Cambridge IGCSE Business Studies 1.4 – Types of business organisation

1.4.1 – Main features of different forms of business organisation

 

Unincorporated Business – 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 – (Owners are held liable for the business. If the business goes in debt, the owner needs to pay back with their own money.

Limited Liability – (Opposite of Unlimited liability, If a business fails, the owners only lose what they invested)

 

Main forms of business organisations

Unincorporated Businesses

• Sole Trader – Owned and operated by one person.

Advantages

• Cheap and easy to startup
• Full control of your own business

Disadvantages

• Unlimited Liability
• If the owner dies, the business no longer exists
• Less money / difficult to expand business

 

• Partnership – Similar to a sole trader but there are 2 owners.

Advantages

• 2 Owners mean that more money can be invested
• Less work since tasks can be done by 2 owners.
• Losses can be distributed among the 2 owners

Disadvantages

• Unlimited Liability
• If one owner dies/quits, the business no longer legally exists.
• There can be disagreement between the 2 owners.

 

Incorporated Businesses

• Private limited company (LTD) – Owned by shareholders.

Advantages

• Limited Liability to all shareholders
• Capital can be invested by many shareholders
• Cheaper to set up than public limited companies
• Continuity of existence – If the business owner dies, the business still exists.

Disadvantages

• Slower to startup (many legal documents needs to be signed)
• Shares can only be sold to family and friends
• Other shareholders need to agree before shares can be sold

 

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

Advantages

• Limited Liability
• Shares can be sold to the general public without permission (Capital (Money) can be raised quickly)
• Continuity of existence
• Company can grow and expand quickly

Disadvantages

• Complicated legal documents (Wastes money and time)
• Expensive to start up
• Company can grow large very quickly which will be difficult to control
• Original owners of the business may lose control of the company
• Shareholders may vote who manages the business in AGM (loss of control)

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.

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Franchising

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

Advantages

• Make money from selling the business’ name to franchisee
• Quick growth of the brand
• Operation of the business is the franchisee’ responsibility

Disadvantages

• If one franchisee has a bad reputation, the entire franchise will be effected e.g. If one Macdonalds store served bad food, all the other Macdonald stores will have a bad reputation.
• Profit from franchised stores are kept by the franchisee

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

Advantages

• 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

Disadvantages

• 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 – 2 or more businesses start a new project together.

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
• Businesses may disagree with each other.