Lecture Notes: Types of Business Organizations

Key Terms

• Limited Liability:
  • Owner's responsibility for business debt is limited to the amount invested.
• Unlimited Liability:
  • Owner is fully responsible for business debts, potentially losing personal assets.
• Incorporated Business:
  • Business has a separate legal identity.
• Unincorporated Business:
  • Business does not have a separate legal identity.
• Shareholders:
  • Owners of a limited company, holding shares that represent ownership.

Private Sector Business Organizations

1. Sole Trader

• Definition: Business owned by one person; unincorporated.
• Advantages:
  • Easy to set up
  • Complete control
  • Close customer relationships
  • Privacy of business information
• Disadvantages:
  • Unlimited liability
  • Limited financing options
  • No continuity after owner's death

2. Partnership

• Definition: Business owned by 2-20 people; unincorporated.
• Requires: Partnership agreement detailing capital, tasks, profit sharing, etc.
• Advantages:
  • More capital available
  • Shared responsibilities and risks
  • Easy to set up
• Disadvantages:
  • Unlimited liability
  • Slow decision-making due to disagreements
  • No continuity after a partner's death

3. Private Limited Company (Ltd)

• Definition: Owned by shareholders; shares not sold to the public.
• Requires: Articles of Association and Memorandum of Association.
• Advantages:
  • More capital from share sales
  • Limited liability
  • Continuity after shareholder's death
  • Separate legal identity
• Disadvantages:
  • Shares not publicly sold
  • Difficulty in transferring shares
  • Public access to accounts
  • Complex setup due to legal formalities

4. Public Limited Company (PLC)

• Definition: Owned by shareholders; shares sold to the public.
• Annual General Meeting: Shareholders vote on the board of directors.
• Advantages:
  • Public share sales
  • Rapid expansion
  • Limited liability
  • Continuity
• Disadvantages:
  • Ownership and control separation
  • Expensive share selling process
  • Risk of overexpansion
  • Public access to accounts

5. Joint Ventures

• Definition: Businesses collaborate on a new project.
• Advantages:
  • Shared risks and costs
  • Combined expertise
• Disadvantages:
  • Shared profits
  • Potential for disagreements

6. Franchise

• Franchisor vs Franchisee:
  • Franchisor: Main brand
  • Franchisee: Individual starting franchise
• Advantages to Franchisor:
  • Rapid growth
  • Franchisee manages outlets
• Disadvantages to Franchisor:
  • Reputation risks from franchisee management
• Advantages to Franchisee:
  • Lower risk of failure
  • Provided products and support
• Disadvantages to Franchisee:
  • Less independence
  • Fees payable to franchisor

Public Sector Business Organizations

Public Corporations

• Definition: Government-owned businesses
• Funding: Taxpayer money
• Examples: Education, hospitals, public transport