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Definition of a Business

Types of Business

Summary

Assessment

A business, also known as an enterprise or a firm, is

an organization involved the trade of goods, services, or

both to consumers. Businesses are prevalent in

capitalist economies, where most of them are privately

owned and provide goods and services to customers in

exchange for other goods, services, or money. Businesses

may also be not-for-profit or state-owned. A business

owned by multiple individuals may be referred to as a

 company.

Sole Proprietorship

Multinational Corporation

Company

Franchise

Partnership

This is a business run by one individual for hisor her own benefit. It is the simplest form ofbusiness organization. Proprietorships have noexistence apart from the owners. The liabilitiesassociated with the business are the personalliabilities of the owner, and the businessterminates upon the proprietor's death.

Advantages Disadvantages

you’re the boss you keep all the profits start-up costs are low you have maximum privacy establishing and operating your

business is simple it’s easy to change your legal structure

later if circumstances change you can easily wind up your business.

you have unlimited liability for debts as there’s no legal distinction between private and business assets

your capacity to raise capital is limited all the responsibility for making day-to-

day business decisions is yours retaining high-calibre employees can be

difficult it can be hard to take holidays you’re taxed as a single person the life of the business is limited.

A corporation is a legal entity, operating under state law,

whose scope of activity and name are restricted by its charter.

Articles of incorporation must be filed with the state to

establish a corporation. Stockholders' are protected from

liability and those stockholders who are also employees may

be able to take advantage of some tax-free benefits, such as

health insurance. There is double taxation with a C

corporation, first through taxes on profits and second on taxes

on stockholder dividends (as capital gains).Advantages Disadvanta

ges

Generally, a corporation's shareholders are not liable for any debts incurred or judgments handed down against the corporation. Shareholders only risk their equity in the corporation.

Corporations may be able raise additional funds by selling shares in the corporation.

Corporations may deduct the cost of benefits it provides to employees and officers.

Some corporations may be able to elect treatment as an S corporation, which exempts them from federal income tax other than tax on certain capital gains and passive income.

Forming a corporation requires more time and money than forming other business structures.

Governmental agencies monitor corporations, which may result in added paperwork.

Corporate profits may be subject to higher overall taxes since the government taxes profits at the corporate level and again at the individual level, if such profits are distributed to the shareholders. Furthermore, a corporation may not deduce from its business income any dividends it pays to its shareholders.

PublicPrivate

A company is an association or collection of individuals, whether natural persons, legal persons, or a mixture of both. Company members share a common purpose and unite in order to focus their various talents and organize their collectively available skills or resources to

achieve specific, declared goals.

A company whose ownership is private. As aresult, it does not need to meet the strictSecurities and Exchange Commission filingrequirements of public companies.Private companies may issue stock and haveshareholders. However, their shares do nottrade on public exchanges and are not issuedthrough an initial public offering. In general, theshares of these businesses are less liquid andthe values are difficult to determine.

Advantages Disadvantag

es

The owners usually work in the business are interested in its success.

The shareholders are often directors and are responsible for running the business.

It is quite easy to set up a private limited company. In some cases the owners may only have invested £100 or £200 to start up.

Shares can only be transferred of all shareholders agree, they cannot be sold to the public. This means the owners have direct control over the business.

As the owners have limited liability they will never lose more that they have invested.

Banks are more willing to lend money to a limited company.

The accounts are still private between the owners, their accountants and the Inland Revenue.

Shares cannot be sold to the general public to raise additional capital.

Limited companies have to comply with more regulations that sole traders or partnerships. A limited company is not allowed to trade under the name of an existing company if this will cause confusion for customers and suppliers.

If the company ceases trading it must officially be ‘wound up’

A company that has issued securities through an initial public

offering (IPO) and is traded on at least one stock exchange or

in the over the counter market. Although a small percentage of

shares may be initially "floated" to the public, the act of

becoming a public company allows the market to determine

the value of the entire company through daily trading. Once a

company goes public, it has to answer to its shareholders. For

example, certain Corporate structure changes and

amendments must be brought up for shareholder vote.

