1.

2 Types of business entities

The learning outcomes (or assessment objectives) for this section of the IB Business Management
syllabus are:

1. Distinction between the private and the public sectors (AO2)

2. The main features of the following types of for-profit organizations (AO3):

• Sole traders
• Partnerships
• Privately held companies
• Publicly held companies

3. The main features of the following types of for-profit social enterprises (AO3):
• Private sector companies
• Public sector companies
• Cooperatives

4. The main features of the following type of non-profit social enterprise (AO3):
• Non-governmental organizations (NGOs).

1. Distinction between the private and the public sectors (AO2)

The private sector of the economy consists of businesses owned and run by private individuals and
organizations that usually, but not always, aim to earn a profit. They operate independently of the
government, although they need to operate within the rules and regulations in the country. Examples
of private sector businesses, which are covered in this section of the syllabus, include the following:

● Sole traders
● Partnerships
● Privately traded companies
● Publicly traded companies
● Social enterprises, including cooperatives and non-governmental organizations
● Multinational corporations (MNCs)

Business organizations that operate in the public sector consist of those controlled by a regional
and/or national government, with the main aim being to provide essential goods and services for the
general public. Such businesses can, but do not always, directly charge customers for such
services. In some cases, such as government housing or state-funded education, the service is
provided by and/or funded by the government.

Examples of such goods and services deemed to be of benefit to society include:

● Infrastructure (such as communication networks, transportation networks, road and highway

networks, waste disposal systems, and flood control systems)

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 ● Housing (public and social housing)
● Health care services
● Education
● National defence (national security)
● Emergency services (ambulance, fire and police)

Key Terms
● The private sector of the economy consists of businesses owned and run by private
individuals and organizations that usually aim to earn a profit for their owners.

● The public sector consists of those organizations controlled by a regional and/or national
government, with the main aim being to provide essential goods and services for the general
public.

2. Types of for-profit organizations (AO3)

This section of the IB Business Management syllabus covers the following types of for-profit
(commercial) organizations:

● Sole traders
● Partnerships
● Privately held companies
● Publicly held companies

Sole traders (AO3)

A sole trader (also known as a sole proprietor) is a commercial for-profit business owned by a single
person. Although this person can employ as many people as needed, the sole trader is the only
owner of the business.

Advantages of sole traders / sole proprietors

The advantages of setting up a business as a sole trader (or sole proprietor) as a type of for-profit
(commercial) organization include:

● It is the quickest and easiest type of business to set up. Sole traders can avoid complicated
and costly set-up procedures.

● The owner receives all of the profits if the business succeeds.

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 ● Sole traders are likely to be highly motivated as the owners have a sense of achievement
from running their own business and can keep all of the profits made.

● The sole trader (owner) has complete control without having to consult with or be
accountable to others.

● Hence, decision-making is also swift as the owner does not have to consult anyone else and
seek their permission to execute a decision.

● The sole trader enjoys privacy as it only needs to publish its financial accounts to the tax
authorities (rather than to the general public like a publicly held company). For example, sole
traders in Hong Kong only need to submit paperwork for the Inland Revenue if their annual
sales revenue exceed HK$2m (around US$260,000). Similarly, sole proprietors in the UK
are able to complete their own business tax returns without the formal requirement of final
accounts being externally audited.

● The owner can benefit from tax advantages. As a small business, many sole traders work
from home, so can claim tax concessions by using part of their home for business purposes.

Disadvantages of sole traders / sole proprietors

However, there are some potentially significant disadvantages of being a sole trader too. These
include:

● The finance to set up and run the business is generally provided by the owner (from
personal savings) as s/he cannot easily access external sources of finance.

● The sole trader accepts all the risks of owning and running their own business, including any
losses made or even the collapse of the organization.

● The workload for a sole trader can be extremely high. There is no one else to share ideas or
to ask questions, so all pressures, burdens and responsibilities fall on the owner. This
means the sole trader often has to work very long hours.

