Types of

Business
Organization
Chapter 4
Objectives
You will learn about:
• sole traders and partnerships
• private and public limited companies
• franchises and joint ventures
• the differences between unincorporated
businesses and incorporated businesses
• the role of the public sector organisations
 Forms of
Organization
Private Sector

Sole Traders/
Sole Partnerships Limited Franchises Joint Ventures
Proprietorship Companies

Private Limited
Public Limited
Sole trader/ Sole
Proprietor

a business that is owned

and controlled by just one
person who takes all of
the risks and receives all
of the profits
 Sole Trader
Advantages Disadvantages

Quick and easy to set up Difficult to compete with other businesses

Complete control May have to work for long hours

Unlimited liability for the debts of the

It needs a small amount of capital
business and risks losing their personal
wealth to pay for the debts
Keeps all the profit

Difficult to raise funds to expand the

business
 Partnership

a business is formed by two

or more people who will
usually share responsibility
for the day-to-day running
of the business. Partners
usually invest capital in the
business and will share
profits.
 Partnerships
Advantages Disadvantages

Great access to finance than sole trader Unlimited liability

Easy to set up-few legal agreements – Partners must share profits

DEED OF PARTNERSHIP
Business decisions are binding on all
Decision making is shared
partners even if they do not agree on
them
Workload is shared
Difficult to finance for expansion
Summary
Unincorporated Business that does not have legal identity separate

businesses from its owners

Unlimited liability
In case of failure, owners have to use their personal
wealth to pay the business debts.
 There is one essential
difference between a
company and an
unincorporated
business, such as a sole
trader or partnership.
A company is a
separate legal unit
from its owners – it is
an incorporated
business- a limited
company.
 Limited Company
• 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
Shareholders 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.
These shareholders appoint
directors to run the business.
In a private limited
company, the directors
are usually the most
important or majority
shareholders (however,
not all the time. It has
to be specified in the
articles of agreement).
However, directors
doesn’t have to be
shareholders.
Private Limited
Company

often a large company;

owned by shareholders
who have limited
liability. The company
cannot sell its shares to
the general public.
 ADVANTAGES
Raise of capital from sale of shares –
° Shares can be sold to a large number of people : friends and relatives of the owners. The sale of shares could
lead to much larger sums of capital to invest in the business, The business could therefore expand more
rapidly.

All shareholders have limited liability –

° It means that if the company failed with debts owing to creditors, the shareholders could not be forced to sell
their possessions to pay the debts.
° The shareholders could only lose their original investment in the shares – their liability is limits to the
original investment.
° Shareholders in a company have less risk than sole trader and partners.
 ADVANTAGES
The people who started the company –
° . are able to keep control of it as long as they do not sell too many shares to other people. (Owners are still
the major stockholders.)

Continuity
° The company will continue with or without the owners.
 DISADVANTAGES
Cannot sell shares to the public -
° Shares in a private limited company cannot be sold or transferred to anyone else without the agreement of
the other stakeholders.

Legal formalities -
° There are significant legal matters which have to be dealt with before a company can be formed.
The Articles of Association – this contains the rules under which the company will be managed.
Rights and duties of all the directors, rules concerning the election of directors and holding of official
meetings; and the procedure to be followed for the issuing of shares.
The Memorandum of Association – this contains the very important information about the company and
the directors. The objective of the company must be stated as well as the number of shares to be bough by
each of the directors.
 DISADVANTAGES
Accounts of a company are less secret than the sole trader or a partnership -
° Each year the latest accounts must be sent to the Registrar of Companies and members of the public can
inspect them. More information about the business are made known to the public.

Cannot offer shares to the general public -

° Therefore, it will not be possible to raise really large sums of capital to invest back into the business.
A partnership is not
a separate legal
entity. Each partner
is personally liable
for the business'
debts. The limited
company is a
separate legal
entity to you
personally. The
law treats your
company's assets as
separate to your
personal assets.
Most suitable
for very large
businesses.
Able to raise the capital to
expand nationally or even
internationally.

Not in the public sector.

Not owned by the government but
by private individuals and as a
result they are in the private
sector.
 ADVANTAGES
° Offers limited liability to shareholders

° It is an incorporated business and has a separate legal identity to the owners or shareholders. Its accounts are
kept separately from those of the owners and there is continuity should one of the stakeholders die.

