1. Types of Business Organization
Adapted from :
GCSE Business Studies

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

3. 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

4. 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

5. 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 

6. 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

7. 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

8. 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 

9. Corporations Business owned by shareholders
Run by directors (who may also be shareholders)
Liability is limited (important)

10. 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

11. 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

12. 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 

13. 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”

14. 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)

15. 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

16. 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.

17. 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

18. Examples of Franchises
McDonalds
Clarks Shoes
Pizza Hut
Holiday Inn
Subway

19. 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.

20. 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

21. 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

22. Examples of Public Sector Organizations
Current Examples
Amtrak
Post Office
MBTA, MBCR

23. 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

24. Examples of Non-Profits
Current Examples
Churches
Soup kitchens
Charities
Political associations
Business leagues
Fraternities & Sororities
Colleges and Universities
Hospitals
Museums