● Legally, a sole trader is treated as the same legal entity as the business, i.e. it is an
unincorporated business. This means the sole trader has unlimited liability so is responsible
for any debt owed to other individuals or organizations, even if this requires the owner to pay
the debts from their personal belongings and assets.

● There is a lack of continuity in the operations of the business if the owner is unwell, wishes
to take a holiday or wants to retire. The latter is a main reason why many sole trader
businesses struggle to continue.

● As sole proprietorships are usually small businesses (such as a small convenience store
owner), they are unlikely to be able to gain any economies of scale, perhaps because they
cannot buy their materials or stocks (inventory) in bulk. This means sole traders pay more
for their goods, their prices charged to customers also tend to be higher. By contrast, larger
businesses (such as supermarket chains) gain these cost-saving benefits, so are able to
charge much lower prices due to their ability to exploit economies of scale.

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 ● Since access to external finance is difficult for most sold traders (because they represent a
high degree of risk), expansion of the business is difficult.

Partnership (AO3)

A partnership is a commercial business that strives to earn a profit for its owners. It is owned by two
or more people.

For an ordinary partnership, the maximum number of partners is usually capped at twenty owners,
although this does vary from one country to another. Some organizations can have more than 20
partners, such as law firms and health clinics. Highly specialised professional service providers
(such as doctors, solicitors, dentists and accountants) are usually set up as partnerships. Many
family-run businesses are also established as partnerships. The owners of a partnership are called
partners.

The vast majority of partnerships are unincorporated businesses, so at least one of the owners must
have unlimited liability. In practice, it is usual for all the partners to share responsibility for any
liabilities made by the partnership. In some countries, it is possible to have a limited liability
partnership (LLP). Setting up an LLP protects each individual partner from being responsible or
liable for another partner’s misconduct or shortcomings.

Most partnerships sign a Deed of Partnership (or Partnership Agreement) as this helps to resolve
potential misunderstandings and disagreements. stating their responsibilities, voting rights, and how
profits are to be shared between the owners.

Advantages of partnerships

The advantages of partnerships as a type of for-profit (commercial) business organization include:

● Partnerships can raise far more finance than sole traders, especially as there can be up to
20 partners (subject to the laws in different countries) in the business. Silent partners (also
known as sleeping partners) can provide additional capital without having any role in the
actual running of the business.

● Having partners enables the firm to benefit from having more ideas and different skills and
expertise.

● Unlike a sole trader, partners can share the burden of their workload and responsibilities.

● Hence, unlike a sole trader, partnerships benefit from continuity as the partnership can
remain in operation if a partner is unwell or wants to go on a family vacation.

● Partnerships can benefit from specialization and the division of labour. For example, a law
firm might have partners who specialize in different specialisms, such as criminal law, civil
law, business law and tax law.

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 ● As with sole traders, business affairs of a partnership are kept confidential, so only the tax
authorities need to know about the financial position of the partnership.

Disadvantages of partnership

However, there are limitations to setting up a business as a partnership. These potential drawbacks
include:

● As the business has more than one owner, this can easily lead to disagreements and conflict
between the owners, which can seriously damage the running of the partnership.

● Decision making is slower than with sole traders because there are more owners involved.
This can also lead to disagreements and conflicts between the owners

● Unlike with a sole trader, the profits made by a partnership must be shared between all the
owners.

● In general, partners have unlimited liability so are liable for any debts, fines, penalties or
lawsuits against the business, even if these were caused by another partner in the firm.
However, sleeping partners are exempt from unlimited liability.

● Compared to limited liability companies, access to finance is restricted to the finances

available from the different partners in the firm. There is no maximum number of owners in
limited liability companies, so they can raise finance through their shareholders.

● There is no continuity if a partner decides to leave the firm or if one of the partners die. This
is because such cases would void the Deed of Partnership. There would be a time delay in
setting up a new partnership agreement.

