Profit-based organisations

The different types of business ownership

When starting a profit-based organisation it will be one of the following forms:

sole trader
partnership
private limited company
public limited company.

We need to distinguish between the different types of business ownership and identify their main advantages and disadvantages

	Advantages	Disadvantages
Sole trader	Cheap and easy to start with few legal formalities All the profit belongs to the owner The sole trader is his/her own boss, and makes all the important decisions	Unlimited liability All the risk is with the owner Time off for sickness and holidays will reduce profits as there is unlikely to be cover. The sole trader needs to be multi-skilled No legal continuity
Partnerships	Cheap and easy to start with few legal formalities More access to finance than sole traders All the profit belongs to the owners The partners are their own bosses, and makes all the important decisions Greater specialism than sole traders	Unlimited liability All the risk is with the partners individually and severally liable There may be disputes between partners and decision-making may be slower No legal continuity Less access to capital than companies
Private Limited Company	The business has limited liability It is easier to raise larger sums of capital More flexible than Plc's Legal continuity Economies of scale Division of labour	Shares can only be sold to other shareholders. Not very flexible if expansion is planned. More legal formalities than sole traders
Public Limited Company	Limited liability Easier access to cheaper finance More funds available for investment Public awareness gives status Legal continuity Economies of scale Division of labour	The company must publish financial results Accounts must be approved by professional auditors Greater need to conform to legal procedures Owners can lose control as shares are freely available on the Stock Exchange Potentially bureaucratic slowing decision-making

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.

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Questions

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.

Business organisation and environment

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