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Business studies notes By sir Hassan Qadeer sHaH

Types of Business Organizations:

Almost every country consists of two business sectors, the private sector and the public sector. Private
sector businesses are operated and run by individuals, while public sector businesses are operated by the
government.
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Business studies notes By sir Hassan Qadeer sHaH

Sole Trader/Sole Proprietorship: Sole traders are the most common form of business in the world
and take up as much as 90% of all businesses in a country. The business is owned and run by one person
only. Even though he can employ people, he is still the sole proprietor of the business
Legal requirements for a Sole Trader business:
• The owner must register with and send annual accounts to the government Tax Office.
• They must register their business names with the Registrar of Business Names.
• They must obey all basic laws for trading and commerce.
Sole traders are recommended for people who are setting up a new business, do not require a lot of
capital for their business or require direct contact for customer service.
Advantages:
• Easy to set up: there are very few legal formalities involved in starting and running a sole
proprietorship. A less amount of capital is enough by sole traders to start the business. There is no
need to publish annual financial accounts.
• Full control & Independence: the sole trader has full control over the business. Decision-making
is quick and easy, since there are no other owners to discuss matters with.
• Sole trader receives all profit: Since there is only one owner, he/she will receive all of the profits
the company generates.
• Personal: since it is a small form of business, the owner can easily create and maintain contact
with customers, which will increase customer loyalty to the business and also let the owner know
about consumer wants and preferences.
• Secrecy: The owner does not have to share information about the business with anyone, except
the Tax office.
Disadvantages:
• Unlimited liability: if the business has bills/debts left unpaid, legal actions will be taken against
the investors, where their even personal property can be seized. This is because the business and
the investors are legally not separate (unincorporated).
• Full responsibility: Since there is only one owner, the sole owner has to undertake all running
activities. He/she doesn’t have anyone to share his responsibilities with. This workload and risks
are fully concentrated on him/her.
• Limited finance: This can restrict growth and expansion of the business; their only sources of
finance are personal savings or borrowing or bank loans.
• Lack of continuity: If the owner dies or retires, the business dies with him/her.

• Loneliness : The owner has no one to consult with regarding the business and takes advice.
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Business studies notes By sir Hassan Qadeer sHaH

Partnerships: A partnership is a legal agreement between two or more (usually, up to twenty) people
to own, finance and run a business jointly and to share all profits. In order to form a partnership, the
partners need to create a partnership agreement/ partnership deed, which is a legal document that all
partners have to sign, which forms the partnership.
Advantages:
• Easy to set up: Like sole traders, very few legal formalities are required to start a partnership
business.
• Responsibilities are divided: The partners can now focus on separate tasks unlike the sole
trader
• Secrecy: There is no need to publish annual financial accounts.
• Partners can provide new skills and ideas: The partners may have some skills and ideas that
can be used by the business to improve business profits.
• More capital investments: Partners can invest more capital than what a sole trade only by
themselves.
Disadvantages:
• Conflicts: arguments may occur between partners while making decisions. This will delay
decision-making. If one partner is dishonest pr inefficient, everybody loses.
• Unlimited liability: similar to sole traders, partners too have unlimited liability- their personal
items are at risk if business goes bankrupt
• Lack of capital: smaller capital investments as compared to large companies.
• No continuity: if an owner retires or dies, the business also dies with them.
Recommended to people who:
• Want to make a bigger business but does not want legal complications.
• Professionals, such as doctors or lawyers, cannot form a company, and can only form a
partnership.
• Family, when they want a simple means of getting everybody into a business (Warning: Nepotism
is usually not recommended).

Note: In some countries, including the UK there can be Limited Partnerships. This business has limited
liability, but shares cannot be bought or sold. It is abbreviated as LLP.
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Business studies notes By sir Hassan Qadeer sHaH

Limited Liability companies

These companies can sell shares, unlike partnerships and sole traders, to raise capital. Other people can
buy these shares (stocks) and become a shareholder (owner) of the company. Therefore they are jointly
owned by the owners of the organization & the people who have bought it’s stocks. These shareholders
then receive dividends (part of the profit; a return on investment).
Shareholders will elect a board of directors every year in the Annual General meeting to manage and
run the company in it’s day-to-day activities. In small companies, the shareholders with the highest
percentage of shares invested are directors, but directors don’t have to be shareholders. The more shares
a shareholder has, the more their voting power.
Legal Formalities for setting up Limited Liability Companies:
In order to register as a limited liability company, the organization must provide the following documents
to the registrar of companies:
The Articles of Association: This contains the rules on how the company will be managed. It
states the rights and duties of directors, the rules on the election of directors and holding official
meetings, as well as the issuing of shares.
The Memorandum of Association: This contains very important information about the company
and directors.
Certificate of Incorporation: the document issued by the Registrar will allow the Company to
start trading.