° Opportunity to raise very large capital sums to increase in the business. There is no limit to the number of
shareholders a public limited company can have.

° There is no restriction on the buying, selling or transfer of shares.

° 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 and banks willing to lend to it than other types of businesses.
 DISADVANTAGES
° The legal formalities of forming such a company are quite complicated and time-consuming.

° There are many more regulations and controls over public limited companies in order to try to protect the
interests of the shareholders. These include the publication of accounts, which anyone can ask to see.

° Selling shares to the public is expensive. The directors will often ask a specialist merchant bank to help them
in this process. It will charge a commission for its services. The publication and printing of thousands of
copies of the prospectus (business publication) is an additional cost.

° There is a real danger that although the original owners of the business might become rich by selling shares in
their business. they may lose control over it when it goes public.
 Make sure you understand the
difference between unlimited
liability and limited liability, and
what that means for the owners of a
business.
Can Public Limited Company be converted to Private Limited Company?

A public company can be converted into the private company only after obtaining its shareholders approval
by way of passing of special resolution in general meeting.

Can Private Limited Company be converted to Public Limited Company?

A private limited company can be converted into a public limited company. The company has to alter the
memorandum of association and articles of association for this process.
 a business system
where entrepreneurs
buy the right to use
the name, logo and
product of an existing
business
 franchisor – the
person or
corporation that
owns the trade-
marks and business
model
franchisee – the
person or corporation
that owns and
operates the business
using the trade-mark
and business model
system licensed from
the franchisor.
https://topfranchise.com/international-
franchise-opportunities/asian/franchises-
in-indonesia/

Indonesia is a country full of

businesses which are part of
franchises, be they foreign of local
franchises. The latest statistics show
that there are more than 460
foreign franchises and 540 local
franchises across the country today.
two or more businesses
agree to work together
on a project and set up
a separate business for
this purpose
 Joint Ventures
Advantages Disadvantages
° Sharing of costs – very important for expensive ° If the new project is successful, then the profits
projects have to be shared with the joint venture partner.

° Local knowledge when joint venture company is ° Disagreements over important decisions might
already based in the country occur.

° Risks are shared ° The two joint ventures might have different ways
of running a business – different cultures.
 JOINT VENTURE vs PARTNERSHIPS
°A joint venture involves two or more persons
or entities joining together in particular
project, whereas in a partnership, it is
individuals who join together for a combined
business.
 JOINT VENTURE vs PARTNERSHIPS
° A partnership will usually last for many years unless
the parties involved have differences. A joint venture
company will last for only a limited period until the
goal is achieved.
 JOINT VENTURE vs PARTNERSHIPS
o Although a joint venture is very similar to a partnership, a
joint venture is generally more limited in scope and
duration. A joint venture is generally considered to be a
partnership for a single transaction. 
https://www.ssek.com/blog/joint-ventures-in-indonesia
 DIFFERENCES BETWEEN
UNICORPORATED BUSINESSES
AND LIMITED COMPANIES
An unincorporated business is one

which does not have a separate legal

identity from its owners.

The owners have unlimited liability

for the debts of the business.

Has greater legal and financial risks

for owners than incorporated

businesses.

 Owners and business have the

same legal identity.

 Owners have unlimited liability

for business debts.

An incorporated business, such as a limited company,
has a separate legal identity from its owners.

The company and not the shareholders is legally

responsible for the activities of the business.

The owners of an incorporated business have limited

liability for the debts of the business.

The risks are removed for the owners of incorporated

businesses such as private and public limited
companies because:
 Owners and the company have separate legal
identities.

 Owners have limited liability for business debts.

 CHOOSING THE TYPE OF BUSINESS
ORGANISATION
° Unincorporated business is much easier to set up.
° Private limited companies, and especially public limited companies, are more complex to set up. They have
many legal controls than unincorporated businesses.
° As businesses grow, owners might decide to incorporate – become a private or public limited company, for a
number of reasons, such as:

To reduce the legal and financial risk to owners.

Separate legal identity also has the benefit of business continuity.

The business may want to raise additional capital to invest in growth plans.
 CHOOSING THE TYPE OF BUSINESS
ORGANISATION
° In setting up a new business, the choice of which form of business organization to use will depend
on several factors.

 The number of owners

 The owners’ role in the management of the business.

 The attitude towards financial risk.

 How quickly the owners want to start operating their business.

 The potential size of the business.

 TASK

CASE STUDY