Abdul Kadir Molla

International School

Grade 9

Chapter-4 Types of business organisation

Business organizations: the private sector

There are several main forms of business organization in the private sector. These are: sole traders,
partnerships, private limited companies, public limited companies, franchises, joint ventures.

Unlimited Liability: If the business fails to pay the bank loan or creditors payment then owners have to
sell their personal asset to pay off the debt. Sole traders and Partnership are the business structures where
owners have to unlimited liability.

Both sole traders and partnerships are said to be unincorporated businesses because they do not have a
separate legal identity from the owners.

Sole trader
is the most common form of business organization. It is a business owned and operated by just one person
– the owner is the sole proprietor. One of the reasons it is such a common form of organization is because
there are so few legal requirements to set it up.

Advantages Disadvantages
Easy to set up as there are few legal formalities May not have the business skills to run a
business and have to work long hours
Owner has the power to keep all the profits for Being only the only owner, it will be difficult to
himself raise additional capital
Owner has the full business control and he has Lack of continuity: If the owner dies then there
the freedom to choose his own holidays, hours is ahigh possibility that the business will shut
of work, prices to be charged and whom to down
employ
Owner can have close contact and close Unlimited Liability and if the business makes any
relationship with customers, consequently loss, owner has to incur the whole loss
increasing the customer loyalty

Partnership
A partnership is a group or association of at least two people who agree to own and run a business
together.

Deed of partnership: It is a written document that provides agreement issues, i.e., Voting rights, the
distribution of profits, the management role of each partner & who has the authority to sign contracts.

Passive/Sleeping partner: a partner who usually supplies the business w/ capital, however they do not
have an active role in running the business. These have limited liability.

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 Abdul Kadir Molla
International School

Advantages of Partnership Disadvantages of partnership

More capital could now be invested into the The partners did not have limited liability. If the
business due to the addition of new owners. business failed, then creditors could still force
the partners to sell their own property to pay
business debts.
The responsibilities of running the business were The business did not have a separate legal
now shared. identity. If one of the partners died, then the
partnership would end.
Easy to set up as less formalities required to set Partners can disagree on business decisions and
up the business consulting all partners takes time.
Losses will be shared between partners Limited access to capital in comparison to
limited companies

Limited Liability:
If the business fails to pay the debt than the owners do not need to sell the personal asset to pay off the
company debt. Limited companies’ owners have limited liability.

 Separate legal identity: the company is recognised in law as having a legal identity separate
from that of its owners
 Share: a certificate confirming part ownership of a company & entitling the shareholder
owner to dividends & certain shareholder rights
 Shareholder: a person / institution owning shares in a limited company
Limited companies: incorporated business w/ limited liability, a separate legal personality & continuity of
a business. In setting up, these must register w/ the registrar of companies at companies’ house. To do
this they must complete:

Memorandum of association: Name of the company, Address of the head office, Maximum share capital
for which the company seeks authorization, Companies declared aims.

Articles of association: Internal workings and riles and regulations of the business & control of the
business e.g. It details the names of directors & the procedure to be followed at meetings

A company is a separate legal unit from its owners – it is an incorporated business.

 this means that: a company exists separately from the owners and will continue to exist if
one of the owners should die
 a company can make contracts or legal agreements
 company accounts are kept separate from the accounts of the owners.

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 Abdul Kadir Molla
International School
Companies are jointly owned by the people who have invested in the business. These people buy shares
in the company and they are therefore called shareholders.

Dividends is a sum of money paid regularly (typically annually) by a company to its shareholders out of its
profits (or reserves).

Annual general meeting (AGM) every year or periodically all the shareholders of a company have met
where how much dividend will be paid, how will company will run in future, past performance of the
company is discussed.

Private limited companies: (Ltd)

an incorporated business that is owned by shareholders but does not have the legal right to offer shares
for sale to the public.

Advantages of Private limited company Disadvantages of Private limited company

Shareholders have limited liability, hence if the There are significant legal matters which have to
business gets bankrupt then owners will not be dealt with before a company can be formed.
need to sell their personal asset to pay off the In particular, two important forms or documents
debt have to be sent to the Registrar of joint stock
Shares can be sold to friends and families; hence Companies (RJSC)
more capital can be raised
Will continue in the event of any shareholders Cannot sell shares to the general public through
debt stock exchange and existing shareholders will
face difficulties to sell shares
Original/ founding owners still be able to control Lack of confidentiality: Financial statements
the business if large number of shares is not sold need to be published periodically which general
public can have access

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 Abdul Kadir Molla
International School

Public limited companies: (plc)

an incorporated business that has the legal right to offer shares for sale to the public through stock
exchange. Stock exchange is a platform where shares can be traded.