Privately held companies (AO3)

Companies (also known as corporation) are commercial for-profit businesses owned by

shareholders. Hence, the profits of a company belong to and are shared among the various owners.
As incorporated businesses, the owners have limited liability. Limited liability protects shareholders
who cannot lose more than the amount they invested in the business. This is because shareholders
are not personally liable for the debts of the company should it go into debt or bankruptcy.

In legal terms, there is a divorce of ownership and control as the owners (shareholders) are treated
as separate legal entities from those who control and run the business (the board of directors and
CEO). It is the board of directors and the CEO (or managing director) who are responsible for the
strategic direction of the company.

There are two categories of companies: privately held companies and publicly held companies.

Features of privately held companies

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 ● The shares of privately held companies cannot be advertised for sale nor sold via a stock
exchange. Shares are not available on an open stock exchange such as the New York Stock
Exchange.

● Most privately held companies (sometimes referred to as private limited companies) are
small businesses, with shares typically owned by family, relatives, and friends.

● The company and its owners are separate legal entities, i.e. there is a legal divorce
(separation) of ownership and control, with the owners (shareholders) appointing a board of
directors to run the company on their behalf.

● Owners have limited liability, so if the business experiences a financial collapse, then the
owners will only be liable for the capital they invested in the company.

● The number of shareholders in a privately held company may be limited. In some countries,
the maximum number is 50 (Turkey) and in others it is 200 (India). In other countries, like the
UK and Switzerland, there is no maximum.

● There is usually no legal requirement for the company to publish detailed financial accounts
for the general public (this is only needed for corporate tax purposes).

Advantages of privately held companies

The advantages of establishing a business as a privately held companies as a type of for-profit

(commercial) organization include the following points:

● There is better control of a privately rather than publicly held company, as shares in a
privately held company cannot be bought or sold without the agreement of existing
shareholders.

● Significantly more finance can be raised compared with a sole trader (one owner) or a
partnership (up to 20 owners).

● Privately held companies have greater privacy compared to publicly held companies; the
latter must make their final accounts available to the general public.

● Shareholders have limited liability, so cannot lose more than what they invest in the
company. Owners are protected against any misconduct or misjudgments of those who run
the company.

● Unlike a sole trader or partnership, a privately held company can enjoy continuity in the
event of the death of a major shareholder.

Disadvantages of privately held companies

However, the potential limitations of being a privately held company include the following :

6
 ● Privately held companies can only sell their shares to family, friends, and employees, with
the approval of the majority of existing shareholders. This can make it difficult to buy and sell
shares in the company.

● They are more expensive to operate than a sole trader or partnership. For example, there
are higher legal fees and auditing fees (for checking and approving of the financial
accounts).

● A privately held company can become a target for a takeover by a larger company which
purchases a majority stake, although other owners have to agree to the sale of the
company.

Publicly held companies (AO3)

Features of publicly held companies

● Also known as a joint-stock company, a publicly held company is owned by shareholders.

The shares in such companies can be bought and sold by the general public, without prior
approval of existing owners.

● Shares in a publicly held company can be bought and sold via a stock exchange (or stock
market), such as the New York Stock Exchange (NYSE), London Stock Exchange, Tokyo
Stock Exchange, and Shanghai Stock Exchange.

● When a company first sells its shares to become a publicly held company, it does so through
an initial public offer (IPO) via a stock exchange.

● In order to protect shareholders, publicly held companies are strictly regulated and are
required to publish their final accounts each year.

● As there is no legal limit placed on the maximum number of shareholders in a publicly held
company, the company can raise a significant amount of finance so long as it can attract
investors.

Advantages of publicly held companies

The advantages of establish a business as a publicly held company as a type of for-profit

(commercial) organization include the following points:

● Additional finance can be raised through a share issue (the process of subsequently selling
more shares in a company). Hence, it is easier for publicly held companies to obtain finance
from a stock exchange to fund its growth and evolution by selling additional share capital. In
2010, Brazil’s state oil company Petrobras raised $70 billion, in the world’s largest share
issue.

