Chapter 6: Appropriateness Of Different Forms Of Ownership

Factors affecting the appropriateness of different types of

ownership

● Growth - Most businesses change their legal status as they grow as

they need to raise more finance. Most of the businesses start small and
gradually get bigger.
● Size - The size of a business plays a significant role in the
appropriateness of different types of ownership.

● The need for finance - Finance is one of key reasons why owners
change the legal status of a business and quite often one of the key
ways to get more money is to change the type of organizations.

● Control - Control and independence are two key factors considered by

owners and this reason encourages some of them to remain sole
traders. In a partnership, the control of the business is spread out.
However, in a limited company you can keep control by owning 51% of
the shares of the company but the wishes of the 49% cannot be denied.

● Limited Liability - Owners can protect their own personal financial

position if the company is a limited company. This factor encourages
some owners to switch to limited companies to provide more financial
protection. Sole traders and partnerships have unlimited liability.

Did you know?

Some business activities require large scale production. Sole traders and
partnerships cannot manage this effectively.
Examples - oil processing, chemical processing, etc

Other factors that influence the appropriateness of different types of

ownership

● Type of business - The type of business plays a significant role in

influencing the type of business. However, they may have exceptions.
For example -
Services such as plumbing,gardening are provided by sole traders.
Professional services such as architectural design, legal advice are provided
by partnerships
Relatively small manufacturing and family businesses tend to be private
limited companies.
Large banks, Retail Chains and Manufacturers are public limited companies

● Ways in which the business plans to use its profits -

For example -
PLC’S need to pay dividends to shareholders.
A growing business that aims to reinvest its profits, will choose to remain a
private limited company

● Factors influencing the choice of the organisation -

For example -
Different stakeholders such as employees, shareholders, government, local
community, customers, suppliers, owners, etc influence the choice of the
organisation.

Did you know?

Some organisations have changed their legal status from public limited
companies to private limited companies.
They did not like sharing control and their main objectives may have been
different from those of the shareholders.
However, doing this requires a lot of money in order to buy enough shares
back and be in control of the organisation.
For example -
Richard Branson (Virgin) and Alan Sugar (Amstrad)

The objectives and type of organisation -

Mostly different types of organisations have different objectives:
● Small sole traders -
Aim to make a modest amount of profit to support and fund a
comfortable and happy lifestyle. They may aim to achieve profit
satisfaction and may not be eager to take on the responsibility
associated with the growth and expansion of the business.
● Family Businesses and Private Limited Companies -
 Control is an important objective and this prevents them from “going
public”. This limits growth and gives higher value to the other
objectives.

● Multinationals -
They aim to grow bigger and dominate the global markets.
Example - McDonalds, one of the biggest multinational food joints in
the world. However, in 2016 they announced plans to grow even bigger
by opening 1250 outlets and 250 outlets in China and Hong-Kong
respectively.