- take part in decision-making
- share profits.
Partnership Agreement
A partnership agreement is a written legal agreement between the partners.
It may include:
- how much capital each partner contributes
- responsibilities of each partner
- how profits are shared
- arrangements for partners leaving or joining.
Advantages
1. More capital
More capital can be raised because several owners can invest.
2. Shared responsibilities
Responsibilities can be shared between partners.
3. Specialisation
Partners can specialise in areas where they have greater skills.
Disadvantages
1. Unlimited liability
There is unlimited liability for ordinary partners.
2. Disagreements
Disagreements may occur between partners.
3. Shared profits
Profits have to be shared between the owners.
5. Unincorporated Businesses
An unincorporated business does not have a separate legal identity from its owners.
This means the owners and the business are legally considered the same.
Examples
- Sole trader
- Partnership
6. Incorporated Businesses
An incorporated business has a separate legal identity from its owners.
Limited companies are incorporated businesses.
This means:
- the company can own assets and make contracts
- its accounts are separate from those of its owners
- the company continues to exist even if an owner dies.
Topic 3: Limited Companies, Shareholders and Control
This topic explains private limited companies, public limited companies, shareholders, dividends, AGMs and the separation between ownership and control.
7. Private Limited Company
A private limited company is owned by shareholders, but its shares cannot be sold to the general public.
The shareholders own the company and appoint directors to manage it.
Advantages
1. Limited liability
Shareholders can only lose their investment.
2. More capital can be raised
Shares can be sold to additional private investors.
3. Continuity
The company continues to exist even if a shareholder dies.
Disadvantages
1. Legal formalities
Legal formalities are required to establish the company.
2. Limited public share sales
Shares cannot be sold to the general public, limiting the amount of capital that can be raised.
3. Less privacy
Company accounts and information may have to be made available.
Suitable for
A private limited company may be suitable for a growing family business or partnership that wants:
- additional capital
- limited liability
- continued control over who owns the shares.
10. Private Limited Company vs Public Limited Company
| Private Limited Company | Public Limited Company |
|---|---|
| Shares cannot be sold to the general public | Shares can be sold to the general public |
| Usually fewer shareholders | May have thousands or millions of shareholders |
| Easier for original owners to keep control | Original owners may lose control |
| Can raise more finance than a partnership | Can raise very large amounts of finance |
| Limited liability | Limited liability |
| Incorporated | Incorporated |
11. Ownership and Control in a Public Limited Company
In large public limited companies:
- shareholders own the business
- shareholders elect the Board of Directors
- directors and managers control the day-to-day running of the business.
This separation is called the divorce between ownership and control.
12. Annual General Meeting (AGM)
An Annual General Meeting (AGM) is a meeting where shareholders can attend and vote, including voting for members of the Board of Directors.
13. Dividends
Dividends are payments made to shareholders from the company's profits after tax.
They are a return to shareholders for investing in the company.
Topic 4: Franchising, Joint Ventures and Public Sector Businesses
This topic covers business arrangements that involve shared brands, shared projects or government ownership.
14. Franchising
A franchise is a business that uses the brand name, products and trading methods of an existing successful business.
The franchisee buys the right to operate the business from the franchisor.
Advantages to the Franchisee
- Lower risk because an established brand is being used.
- Advertising and promotion may be provided by the franchisor.
- Training and business support are usually provided.
Disadvantages to the Franchisee
- Less independence when making business decisions.
- A licence fee must be paid.
- The franchisee may have to pay a percentage of sales to the franchisor.
Advantages to the Franchisor
- Faster expansion using the franchisee's capital.
- Franchisees manage their own outlets.
Disadvantage to the Franchisor
Poor management by one franchisee could damage the reputation of the whole brand.
15. Joint Venture
A joint venture occurs when two or more businesses start a new project together and share:
- capital
- risks
- profits.
Advantages
- Costs and risks are shared.
- A local partner may provide valuable knowledge of customers and the market.
Disadvantages
- Profits have to be shared.
- Partners may disagree about important decisions.
Joint ventures are especially useful when businesses enter foreign markets where a local partner has better knowledge of the market.
16. Public Sector Businesses
The public sector includes businesses and organisations owned by:
- central government
- local government.
Examples include
- schools
- hospitals
- fire services
- government departments.
17. Public Corporations
A public corporation is a business owned and controlled by the government.
Government ministers usually appoint a Board of Directors to manage the organisation.
Advantages
- Essential services can be provided even when they are not very profitable.
- Government ownership can protect consumers where there is little or no competition.
Disadvantages
- There may be less pressure to control costs and earn profits.
- Lack of competition may reduce the incentive to improve efficiency or customer service.
Topic 5: Revision, Risk and Exam Focus
Use this topic to compare ownership, liability and risk, then revise the key definitions and examination checklist.
18. Risk, Ownership and Liability
| Business Type | Owners | Limited Liability? |
|---|---|---|
| Sole trader | One person | No |
| Partnership | Two or more partners | No, normally |
| Private limited company | Shareholders | Yes |
| Public limited company | Shareholders | Yes |
Key Definitions
| Term | Meaning |
|---|---|
| Sole trader | Business owned by one person |
| Partnership | Business jointly owned by two or more people |
| Partnership agreement | Written legal agreement between partners |
| Unlimited liability | Owners can be personally responsible for business debts |
| Limited liability | Shareholders can only lose the amount invested |
| Unincorporated business | Business without a separate legal identity from its owners |
| Incorporated business | Business with a separate legal identity from its owners |
| Shareholder | Person who owns shares in a limited company |
| Private limited company | Company whose shares cannot be sold to the public |
| Public limited company | Company whose shares can be sold to the public |
| Dividend | Payment to shareholders from company profits |
| Franchise | Business operated using another successful firm's brand and trading methods |
| Joint venture | Two or more businesses starting a project together and sharing costs, risks and profits |
| Public corporation | Government-owned and controlled business |
What Students Must Know for the Examination
Students should be able to:
- distinguish between the main forms of business organisation
- explain key advantages and disadvantages of sole traders and partnerships
- explain limited and unlimited liability
- distinguish between incorporated and unincorporated businesses
- explain important advantages and disadvantages of private and public limited companies
- distinguish between private limited and public limited companies
- understand the separation between ownership and control
- explain how a franchise operates
- explain the main benefits and drawbacks of franchises
- explain what a joint venture is
- identify when different business structures may be appropriate
- explain what public corporations are.
Quick memory aid
Sole trader = one ownerPartnership = shared ownershipLtd/plc = shareholdersFranchise = existing brandJoint venture = shared projectPublic corporation = government owned