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 ● It is also easier for large publicly held companies to borrow money from bank loans and
mortgages, due to their lower level of risk for financial lenders.

● As with privately held companies, the shareholders of publicly held companies enjoy limited
liability.

● Large publicly held companies get to enjoy the benefits of operating on a large scale, such
as opportunities to exploit economies of scale, market share, and market power.

● As with privately held companies, publicly held companies enjoy continuity even if a principal
or major shareholder leaves the organization or passes away.

Disadvantages of publicly held companies

The limitations or drawbacks of being a publicly held company include the following points:

● There is a lack of privacy because the general public have access to the financial accounts
of publicly held companies.

● Publicly held companies are the most administratively difficult and expensive form of
commercial for-profit business to set up and run. For example, there are high costs of
complying with the rules and regulations of the stock market.

● As the general public can buy and sell shares freely, there is always a potential threat that a
rival company will make a takeover bid.

● Large companies can suffer from diseconomies of scale. Being too large can cause
inefficiencies in the company, and hence higher average costs of production.

Key Terms

● Companies (also known as corporation) are commercial for-profit businesses owned by

shareholders.

● A Deed of Partnership (or partnership deed) is a formal partnership agreement or contract

between the owners, which includes legal agreements such as the formal responsibilities of
each owner, their voting rights, and how profits are to be shared between the partners.

● An ordinary partnership has a minimum of 2 partners and up to twenty owners (although

this does vary from one country to another).

● Partners are the co-owners of a partnership business.

● A partnership is a commercial (for-profit) business that strives to earn a profit for its owners.

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 ● Privately held companies are limited liability companies owned by shareholders but the
shares in the business cannot be advertised or traded on a stock exchange.

● Publicly held companies (or joint-stock companies) are limited liability companies owned
by shareholders with the shares in the business being traded (bought and/or sold) on a
public stock exchange (or stock market).

● Shareholders are the owners of a limited liability company.

● Silent partners (also known as sleeping partners) are inactive owners of a partnership
business, who provide additional capital without having any role in the actual running of the
organization.

● A sole trader (or sole proprietor) is the single owner of a business organization, so makes
all the decisions and takes all the risks in running the enterprise.

● A stock exchange (or stock market) is a marketplace where shares in publicly held
companies can be bought and/or sold, such as the New York Stock Exchange (NYSE).

● Unlimited liability means that if the sole proprietorship fails, the sole trader is personally
held responsible for all the debts of the business. As there is no limit to the amount of
losses, this means that the sole trader could lose their personal possessions to pay for the
organization's debts.

3. Types of for-profit social enterprises (AO3)

Social enterprises are an example of social purpose organizations (SPOs). They aim to primarily
provide a solution to important social or environmental issues. They exist to create a better world
due to the role they play to improve society overall. As they are not always revenue-generating,
SPOs often need financial funding and suitable human resources. Other SPOs include charities,
cooperatives, and non-governmental organizations (NGOs). Although there is no universally

9
accepted definition of a social enterprise (and the legal definition differs between countries), it is
essentially an organization that focuses on meeting social objectives (such as improving social and
environmental well-being) and not only commercial business objectives such as profit maximization
or maximizing shareholder returns.

Traditional for-profit organizations strive to maximise profits or financial gains for their owners
(shareholders). Whilst traditional businesses might donate money to charitable causes or have
ethical objectives, they primarily aim to earn a profit.

Unlike traditional commercial for-profit businesses, social enterprises combine social and
commercial agendas in order to achieve their social and environmental agenda, i.e., they strive to
gain a financial surplus to facilitate social gain. Their activities, by definition, purposely create social
benefits.

Some differences between social enterprise, traditional commercial (for-profit business entities), and
charitable organizations are outlined below.

