Types of Business Organizations
Topic Twelve

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Sole Proprietorship

The sole proprietorship is a form of business which is operated by one person for his or her own benefit.

The features of the sole trader are as follows:

  • This type of business is the simplest form of business operations and has no existence apart from the owners;
  • Whatever liabilities associated with the business are the personal liabilities of the owner and the business terminates upon his or her death or by voluntary termination;
  • The owner undertakes the risks of the business to the extent of his or her assets;

Advantages of the Sole Proprietorship

  • Simplicity of organization - this form of business is relatively simple and least costly with minimum legal requirements.
  • Profits – profits are for the sole owner alone and are not shared with multiple owners so that the sole owner’s profits are high,
  • Efficiency in decision-making - due to the fact that the scale of operations is small, there is more efficient decision-making in this type of operations.

Disadvantages of the Sole Proprietorship

  • Unlimited liability- the business owner also bears all the losses;
  • Difficulty in raising capital- this is so because an individual's resources are typically less than the pooled resources of partners,
  • Lack of business continuity- if the sole trader gets old, there may be no one suitable to take over the business,

Partnerships-General and Limited

A general partnership is an agreement established between two or more persons who join together to carry on a business operation for profit.

The features of partnerships are:

  • Each partner contributes capital and other assets and each also shares in the profits and losses of the business;
  • This form of business operations limits the personal liability of individual partners for the liabilities of the business based on the amount they would have invested.

Advantages of Partnerships-General and Limited

  • Capital - greater possible capital availability,
  • Resources - greater resources for decision-making and creative activity,
  • Simplicity - ease and inexpensive to organize,
  • Productivity - higher productivity in the sense that each partner is specialised in the area in which he or she is good at.

Disadvantages of Partnerships-General and Limited

  • Unlimited liability – liability is unlimited in that the partners are liable for all of the losses of the business,
  • Divided authority- the division of authority for making decisions among the partners can delay the decision-making process,
  • Limited lifespan of the company – this is so due to the exit of key partners of the business.

Private Joint Stock or Private Limited Liability Company

There are two types of joint stock companies which are private joint stock company (private limited liability company) and public joint stock company (public limited liability company).

The features of a private joint stock company are as follows:

  • A private joint stock company is a company that is owned by a small amount of investors or shareholders,
  • Legally, the company is a separate entity from the owners. The shareholders are private owners of the company,
  • One of the main features of such an entity is that the company can only require that shares be issued privately and not publicly as in the case of a public stock exchange.

Advantages of a Private Joint Stock Company

  • Limited liability – there is limited liability of members to the extent of the amount of money they would have invested in the company,
  • Life span - private joint stock companies have unlimited life in that if investors exist the company, other investors can purchase their shares in the company and so there is continuity of business,
  • Capital - such companies usually have a larger and more stable source of capital that the sole trader,
  • Management - there is managerial superiority in the sense that the company is managed by competent personnel other than the owners.

Disadvantage of a Private Joint Stock Company

  • Complexity - complex legal documentation required in order to set up this type of business and to administer it,
  • Capital constraints - legally such companies are restricted from selling their shares publicly so that there may be some constraint in terms of obtaining large amounts of capital.

Public Joint Stock or Public Limited Liability Company

A public joint stock company is one where investors come together to own a company. In these companies, shares are issued in the primary market and then can be bought and sold in the public secondary stock market.

The features of a public joint stock company are as follows:

  • Funding – this comes mainly from the issuance of shares to members of the public,
  • Liability - the liability of shareholders are limited to the amount of their investments in the company,
  • Legal requirements - this company is a legal entity which must meet all of the legal requirements,
  • Owners - investors are shareholders and also owners of the company,
  • Dividends - shareholders receive annual dividends if the company makes a profit.

Advantages of a Public Joint Stock Company

  • Capital - these companies are able to raise a larger amount of capital than the other forms of business organizations,
  • Efficiency - due to the fact that these companies are separate from their owners and managed by separate professionals, there is more scope for efficiency through competence of managers,
  • Continuity - there is business continuity even if members cease to become investors in the company – their shares can simply be transferred or sold to other investors,

Disadvantages of a Public Joint Stock Company

  • Alienation - largeness in size can result in alienation of employees.
  • Costs - costs to organize a public joint stock company are higher than most other forms of business organizations,

Co-operatives

Co-operatives are autonomous associations formed and democratically directed by people who come together to meet common economic, social and cultural needs. Cooperatives are based on the principles of empowerment, education and community.

Advantages of Cooperatives

  • Easy of formation the formation of a cooperative society is very simple as compared to the formation of any other form of business organisations,
  • Limited liability - in most cases, the liabilities of the members of the society are limited to the extent of capital contributed by them.
  • Surplus shared by the members - the profit made by the cooperative is utilised for meeting the day-to-day administration cost of the society and also shared among the members.

Disadvantages of Cooperatives

  • Limited resources - cooperative societies’ financial strength depend on the capital contributed by its members and loan raising capacity.
  • Inefficient management - cooperative societies are managed by the members only who may not possess the managerial skills required.

Public Corporations

Public or state-owned corporations are organizations owned by the government. These were formed to provide society with much needed goods and services which the government feels will be provided at a high cost by the private sector.

Advantages of Public Corporations

  • Economies of scale it has always been stated that if many companies were to provide some of the public services, then there will be diseconomies of scale in that there will be blockages and interruptions. Therefore, it will be more efficient for one company to provide such services as there will be economies of scale which can be passed on to the public in the form of lower prices.
  • Accessibility – because the objective of public corporations is not profit-making but to provide the public with the best possible needed service at a low cost, then accessibility to the service will be easier.
  • Funding because public corporations are government-owned and funded by the government, it will be easier for these corporations to access funding than private corporations.

Disadvantages of Public Corporations

Though public corporations are very important for the provision of critical services to society, there can be some setbacks for these corporations. Some of these setbacks are as follows:

  • Innovation because the motive of public corporations is really that of providing a public service and not profit-driven, there may be the issue regarding innovation. There may not be the motivation to invest in hi technology to modernize.
  • Efficiency relating to the above point is that of the efficiency of the provision of the services to the public by these public corporations. Providing critical services to the public at a low cost is one thing but the timely provision of these services is another critical issue. Not motivated by profits, public corporations may not have the drive to ensure that the services delivered are to the satisfaction of the public.

Multinational Corporations

A multinational corporation (MNC) is a corporation that has its facilities and other assets in at least one country other than its home country. Such companies have offices and/or factories in different countries and usually have a centralized head office where they co-ordinate global management.

Advantages of MNC's for the Host country

The advantages of MNCs to the host country are as follows:

  • Economic - the investment level, employment level and income level of the host country increase due to the operation of MNC's. This contributes positively to the economic development of the host country.
  • Technology - the industries of the host country get the latest technology from foreign countries through MNC's.
  • Management expertise - the host country also has an opportunity to benefit from the management expertise of the MNCs.
  • Creation of competition - MNC's break protectionism, local monopolies, create competition among domestic companies and thus enhance their competitiveness. This competitiveness is considered very necessary in order for economic growth of these host countries.
  • Improvement in balance of payments position - the host country can reduce imports and increase exports due to goods produced by MNC's in the host country. Therefore, MNCs contribute to increasing the exports of the host country which can translate into an improvement in the host country’s balance of payments position.

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