Advantages of Private limited company Disadvantages of Private limited company

Shareholders have limited liability, hence if the
business gets bankrupt then owners will not
need to sell their personal asset to pay off the
debt
Will continue in the event of any shareholders
debt
Shares can be sold general public hence highest
capital can be raised and bank loan can be
obtained easily
A business trading as a public limited company
usually has high status and should find it easier
to attract suppliers prepared to sell goods on
credit
Original/ founding owners still be able to control risk of takeover due to the availability of shares
the business if large number of shares is not sold
There are significant legal matters which have to
be dealt with before a company can be formed.
In particular, two important forms or documents
have to be sent to the Registrar of joint stock
Companies (RJSC)
Setting up as plc is very expensive
Cannot sell shares to the general public through
stock exchange and existing shareholders will
face difficulties to sell shares
Lack of confidentiality: Financial statements
need to be published periodically which general
public can have access
Share prices are subject to market prices and if
the price fluctuates or gets low then business
will have very bad reputation in the market

Franchises:
a business that uses the name, logo & trading systems of an existing successful business; based upon the
purchase of a franchise license from the franchiser.

Franchisee: business who purchases the license to do business

Franchisor: business that sells the license to other businesses

To the franchisor To the franchisee

The franchisee buys a licence The chances of business failure are much
from the franchisor reduced because a well-known product is
being sold
Expansion of the franchised All supplies are obtained from a central source
business is much faster than if – the
franchisor

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 Abdul Kadir Molla
International School
the franchisor had to finance There are fewer decisions to make than with
all new outlets an independent business, prices, store layout
and range of products will have been decided
Advantages by the franchisor
The management of the Training for staff and management is provided
outlets is the responsibility of by the franchisor
the franchisee
All products sold must be Banks are often willing to lend to franchisees
obtained from the franchisor due to relatively low risk
hence franchisor will enjoy The franchisor pays for advertising.
higher sales

Disadvantages To the Franchisee To the Franchisor

Poor management of one Less independence than with operating a non-
franchised outlet could lead to
franchised business
a bad reputation for the whole
May be unable to make decisions that would
business suit the local area, for example, new products
that are not part of the range offered by the
franchisor
The franchisee keeps profits Licence fee must be paid to the franchisor and
from the outlet possibly a percentage of the annual turnover
Joint ventures
A joint venture is when two or more businesses agree to start a new project together, sharing the capital,
the risks and the profits. Example: Hero Honda, BD Government and Chinese private companies making
manufacturing the flyovers

Advantages
Sharing of costs – very important for expensive
projects such as new aircraft
Local knowledge when joint venture company is
already based in the country
Risks are shared
Disadvantages
If the new project is successful, then the profits
have to be shared with the joint venture partner
The two joint venture partners might have
different ways of running a business – different
cultures
Disagreements over important decisions might
occur

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 Abdul Kadir Molla
International School

Business in the Public Sectors

A public corporation is a business in the public sector that is owned and controlled by the state
(government). Example: WASA, DESCO, Bangladesh Bank

Advantages Disadvantages
Some industries are considered so important Often there is no close competition to the public
that government ownership is thought to be corporations. There is therefore a
essential. These include water supply and  lack of incentive to increase
electricity generation in many countries. consumer choice,
 lack of profit motive may lead to
inefficiency.
 lack of improving customer service
customer service.
If an important business is failing and likely to Government subsidies can lead to inefficiency,
collapse, the government can step in to and it may also be unfair if the public
nationalise it. This will keep the business open corporation receives a subsidy but private firms
and secure jobs. in the same industry do not.
Consumers can enjoy essential product and Governments can use these businesses for
services at an affordable rate political reasons

Problems resulting from changing from one legal structure to another

Changing from sole trader to partnership

 Sharing profits
 Interference in decision-making
 Bad decision of one partner affects all partners
Changing from partnership to limited company

 Owners may lose control

 Legal work required
 Financial accounts have to be made public
 Decrease in privacy

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