Business organisations

• There are two main types of business organization;

 Private businesses
 Public businesses
Classification of business organisations
Unincorporated and Incorporated businesses

Unincorporated Businesses:
• These are businesses that have unlimited liability -Owner has unlimited
liability for business actions
• The owner and the business are viewed as one - no legal difference
• Most unincorporated businesses operate as sole traders and as partnerships
Incorporated Businesses:
• There is a legal difference between the business (company) and the
owners
• Owners (shareholders) have limited liability
• The company has a separate legal identity
• Most incorporated businesses operate as private limited companies and as
public limited companies
 1. Sole trade businesses
• These are businesses owned by one person.
• Even though he can employ people, he is still the sole proprietor of the
business.
• Sole traders are the most common form of business in the world.
 Advantages of sole trade businesses
• There are few legal formalities required to operate the business.
• The owner is his own boss, and has total control of the business.
• The owner gets 100% of profits.
• Decision making is fast as he does not have to consult anyone before making decisions.
• The business is very flexible since it can be changed to any kind of business the sole
trader wants
• He has close contact with customers and therefore the ability to respond quickly to
their needs and demands.
Disadvantages of sole trader businesses
• Nobody to discuss problems with and thus can make wrong decisions which can bring down
the business.
• Has Unlimited liability. (loss of both personal property and business property in case the
business is unable to pay its debts)
• Limited finance/capital, business will remain small.
• The owner normally spends long hours working which can affect his health.
• Does not benefit from economies of scale.
• No continuity especially if the sole trade dies.
• He meets the losses made by business alone
Sole trade is recommended for people who;
• Are setting up a new business.
• Do not require a lot of capital for their business.
• Require direct contact for customer service.
 ii. Partnerships

• A partnership is a business formed by more than 2 people who agree to

own and run a business together.
• They have unlimited liability
• The partners will contribute to the capital of the business and will usually
have a say in the running of it.
• They will share any profits made.
 Advantages of Partnerships
• Partners share duties depending on each partners skills
• Partners consult amongst themselves thus making informed decisions.
• Partners can raise more capital than the sole trader thus enabling them to start
a bigger business or expand an existing one.
• Losses and liabilities are shared among partners thus spreading the burden.
• Partners are not required to disclose and present their books of accounts to
the members of public .This helps them to keep business secrets to themselves.
 Disadvantages of partnership businesses
• Liability of partners is unlimited, this exposes personal assets at risk of being
used to meet the liability of partnership.

• Disagreement may arise among partners thus affecting the smooth running of the
business.

• Decision making process is longer and slow since all partners have to be
consulted and consensus have to be reached among partners.
• Actions of a partner binds all other partners even if a partner was not
authorised to take or make such actions and decisions. This may affect the
business and partners negatively.

• They are less flexible and therefore cannot easily change its nature of
operations as this requires consultation and consensus among partners.
 iii. Private limited companies
• These are businesses formed by more 2 members.

• They have separate legal identities to their owners, and thus their owners have limited liability.

• The company has continuity, and one can sell shares to friends or family, although with the consent of all shareholders.

• They are abbreviated as Ltd (UK), or Proprietary Limited, (Pty) Ltd.

• They are not listed in stock exchange

• Their shares are not freely transferable

 Control and ownership of private ltd
company.
• Private limited company are owned by share holders, who elect directors
amongst themselves to run the company.

• The directors may appoint managers who run the business on day to day
basis.
Advantages of private limited companies
 Shareholders have limited liability. As a result more people are prepared to risk
their money as an investment than in a partnership or as a sole trader.
 More capital can be raised through the sale of shares.
 Control of the company cannot be lost to outsiders as shares can only be sold to
new members if existing shareholders agree.
 The business will continue even if one of the owners dies. Their shares will
simply be transferred to another owner.
Disadvantages of private limited companies
• Profits have to be shared out among a much larger number of owners. This is
called a dividend.
• There is a legal procedure to set up the business. This takes time and money.
• Firms are not allowed to sell shares to the public. This restricts the amount of
capital that can be raised.
• Financial information must be published each year and is available for the public
(or competitors) to examine.
• If one shareholder decides to sell shares it may take time to find a buyer.
 iv. Public Limited Companies

• Public limited companies are formed by a minimum of 7 persons and has

no maximum number.
• Public limited companies are similar to private limited companies, but
they are able to sell shares to the public.
 Control and ownership in a public limited
company:
• Annual General Meeting (AGM) is held every year and all shareholders are invited to attend. AGMs are
held to;
 Elect the Board of Directors (BOD)
 Vote for important issue presented by the BOD. Buying another business, delisting in security exchange
e.tc.
 Reading of financial reports for the year are presented
NB
 Shareholders own the company
 Directors run the company on behalf of shareholders
 They hire managers for day to day running of the business
• Advantages of public limited companies
 v. Franchise
 A franchise is a business with a successful brand name that recruits
franchisees (individual businesses) to sell for them. (e.g. McDonald,
Burger King, KFC etc)
 A franchisor is the owner of the franchise while a franchisee is the
person who buys the name and brands from the franchisor
• Advantages and disadvantages of franchise business to franchisee

• Advantages and disadvantages of franchise business to franchisor

 vi. Joint venture
• This occurs when two businesses agree to start a new project together, sharing capital, risks and
profits.
Advantages
• Shared costs which help in tackling expensive projects. (e.g. aircraft)
• Pooled knowledge. (e.g. foreign and local business)
• Risks are shared.
Disadvantages
• Profits have to be shared.
• Disagreements might occur.
• The two partners might run the joint venture differently.
• A mistake done will reflect on both businesses in a joint venture which may damage their reputation.
 PUBLIC CORPORATION
• This is a business owned and controlled by the government
• It is financed by the government through taxation
Objectives of public corporations
 provide services to the people at low or no cost
 To create jobs
 Ensure citizens have access to services
• Examples of public businesses are hospitals and schools