Types of Business Organization Adapted from : GCSE Business Studies

Types of Business Organization Sole Proprietorship Partnership Corporations: Private & Public Co-operatives Franchises Public sector/Non-profits

Sole Proprietors A 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 Proprietorship ADVANTAGES 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

Sole owners may lose personal assets if their business fails 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 

Partnership Ownership 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 Liability Company 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

Franchises Franchisor– 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 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 Organizations What 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 Businesses What 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