Shareholders can also vote with their dollars by bidding up

the company to a premium valuation or selling it to a level

below its intrinsic value.

Advantages Disadvantag

es

Much more capital (money) is available as there are more people to buy the shares – this makes expansion easier.

Some public companies can be quite small – there needs to be a minimum of two directors and two shareholders.

Large public companies can often operate more cheaply than small companies as they can operate economies of scale. This means they could mass produce goods or buy in bulk to save money.

If the company is successful then the shares will increase in value which will increase the overall value of the company.

A public company must be registered with the Registrar of Companies and has external regulations to comply with.

An annual general meeting (AGM) must be held each year nad all shareholders must be invited.

Specific accounts must be prepared each year and audited, the public can have access to these accounts.

Shareholders invest their money into and in return for this investment they are entitled to part of the profits – this is called a dividend.

Shareholders may have little interest in the long term success of the business and may only be interested in a quick return on their investment.

The original owners may lose control over the company

Advantages Disadvantage

s

A franchise business is a business in which the owners, or "franchisors", sell the rights to their business logo, name, and model to third party retail outlets, owned by independent, third party operators, called "franchisees". Franchises are an extremely common way of doing business. In fact, it's difficult to drive more than a few blocks in most cities without seeing a franchise business. Examples of well-known franchise business models include McDonalds, Subway, UPS, and KFC.

•The risk of business failure is reduced by franchising. Your business is based on a proven idea. You can check how successful other franchises are before committing yourself.•Products and services will have already established a market share. Therefore there will be no need for market testing.•You can use a recognized brand name and trade mark. You benefit from any advertising or promotion by the owner of the franchise - the 'franchisor'.•The franchisor gives you support - usually as a complete package including training, help setting up the business, a manual telling you how to run the business and ongoing advice.•No prior experience is needed as the training received from the franchisor should ensure the franchisee establishes the skills required to operate the franchise.•A franchise enables a small business to compete with big business

•Costs may be higher than you expect. As well as the initial costs of buying the franchise, you pay continuing management service fees and you may have to agree to buy products from the franchisor.•The franchise agreement usually includes restrictions on how you can run the business. You might not be able to make changes to suit your local market.•You may find that after time ongoing franchisor monitoring becomes intrusive•The franchisor might go out of business.•Other franchisees could give the brand a bad reputation, so the recruitment process needs to be thorough•You may find it difficult to sell your franchise - you can only sell it to someone approved by the franchisor.

Disadvantages

Advantages

A partnership is an arrangement where parties,

known as partners, agree to cooperate to advance

their mutual interests. The partners in a

partnership may be individuals, businesses, 

interest based organizations, schools, 

governments or combinations organizations may

partner together to increase the likelihood of each

achieving their mission and to amplify their

Reach.

•Two heads (or more) are better than one•your business is easy to establish and start-up costs are low•more capital is available for the business•you’ll have greater borrowing capacity•high-calibre employees can be made partners•there is opportunity for income splitting, an advantage of particular importance due to resultant tax savings•partners’ business affairs are private•there is limited external regulation•it’s easy to change your legal structure later if circumstances change.

•The liability of the partners for the debts of the business is unlimited.•Each partner is ‘jointly and severally’ liable for the partnership’s debts; that is, each partner is liable for their share of the partnership debts as well as being liable for all the debts.•There is a risk of disagreements and friction among partners and management.•Each partner is an agent of the partnership and is liable for actions by other partners.•If partners join or leave, you will probably have to value all the partnership assets and this can be costly.

Answer the following questions by clicking on

your response.

1.The form of business organization that has the largest sales volume is the:

a. Partnership.b. corporation.c. cooperative.d. Franchise .

2. The simplest form of business ownership is a:

 a. proprietorship.b. partnership.c. corporation.d. cooperative.

3.Which of the following is an advantage of a sole proprietorship?

 a. ease of starting a business.b. being your own boss. c. pride of ownership. d. all of the above.

4. The major advantage of a franchise is:

a. training and management assistance. b. personal ownership.c. nationally recognized name.d. all of the above.

5.The most effective form of business organization for raising capital is the:

a. Franchise . b. partnership. c. corporation.  d. proprietorship.