The different types of business ownership
When starting a profit-based organisation it will be one of the following forms:
- sole trader
- private limited company
- public limited company.
We need to distinguish between the different types of business ownership and identify their main advantages and disadvantages
|Private Limited Company||
|Public Limited Company||
Remember that those who found a business take the initial risks and make all the original decisions. For a sole trader both risk-taking and decision-making are their responsibility.
However, when a plc is formed, the owners and the shareholders are normally different people. Professional managers are appointed by the owners of a business to run the business on their behalf. This is referred to as the 'separation (or divorce) of ownership and control'. It is important to appreciate the problems associated with size and the divorce of ownership and control.
As the business grows it will need more finance and this is normally easier for Plc's. The complexity of operations will require the recruitment of specialist professionals. They often prefer to work for Plc's as the financial rewards, company benefits and promotion opportunities, tend to be better. However, managers controlling the decision-making process are employees, not owners. In theory they represent the owners, but in practice with Plcs, this is often not the case as the shares are held by thousands of 'owners' who may not share objectives or vote at general meetings. Remember that shareholders might consider profits, and therefore dividends, to be the prime reason for their investment; whereas managers may need to look to the longer-term survival and growth of the business as the expense of short term profits.
So, stakeholder conflict can arise as a business changes its business and legal structures.
- Outline the major factors involved in starting a business.
- Describe the main characteristics of the different forms of business ownership.
- Explain the reasons for converting a private limited company into a Plc.
- Examine how the divorce takes place between the ownership and control of a business.