Unincorporated Business: These are businesses that are not legally registered as companies. A business that does not have a separate legal identity from its owner(s) e.g. If the business is sued, the owner is responsible and may need to cover the cost with their own personal money.

Incorporated Business – Business that has a separate legal identity from its owner(s) e.g. If the business goes bankrupt, the owners won’t be held responsible and only lose the money they invested.

Unlimited Liability: The financial obligation of business owners in the event of business failure is to repay all business debts.

Limited Liability: The financial obligation of business owners for business debts is no more than the amount of capital they invested in the enterprise. This is because business owners with limited liability have a separate legal identity from their business

Main forms of business organisations

Unincorporated Businesses

A sole trader or sole proprietorship is a business owned and controlled by one person

Advantages
  • A sole trader is his or her own boss
  • A sole trader can choose his or her own hours of work
  • A sole trader receives all profits
  • This type of business is easy to set up
Disadvantages
  • may lose revenue if off sick or on holiday
  • has unlimited liability to pay business debts
  • has full responsibility for the business
  • may lack capital to finance business growth

Partnership : This is a legal agreement between two or more people to own, finance and run a business. It is popular among professionals such as solicitors, accountants, veterinary surgeons.

Advantages
  • A partnership is easy to set up
  • More partners means more capital
  • Partners bring new skills and ideas
  • Limited partners have limited liability
  • Partners share responsibility for decisions
Disadvantages
  • Partners can disagree
  • Partners share any profits
  • General partners have unlimited liability
  • Partners may lack capital to finance growth

Incorporated Businesses

  • Private limited company (LTD) – Owned by shareholders.
Advantages
  • Shareholders have limited liability
  • Shareholders receive dividends from profits
  • Shareholders elect directors to manage  company
  • The company has a separate legal identity
  • It is a popular form of organization for sole traders and partnerships seeking to raise additional finance for business expansion
Disadvantages
  • Financial information may have to be disclosed
  • Large shareholders can out-vote others
  • Directors may run the business in their own interests rather than for shareholders
  • Shares can only be sold privately and with the agreement of all other shareholders

Public limited company (PLC) – Similar to a private limited company but shares can be sold to the public. Great for large companies.

Advantages
  • Shareholders have limited liability
  • Shareholders receive dividends from profits
  • Shareholders elect directors to manage the company
  • Companies have a separate legal identity
  • Shares can be advertised and sold publicly on
  • the stock market to raise significant new capital
Disadvantages
  • The legal costs of set up can be high
  • Annual financial accounts must be published during the AGM
  • Directors may run the business in their own interests rather than for shareholders
  • The original owners may also lose control of their company if it is taken over by another company through the purchase of shares on the stock market

Annual General Meeting (AGM) – Meeting that must be held every year for shareholders to vote for the company’s next directors.

Shareholders – Owners of a limited company, they buy shares which represent the percentage they own of the company.


Franchising

A franchise is an arrangement between two existing organisations when a new business (franchisee) although a seperate legal entity trades under the name of an existing business (franchisor)

Franchisor – Company that owns the original business, Franchisors sell the franchise to a franchisee

Benefits to the Franchisor
  • Make money from selling the business’ name to franchisee
  • Quick growth of the brand
  • Operation of the business is the franchisee’ responsibility
Drawback to the Franchisor
  • If one franchisee has a bad reputation, the entire franchise will be effected e.g. If one Walmart store sells bad products, all the other Walmart stores will be affected.
  • Profit from franchised stores are kept by the franchisee

Franchisee – Someone who buys a franchise from the franchisor to use the brand name

Benefits to the Franchisor
  • Less chances of failure since the business is well known.
  • Most of the advertisements are paid by the franchisor
  • Less decision making is required from the franchisee e.g. food recipe is already planned from franchisor
  • Staff training may be provided from franchisor
Drawback to the Franchisor
  • Franchisee won’t be able to make own decisions e.g. come up with own menu
  • Franchisee needs to pay the franchisor to use brand name

Joint Ventures: This is an agreement between two existing organisations to start a jointly owned company. A common situation is when a business wants to expand into a new market and has little knowledge of that market, rather than setting up all alone and risking failure, it forms a joint venture with a local business that has knowledge of the market and an established brand.

Advantages
  • Costs can be shared amongst the companies
  • Knowledge and skills from more than one company
  • Risks are shared (If the project fails)
Disadvantages
  • Profit is shared
  • Conflict of interest can bring an end to the business.
  • Businesses may disagree with each other.