Adapted from : GCSE Business Studies Types of Business Organization

Adapted from :Adapted from :GCSE Business GCSE Business

StudiesStudies

Types of Business Organization

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GCSE Business GCSE Business StudiesStudies

Types of Business Organization

Sole Proprietorship

Partnership

Corporations: Private & Public

Co-operatives

Franchises

Public sector/Non-profits



Sole ProprietorsA sole proprietorship is a business that is owned by one person

It may have one or more employees

The most common form of ownership:

OVER 70% of US businesses are SP’s

Often succeed – why?

Can offer specialist services to customers

Can be sensitive to the needs of customers – since they are closer to the customer and react more quickly

Can cater for the needs of local people – a small business in a local area can build up a following in the community due to trust



Operating as a Sole ProprietorshipADVANTAGES

Total control of business by owner

Quicker decision-making

Cheaper and quicker to start up

Keep all profit

DISADVANTAGES

Unlimited liability

Difficult to raise finances

May be difficult to specialize or enjoy economies of scale

Problem with continuity if sole owner retires or dies



Unlimited Liability

An important concept – it adds to the risks faced by the sole proprietor

Business owner responsible for all debts of business

May have to sell own possessions to pay creditors

Sole owners may lose personal assets if their business fails



PartnershipOwnership of business shared between partners

Most partnerships have between two and twenty members though there are examples like major accounting or legal firms where there are hundreds of partners

Rules of the partnership described in the Partnership Agreement:

Amount of capital each partner should provide

How profits or losses should be shared among the partners

How many votes each partner has (usually based on proportion of capital provided)

Rules on how to take on new partners



Advantages of Partnership

Spreads the risk across more people, so if the business gets into difficulty then there are more people to share the burden of debt

Partner may bring money and resources to the business

Partner may bring other skills and ideas to the business, complementing the work already done by the original partner

Increased credibility with potential customers and suppliers – who may see dealing with the business as less risky than trading with just a sole trader



Disadvantages of a Partnership

Have to share profits

Less control of business for individual

Disputes over workload / roles

Problems if partners disagree over direction of business

Partnerships are difficult businesses to run. The partners need to trust each other

Nearly all partnerships also have unlimited liability – the risk does not go away



Corporations

Business owned by shareholders

Run by directors (who may also be shareholders)

Liability is limited (important)



Setting up a Private Corporation

An Incorporated company is a “separate” legal person so far as the law is concerned – i.e. it is separate from its shareholders

Shareholders own company

Company employs directors to control management of business

The directors may also be shareholders (most are)

Directors are responsible to shareholders



Importance of Limited LiabilityCompany is a “separate” legal person so far as the law is concerned – i.e. it is separate from its shareholders

Shareholders can only lose money they have invested

Encourages people to invest in companies – lower risk than operating as a sole proprietor or partnership

Those who have a claim against company:

Remember – the company is a “separate legal person” – you have to sue the company, not the shareholders

Limited liability means that they can only recover money from existing assets of business

They cannot claim personal assets of shareholders to recover amounts owed by company



Private vs Public Corporations

Shares in a private corporation are held by shareholders, often a family, or another small group—not offered to the general public for sale.

Shares in a public corporation can be traded on Stock Exchange and can be bought by members of general public

Private and Public Limited Companies are still both companies! The main difference is

concerned with the share capital of the company



Should a Private Company go Public?Most don’t!

Going Public is mainly about making it easier to raise money

Shares in a private company cannot be offered for sale to general public

Restricts availability of finance, especially if business wants to expand

It is also easier to raise money through other sources of finance e.g. from banks.

Note: becoming a “public company” does not necessarily mean that company is quoted on Stock Exchange

To do that, company must do an “IPO”



Disadvantages of Being a Public Corporation

Costly and complicated to set up

Certain financial information must be made available for everyone, competitors and customers included

If the Public Company offers its shares on the Stock Exchange…

Shareholders in public companies expect a steady stream of income from dividends

Increased threat of takeover

Greater public scrutiny and profile (e.g. analyst reports, press reports)



Initial Public Offerings (IPO’s)

When shares in a “Public Corporation” are first offered for sale to general public

Company is given a “listing” on Stock Exchange

Opportunity for company to raise substantial funds through investment banking funding of shares

Also a chance for existing shareholders to “cash in” by selling some or all of their shares (e.g. a venture capitalist who may have invested earlier)

Complex and expensive process



FranchisesFranchisor– a business whose sells the right to another business (franchisee) to operate a franchise

Franchisor may run a number of their own businesses, but also may want to let others run the business in other parts of the country

A franchise is bought by the franchisee

Franchisee required to invest – often a large amount—in acquiring the franchise license and setting up the business

Once they have purchased the franchise they have to pay a proportion of their revenues (“commission”) to the franchisor on a regular basis

Franchisor usually provides support through training, management expertise and marketing

May also supply the raw materials and equipment.



Advantages and Disadvantages of Franchising

Advantages

Tried and tested market place, so should have a customer base

Easier to raise money from bank to buy a franchise

Given right and appropriate equipment to do job well

Normally receive training

National advertising paid for by franchisor

Tried and tested business model

Disadvantages

Cost to buy franchise

Have to pay a percentage of your revenue to business you have bought franchisor

Have to follow franchise model, so less flexible



Examples of Franchises

McDonalds

Clarks Shoes

Pizza Hut

Holiday Inn

Subway



Why Franchising is Popular

An attractive option for businesses that want to grow rapidly but don’t want to invest in opening in lots of different locations

Franchisee provides most of finance – reduces investment in expansion

Local entrepreneur sees opportunity to set up business with reduced risk

Banks like combination of large company and small local business as a reduced lending risk.



Co-operatives

Three main types of co-operative

Retail co-ops

Marketing or trader co-ops

Workers co-ops

Examples:

Co-operative Retail Society

Farmer’s co-operatives marketing and distributing food products

Small business credit unions

Artists’ co-operatives sharing studio and exhibition facilities



Public Sector OrganizationsWhat are they?

Publicly-owned organizations

Provide goods and services to the public at national and local government local levels

Organizations owned and controlled by the government or local authority or a combination

Why do they exist?

Provide essential services not fully provided by private sector

Prevent exploitation of customers

Avoid duplication of resources

Protect jobs and maintain key industries



Examples of Public Sector Organizations

Current Examples

Amtrak

Post Office

MBTA, MBCR



Non-Profit BusinessesWhat are they?

Businesses that use surplus revenues to achieve their goals, rather than to provide profits or dividends for shareholders

Non-profits want to earn high revenues and make profits—it is just what they do with profits them that is different!!!

Provide goods and services to the public at national and local government local levels

Why do they exist?

Provide essential services not fully provided by private sector

Prevent exploitation of customers

Avoid duplication of resources

Protect jobs and maintain key industries



Examples of Non-Profits

Current Examples

Churches

Soup kitchens

Charities

Political associations

Business leagues

Fraternities & Sororities

Colleges and Universities

Hospitals

Museums

Documents

Adapted from : GCSE Business Studies Types of Business Organization