* Whilst traditional businesses may allocate some funds to CSR, it is not their main or most
important focus. Instead, the main driver for such businesses is profit, growth, and protecting
shareholder value. A growing number of traditional businesses are reporting on the triple bottom line
as part of their CSR and sustainability goals.

Traditional businesses focus on their mission whereas social enterprises focus on their purpose. The
differences between an organization's mission and purpose are outlined in the table below. In reality,
it is up to each business to determine its preferred approach to its mission or purpose. Nevertheless,
social enterprises generate revenue like any business organization, but hold community objectives
for the wellbeing of others in society, rather than primarily aiming to earn profit for their owners.

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Types of social enterprise explicitly featured in the IB Business Management syllabus:

● For-profit social enterprises (AO3):

(i) Private sector companies,

(ii) Public sector companies, and

(iii) Cooperatives.

● Non-profit social enterprises (AO3):

(iv) Non-governmental organizations (NGOs)

Note that social enterprises can, and often are, for-profit organizations. However, the difference is
their existence (or social purpose) is beyond profitability as its very existence generates social
benefits. In other words, profit follows as a consequence of its social and environmental goals, rather
than as a result of its commercial activities.

A for-profit social enterprise uses commercial business practices in order to achieve social goals,
such as improving the environment, building better communities and developing social wellbeing.
Such organizations do not focus on generating profits for their shareholders but strive to build and
improve communities.

There are three main types of for-profit social enterprises covered in the IB Business Management
syllabus:
(i) Private sector companies
(ii) Public sector companies
(iii) Cooperatives

Top tip!

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For-profit social enterprises are not traditional charities. Unlike traditional charities, for-profit social
enterprises need to earn a profit (or financial surplus) in order to survive. This is because traditional
charities rely on donations as their main source of finance.

The triple bottom line

For-profit social enterprises have three main objectives, commonly referred to as ‘the triple bottom
line’. The triple bottom line, a business management model developed by John Elkington (b.1949),
comprises of the following:

1. Economic objective (profit) - to earn a profit to fund its activities and growth in a
sustainable way.

2. Social or cultural objective (people) - to provide social gains for members of local
communities, such as providing job opportunities and support for less-privileged members of
society.

3. Environmental objective (planet) - to manage and operate the business in such a way as
to protect the ecological (natural) environment, i.e., behaving in an environmentally
sustainable and responsible manner.

Top tip!

Remember that social enterprises can be not-for-profit or for-profit. All social enterprises focus on
meeting social goals and not only commercial organizational objectives.

HL students should learn this section of syllabus thoroughly as the focus of the Paper 3 exam (HL
only) is on a social enterprise. The examination addresses three key aspects:

1. identify and describe a human need (worth 2 marks)

2. explain the potential organizational challenges facing the social entrepreneur wanting
to meet this need (worth 6 marks), and
3. write a decision-making document that includes a business recommendation or plan of
action (worth 17 marks)

(i) Private sector companies (AO3)

Private sector companies are for-profit business organizations that operate in the private sector.
They differ from those that operate in the public sector in terms of ownership, and control, the
purpose of their existence, how they raise finance, how they are managed, and how any profits
(financial surplus) are distributed or how losses are dealt with.

For-profit social enterprises can operate as private sector companies in the private sector of an
economy.

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A for-profit social enterprise operating as a private sector company is a revenue-generating,
profit-seeking organization but the purpose of its existence is mainly concerned with social goals
which are at the centre of its operations. This differs from commercial or traditional for-profit
companies that aim to maximise earnings for their shareholders (owners). For-profit social
enterprises have social objectives and use ethical practices to achieve these goals.

Therefore, for-profit social enterprises in the private sector earn their revenues and profit in socially
responsible ways and use the surplus to directly benefit the society or environment rather than
distributing the profit to owners in the form of dividend payments.

