Types of business organizations

Two Sectors

The economy can be divided into two sectors:

 The Private Sector

 The Public Sector

The Private Sector

 firms that are owned by private individuals

 Firms in the private sector include:
 Sole Traders
 Private Limited Companies (Ltd)
 Partnerships
 Public Limited Companies (PLC)

The Public Sector

 Made up of central government, local government, and businesses that are owned by
government
 In the last twenty years the number of government-owned firms in the UK has shrunk massively
 Now, very few examples remain: for instance, the Royal Mail

Private Sector Firms

One of the key differences is between:

 Sole traders and partnerships whose liability is unlimited And

 Private Limited and Public Limited Companies, who have ‘limited liability’

Other Business Types

 Co-operatives are owned by their staff, who are ‘members’ of the firm
 Profits are shared amongst the members
 Losses too must be shared

Franchises

 Many businesses today are franchises

 A business idea is licensed to a franchisee
 The owners of the brand receive a license fee
 The franchisee gains the right to use the business brand
Not For Profit Businesses

 Many charity-based business organizations are run as ‘not for profit’ operations
 They typically receive donations or funds from groups or government
 Any financial surplus is ploughed back into the business
 The organization does not aim to generate profits

Sole Proprietorship/ Sole trader

A business owned and managed by one individual; the business and the owner are .one and the same in
the eyes of the law.

Sole Proprietorship

Advantages

❑Simple to create

❑Least costly form

❑Profit incentive

❑Total decision-making

❑No special legal restrictions

❑Easy to discontinue

Sole Proprietorship

Disadvantages

❑Unlimited personal liability

❑Limited skills and abilities

❑Feelings of isolation

❑Limited access to capital

❑Lack of continuity of business

Partnership

An association of two or more people who co-own a business for the purpose of making a profit Formed
through a partnership agreement

Partnership

Advantages

❑Easy to establish
❑Complementary skills

❑Division of profits

❑Larger pool of capital

❑Ability to attract limited partners

❑Little governmental regulation

❑Flexibility

❑Taxation

Partnership

Disadvantages

❑Unlimited liability of at least one

❑Difficulty in disposing of interest

❑Lack of continuity

❑Potential for personality and authority conflicts

❑Partners bound by law of agency

Special Partnerships

 Limited partnership-composed of at least one general partner and at least one limited partner
 Limited liability partnership-a special type of limited partnership, in which all partners are
limited partners
 Master limited partnership-a partnership whose shares are traded on stock exchanges, just like
corporations

Corporations

A separate legal entity apart from its owners which receives the right to exist from the state in which it is
incorporated

❑Domestic

❑Foreign

❑Alien

❑Publicly held
❑Closely held

Corporations

Certificate of Incorporation

❑Name

❑Statement of purpose

❑Time horizon

❑Names and addresses of incorporators

❑Place of business

❑Capital stock authorization’

❑Capital required at time of incorporation

❑Restrictions on transferring shares

❑Names and addresses of officers

❑By-laws/ Rules and regulations

Corporations

Advantages

❑Limited liability of stockholders

❑Ability to attract capital

❑Ability to continue

Indefinitely

❑Transferable ownership

Corporations

Disadvantages

❑Cost and time in incorporating

❑Double taxation

❑Potential for diminished incentives

❑Legal requirements and red tape

❑Potential loss of control

Limited Liability Company

A relatively new form of ownership that, like an S corporation, is a cross between a partnership and a
corporation; it is not subject to many of the restrictions imposed on S corporations;

Limited liability

Continuity of life

Free transferability of interest

Centralized management

Limited Liability Corporation

 Articles of organization-name and address, method of management, duration, names and

addresses of each organizer
 Operating agreement-no more than 2 of: limited liability, continuity of life, free transferability
of interest, centralized management

Limited Liability Corporation

 Limited personal liability

 No limit on number of shareholders
 No ban on nonresident alien
 No restriction on a member’s ability to manage the company
 Avoids double taxation
 Flexibility to divide income as owners see fit
 Not subject to self-employment tax except for managing member
 Professional Corporation-lawyers, accountants, doctors, dentists, etc.` Professionals come
together and form a company
 Joint Venture-partnership formed for a specific purpose