Unit 2: Business Structure and Control | Business Organisations

There are five main forms of business organisation in the private sector:

Sole trader: it is a business owned and operated by just one person. It is a very common form of business organisation.

Advantages	Disadvantages
Few legal regulations for owner to worry when setting up the business.	No one to discuss business matters.
Owner has complete control over business (he is his own boss).	It has unlimited liability; which means that if the business cannot pay its debts, then the creditors will force to sell owner’s possessions.
Able to keep all profits - don’t have to share them.	Business likely to remain small because capital for expansion is often restricted.

Partnership: a group or association of between 2 to 20 people who agree to own and run the business together.

Advantages	Disadvantages
More capital could be invested to the business and this will allow expansion on the business.	Consulting all partners takes time and partners can actually disagree on important business decisions.
Responsibilities of running the business are shared.	If one partner is inefficient, then the other partners could suffer by loosing money.
Any losses made by the business would now be shared by the partners.	They have unlimited liability.
-	It is an unincorporated business.

An incorporated business has a separate legal unit from its owners, which means:

• company exists separately from its owners and will continue to exist if one of the owners die.
• a company can make contract and legal agreements.

Shareholders: the owners of a limited company. They buy shares which represent part ownership of a company.

Private limited companies: it is a company in the private sector of the economy and it has restrictions on the sale of shares.

Advantages	Disadvantages
Shares can be sold to a large number of people, which can lead to much larger sums of capital to invest in the business - therefore the business will expand quicker.	The shares in a private limited company cannot be sold or transfered to anyone else without the agreement of the other shareholders.
It has limited liability, which encourages people to buy shares as they know that the maximum they can loose is what they invest.	There are significant legal matters which have to be dealt before the company can be formed:  Articles of association: contains the rules under which the company will be managed. Memorandum of association: contains very important info about the company and the directors.
The people who started the company are able to keep control of it as long as they do not sell many shares to other people.	For rapidly expanding businesses, the company cannot offer its shares to the general public. Therefore, it will not be able to raise really large sums of capital to invest back into the business.

Public limited companies: Limited companies which can sell shares on the stock exchange (to the public).

Advantages	Disadvantages
Limited liability to shareholders.	Lots of legal formalities which are costy and time consuming.
These businesses can raise large capital as there is no limit to the number of shareholders.	PLCs are huge in size and may face management problems such as slow decision making.
The business is incorporated.	The original owners may lose control.

Franchise: it is an extremely widespread form of business operation. The franchisor is a business with a product/service idea that does not want to sell to the consumer directly. Instead, it appoints franchisees to use the idea and to sell it to the consumer. An example would be McDonalds.

FRANCHISOR:

Advantages	Disadvantages
No need of buying more shops as franchisee opens them.	Poor management of one franchised outlet could lead to a bad reputation for the whole business.
All products sold must be obtained from the franchisor.	The franchisee keeps profits from the outlets.
Expansion of the franchised business is much faster than if the franchisor had to finance all the outlets.	-

FRANCHISEE:

Advantages	Disadvantages
Chances of business failure are much reduced because a well-known product is being sold.	Less independence than with operating a non-franchised business.
The franchisor pays for advertising.	May be unable to make decisions that would suit the local area.
Banks are often willing to lend money to franchisees due to relatively low risks.	License fee must be paid to the franchisor and possibly a percentage of the annual turnover.

Joint ventures: when two or more businesses agree to start a new business together, sharing the capital, the risks and the profits:

Advantages	Disadvantages
Sharing costs.	If the project is successful, profits will have to be shared with the joint venture partner.
Risk is shared.	Disagreements over important decisions might occur.
Local knowledge when joint venture company is already based in the country.	The two joint venture partners might have different ways of running the business.

Multinational businesses: those firms with factories, production or service operations in more than one country. Firms become multinational for the following reasons:

• By producing in various countries they can keep transport costs to a minimum. 
• They can avoid trade barriers by producing inside a country.
• Can gain access to raw materials or cheap labour.
• Reduce risks from foreign exchange fluctuations.

Advantages in a country:

• Jobs are created, which reduces the level of unemployment.
• Taxes are paid by the multinationals, which increases the funds to the government.

Disadvantages in a country:

• Local firms may be forced out of business.
• The jobs created are often unskilled.
• Multinationals often use up scarce and non-renewable primary resources in the host country.