(ii) Public sector companies (AO3)

The public sector is the part of the economy composed of government-owned and/or
government-controlled enterprises. It does not include any private sector enterprises (sole traders,
partners, limited liability companies, and private sector social enterprises). Public sector companies
operate in a commercial-like way (selling goods and/or services in order to generate a financial
surplus) but are owned and/or controlled by government authorities. They can be owned wholly or
partially by the government. They are set up as legal business entities to partake in the commercial
business activities, enabling successful public sector companies to earn a financial surplus for the
government to be used for the benefit of society as a whole.

Quite often, the public sector is unable to provide the necessary resources and finances to operate
an enterprise, so some of the funding required comes from the private sector. In such a case, a
public-private partnership (PPP) is established. A PPP is a jointly established enterprise by a
government and one or more private sector businesses. According to the World Bank, a PPP is
defined as a long-term contract between a private company and a government agency for providing
a public asset or service, in which the private party bears significant risk and management
responsibility (not necessarily the majority stake though). The exact arrangements will differ from
case to case and from country to country, but often involve the public sector having a majority share
in the joint venture. In any case, the public sector company exists to create employment and to
reinvest profits (financial surplus) back into the business and the local community.

Examples of service providers in the public sector that operate as for-profit social enterprises
include:

● Broadcasting services, such as national broadcasters of television and radio services.

● Educational establishments, such as schools, colleges, and universities.

● Housing associations to provide social housing for people.

● National health service providers that charge for some of their services although provide free
basic healthcare services to the vast majority of the population.

● Public transport providers, such as buses and mass rail transit.

● Sports and leisure centres, including public swimming pools.

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Advantages of public sector companies

The advantages of establishing public sector enterprises as a form of for-profit social enterprise
include:

● Providing a viable solution for the government to finance projects that it simply does not have
enough money for unless it is able to charge for the services provided.

● As the product is provided by the government, there are fewer risks involved.

● By being able to charge for their services, public sector companies help to reduce the debt
burden of the economy and taxpayers in particular.

● Public sector companies create secure employment opportunities and have a positive impact
on local communities and the country’s overall economic growth and development.

Limitations of public sector companies

However, there are potential drawbacks of establishing public sector enterprises. These limitations
include the following points:

● By funding a particular public sector enterprise, the government gives up the option of
financing other items of government expenditure, such as road maintenance, flood defence
systems, and developing communications networks.

● In addition, most public sector enterprises are expensive to operate (involving high set-up
costs and running costs). This means they can be high-risk businesses with unpredictable
rates of return on the investments.

● Hence, it can be difficult to persuade private sector partners or investors to help fund public
sector companies. Investors could be unsure and unwilling to form a PPP, for example, due
to the uncertainty of such businesses being able to generate any long-term profit.

● Public sector companies are often associated with bureaucratic policies and procedures,
which can cause inefficiencies and delays to decision making.

Top tip!

Do not confuse publicly held companies, which operate in the private sector and offer their
shares on a public Stock Exchange, with public corporations, which are public sector companies
owned by the government on behalf of the general public.

(iii) Cooperatives (AO3)

Cooperatives are for-profit social enterprises that are owned and managed by their members.
Examples are employee cooperatives, producer cooperatives, managerial cooperatives and

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customer cooperatives. Cooperatives exist throughout the world, but are predominant in the
agricultural and retail sectors of the economy in many parts of Europe.

Features of cooperatives

● As a category of for-profit social enterprises, cooperatives strive to provide a service for the
members, providing and creating value, instead of seeking to earn a desired level of profit
margin for their member-owners. However, any profits of the cooperative are shared with its
members.

● Most cooperatives are registered as limited liability organizations. Like limited liability
companies, cooperatives have a separate legal entity from their shareholder owners. Hence,
shareholders, directors, managers, and employees are not held personally liable for any
debts incurred by the cooperative.