Private Limited Companies: One or more owners who can sell their shares to only the people known
by the existing shareholders (family and friends). Example: Ikea.
Advantages:
• Limited Liability: this is because the company and the shareholders have separate legal
identities.
• Raise huge amounts of capital: selling shares to other people raises large amounts of capital,
which is why companies are large.
• Control: Pvt limited companies can maintain more control as they can control who the shares are
sold to, since there is a restriction on the transfer of shares
• Public Ltd. Companies can advertise their shares in the form of a prospectus which tells
interested individuals about the business, it’s activities, profits, board of directors, shares on sale,
share prices etc. This will attract investors.
Disadvantages:
• Required to disclose financial information: Limited companies are required by law to publish
their financial statements. All the writing, printing and publishing of such details can prove to be
very expensive, and other competing companies could use it to learn the company secrets.
• Private Limited Companies cannot sell shares to the public. Their shares can only be sold to
people they know with the agreement of other shareholders. Transfer of shares is restricted here.
This is inefficient and raises less capital than Public Ltd. Companies.
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Business studies notes By sir Hassan Qadeer sHaH

Public Limited Companies: They are similar to private limited companies but they have the added
advantage of selling shares to the public and having their shares traded on the stock exchange.
Legal requirements to become a public limited company.
• A statement in the Memorandum of Association must be made so that it mentions that
this company is a public limited company.
• All accounts must be made public
• The company has to apply for a listing in the Stock Exchange.
• A prospectus must be issued to advertise to customers to buy shares, and it has to state
how the capital raised from shares will be spent.
Advantages:
• Limited Liability
• Continuity
• Potential to raise limitless capital: Public limited companies can sell their shares on
the stock exchange and raise potentially huge amounts of capital
• No restrictions on transfer of shares
• High status will attract investors and customers
Disadvantages:
• Many Legal formalities
• Scrutiny: Many rules and regulations to protect shareholders, including the publishing of
annual accounts.
• Expensive: Selling shares is expensive, because of the commission paid to banks to aid
in selling shares and the costs of printing the prospectus.
A summary of everything learned until now, in this section, in case you’re getting confused:
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Business studies notes By sir Hassan Qadeer sHaH

Franchises
The owner of a business (the franchisor) grants a licence to another person or business (the
franchisee) to use their business idea – often in a specific geographical area. Fast food companies such
as McDonald’s and Subway operate around the globe through lots of franchises in different countries.

ADVANTAGES DISADVANTAGES
TO - Rapid, low-cost method of - Profits from the franchise need to be
FRANCHISOR business expansion shared with the franchisee

- Gets income from franchisee in the - Loss of control over running of business
form of franchise fees and royalties
- If one franchise fails, it can affect the
- Franchisee will better understand reputation of the entire brand
the local tastes and so can
advertise and sell appropriately - Franchisee may not be as skilled

- Can access ideas and suggestions - Need to supply raw material/product and
from franchisees provide support and training

- Franchisee will run the operations

TO FRANCHISEE - An established brand and - Cost of setting up business

trademark, so the chance of
business failing is low - No full control over business- need to
strictly follow franchisor’s standards and
- Franchisor will give technical and rules
managerial support
- Profits have to be shared with the
- Franchisor will supply the raw franchisor
materials/products
- Need to pay franchisor franchise fees and
royalties

- Need to advertise and promote the

business in the region themselves
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Business studies notes By sir Hassan Qadeer sHaH

Joint Ventures
A Joint Venture is an agreement between two or more businesses to work together on a project. The
foreign business will work with domestic business in the same industry. Eg: Google Earth is a joint
venture/project between Google and NASA.
Advantages
• Reduces risks and cuts costs
• Each business brings different expertise to the joint venture
• The market potential for all the businesses in the joint venture is increased
• Market and product knowledge can be shared to the benefit of the businesses
Disadvantages
• Any mistakes made will reflect on all parties in the joint venture, which may damage their
reputations
• The decision-making process may be ineffective due to different business culture or different
styles of leadership

Public Sector Corporations

Public sector corporations are businesses owned by the government and run by directors appointed by
the government. They usually provide essentials services like water, electricity, health services etc. The
government provides the capital to run these corporations in the form of subsidies (grants). The UK’s
National Health Service (NHS) is an example. Public corporations aim to keep prices low so everybody
can afford the service, to keep people employed and to offer a service to the public everywhere.
Advantages:
• Some businesses are considered too important to be owned by an individual. (electricity, water,
airline)
• Other businesses, considered natural monopolies, are controlled by the government. (electricity,
water)
• Reduces waste in an industry. (e.g. two railway lines in one city)
• Rescue important businesses when they are failing through nationalisation
• Provide essential services to the people
Drawbacks:
• Motivation might not be as high because profit is not an objective
• Subsidies lead to inefficiency. It is also considered unfair for private businesses
• There is normally no competition to public corporations, so there is no incentive to improve
• Businesses could be run for government popularity