● All member shareholders are expected to help run the cooperative, although it is overseen
by an elected board of directors that makes long-term strategic decisions.

● All members of a cooperative have equal voting rights, irrespective of their role in the
business or their level of investment in the cooperative.

● Members of a cooperative have limited liability, restricted to the amount they invested in the
business.

● Cooperatives tend to have a democratic culture, with empowerment of its members to make
decisions. The organizational structure is rather flat as there is decentralised decision
making.

Advantages of cooperatives

The advantages of establishing cooperatives as a form of for-profit social enterprise include:

● Cooperatives are not difficult or expensive to set up.

● Cooperatives are tax exempt because the focus of the business is on serving the collective
interests of its member-owners and the community (such as home care associations for the
elderly).

● As all member shareholders are expected to help run the cooperative, it is more likely to
succeed.

● Similarly, as the owners have equal voting rights, the cooperative is more democratic so the
members feel equally important to the success of the business. This is likely to lead to a
harmonious working environment.

● There is an absence of pressure from external investors and shareholders, so the

member-owners of the cooperative can run the business that best suits their own interests.

15
 ● As cooperatives strive to benefit their members and society, they often qualify for
government financial support.

● Unlike partnerships or sole traders, there is continuity in a cooperative should a key owner
leave the organization, for whatever reason.

Disadvantages of cooperatives

However, there are potential drawbacks of establishing a business as a cooperative. These include
the following points:

● As cooperatives are not profit-driven, it can be difficult to attract investors, financiers and
member-shareholders.

● Similarly, employees and managers of cooperatives may lack the financial motivation to
excel, due to the absence of a profit motive.

● Most cooperatives have very limited sources of finance as their capital depends on the
amount contributed by their members.

● Most cooperatives are unable to hire a range of specialist managers to run the business, due
to the lack of financial rewards and sources of finance to remunerate their senior staff. This
can limit the success of the cooperative.

● A democratic culture is not always effective. Despite some members having more to
contribute to the organization and greater responsibilities, they only get one vote as do all
other members. This can be somewhat inefficient and perceived as unfair for some
members.

Key Terms

● Cooperatives are for-profit social enterprises that are owned and managed by their
members.

● A for-profit social enterprise uses commercial business practices in order to achieve social
goals, such as improving the environment, building better communities and developing social
wellbeing.

● Private sector companies are for-profit business organizations that operate in the private
sector.

● Public-private partnerships (PPP) are an example jointly established by a government and

one or more private sector businesses.

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 ● Public sector companies operate in a commercial-like way (selling goods and/or services
in order to generate a financial surplus) but are owned and/or controlled by government
authorities. They can be wholly or partially owned by the government.

● Social enterprises are organizations that use commercial business principles and practices
to achieve social and/or environmental objectives by competing with other rival businesses.

4. Non-profit social enterprises (AO3)

Features of non-profit social enterprises (AO3)

Some social enterprises are not run for profit, such as non-governmental organizations (NGOs).
However, even these non-profit organizations must earn a financial surplus from their business in
order to continue operating. The difference is that the surplus is reinvested back in the social
enterprise and/or the community.

Recall that social enterprises generate revenue like any business organization, but hold community
objectives for the wellbeing of others in society, rather than primarily aiming to earn profit for their
owners. Non-profit social enterprises operate in a commercial-like way but they do not distribute any
profits or financial surplus to their owners or shareholders. Instead, the surplus they may earn is
completely reinvested in the organization in order to pursue their vision and/or mission.

Social enterprises are an example of social purpose organizations (SPOs) that aim to primarily
provide a solution to important social or environmental issues, and not only commercial gains
for its owners. Irrespective of whether they are for-profit or non-profit, all social enterprises
leverage their ability to connect the work carried out by employees with a social goal. This
provides employees with a sense of social purpose and the feeling of being able to make a
positive difference to the social cause.

For example, Doctors Without Borders is an international humanitarian medical NGO, free from
direct control of any local or national government.

Advantages of non-profit social enterprises

The advantages of establishing a business as a non-profit social enterprise include the following
points (which apply to both NGOs and charities):

● Non-profit social enterprises exist for the benefit of local communities and societies.
Examples include fundraising events and donations to meet social aims of a community.

● Non-profit organizations, including non-profit social enterprises, are exempt from paying
corporate and profits taxes.

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 ● Many NPOs also qualify for government assistance in the form of grants and/or
subsidies, thereby reducing their costs of production.

● There can be a positive impact on employees and donors who feel that the non-profit
enterprise is pursuing a socially meaningful ambition.

Disadvantages of non-profit social enterprises

However, there are potential disadvantages of establishing businesses as non-profit social

enterprises. These include the following points (which apply to both NGOs and charities):

● There are strict guidelines and restrictions that non-profit social enterprises must follow;
not all trading activities are permitted. This is to ensure the general public is protected
against fraudulent activities by dishonest charities or non-governmental organizations.

● NPOs depend on the goodwill of the general public and donors to fund their operations.
As a result, business survival is often difficult for many smaller, less-known non-profit
social enterprises.

● There is a lack of financial and cost control because, unlike in a for-profit organization,
managers at NPOs are not expected to earn a profit for their owners or shareholders.

● As a non-profit organization, the wages and remuneration of workers are often lower
than in commercial, for-profit organizations. Whilst it might be socially acceptable that
the managers at a bank or private law firm is paid an annual bonus, gets to travel on
business class and is offered a company car, the equivalent benefits for a person
working for a charity might be deemed to be rather unethical.

The only specific type of non-profit social enterprises mentioned in the syllabus is
non-governmental organizations (NGOs).

(iv) Non-governmental organizations (NGOs) (AO3)

A non-governmental organization (NGO) is a type of non-profit social enterprise that operates in

the private sector of the economy. Therefore, it is not part of a government organization.
Instead, it is operated a voluntary group to promote a social cause, such as the protection of
human and animal rights, protection of the environment, and development aid. They operate at
a local, national, or international level and put pressure on governments to adopt policies in
support of their social cause.

They are usually funded by a combination of sources:

● Government grants or donations

● International organizations
● Charitable organizations
● Commercial businesses, as part of their corporate social responsibilities (CSR), and

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 ● Private donors and philanthropists.

Examples of non-governmental organizations include: Oxfam, the Wikimedia Foundation,

Amnesty International, Doctors Without Borders, the World Wildlife Fund, and World Vision
International.

Top tip!

There is no universally accepted legal definition of an NGO and a charity; the meaning will differ
from country to country. The IBO, for example, is a non-profit organization with charitable status
- it is registered with the Charitable Commission in the UK as charitable company. Many private
fee-paying international schools also operate in this way.

However, some differences between NGOs and charities may include:

● Non-governmental organizations are completely independent of government control.

Charities can operate in the public sector, i.e., they are run and operated by the
government or public sector agencies.

● NGOs can operate at the community, national, or international level for a range of social
or political reasons, including humanitarian causes, protection of the environment, and
the conservation of wildlife. Charities tend operate on a smaller scale with a specific
focus, such as developing the arts, helping people with illnesses such as sight or hearing
impairments, relieving homelessness, or other publicly beneficial actions.

● Furthermore, NGOs generally lobby governments for desired change or a community

goal, such as environmental protection, whereas charities do not tend to get involved in
politics or lobbying of governments.

Key Terms

● A non-governmental organization (NGO) is a type of non-profit social enterprise that

operates in the private sector as a voluntary group to promote a social cause.

● Non-profit social enterprises operate in a commercial-like way but they do not

distribute any profits or financial surplus to their owners or shareholders.

● Social enterprises are business entities that generate revenue just like any business
organization, but hold community objectives for the wellbeing of others in society, rather
than primarily aiming to earn profit for their owners.

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