1.

4 TYPES OF
BUSINESS
ORGANIZATION
Learning Objectives
◦ To understand and learn about the different types of Business Organization.

◦ To discuss the benefits and negatives of the different forms of Business

Organization.

◦ To evaluate and determine what Business Organization is the best and to apply
your learning to real-life companies.
◦ Global Context: Globalization and Sustainability

◦ Key Concept: Global Interaction and Identity

Starter Activity: Can you guess the
different types of Business Organization?
Sole Trader/Sole Proprietorship
◦ A business organization owned and controlled by one
person. Sole traders can employ other workers, but only
he/she invests and owns the business.

◦ What are the benefits and negatives of being a Sole Trader? Discuss
◦ Find examples online of successful Sole Traders.
Sole Trader/Sole Proprietorship
◦ 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: 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.
Sole Trader/Sole Proprietorship
◦ 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, if their investments
don’t meet the unpaid amount. This is because the business and the investors are the 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.
◦ Lack of capital: As only one owner/investor is there, the amount of capital invested in the
business will be very low. This can restrict growth and expansion of the business. Their only
sources of finance will be personal savings or borrowing or bank loans (though banks will be
reluctant to lend to sole traders since it is risky).
◦ Lack of continuity: If the owner dies or retires, the business dies with him/her.
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.
◦ Advantages:
◦ Easy to set up: Similar to sole traders, very few legal formalities are required to start a
partnership business. A partnership agreement/ partnership deed is a legal document that all
partners have to sign, which forms the partnership. 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
himself could.
What Issues do you think can arise with
Partnerships?
◦ Disadvantages:
◦ Conflicts: arguments may occur between partners while making decisions.
This will delay decision-making.
◦ 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.
Learning Objectives and Outcomes
◦ Learning Objective: Examine the world’s most famous franchises
and critically evaluate why their models are so successful.

◦ Learning Outcomes
◦ To be able examine what a Franchise is.
◦ To critically evaluate global franchise icons and explain why they
have become successful.
◦ To be able to differentiate between a Franchise and a Franchisee.
Starter Activity (3-4 mins)

◦ What do you know about franchises?

◦ List as many different famous Franchises you can think of without

the use of the internet

◦ (In teams)
What is a Franchise?
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.
Franchises
Who Benefits more and how? The Franchise or The
Franchisee? (15 Mins)

◦ Discuss the above question in Groups.

◦ Then:

◦ Who would you prefer to be in this position and why?

 Franchises
ADVANTAGES DISADVANTAGES

Rapid, low cost method of business expansion Profits from the franchise needs to be shared with the franchisee
Gets and income from franchisee in the form of franchise fees Loss of control over running of business
and royalties If one franchise fails, it can affect the reputation of the entire
TO FRANCHISOR Franchisee will better understand the local tastes and so can brand
advertise and sell appropriately Franchisee may not be as skilled
Can access ideas and suggestions from franchisee Need to supply raw material/product and provide support and
Franchisee will run the operations training
Franchises

Cost of setting up business

No full control over business- need to strictly follow
An established brand and trademark, so chance of
franchisor’s standards and rules
business failing is low
TO FRANCHISEE Profits have to be shared with franchisor
Franchisor will give technical and managerial support
Need to pay franchisor franchise fees and royalties
Franchisor will supply the raw materials/products
Need to advertise and promote the business in the
region themselves
What ways do Franchisee’s incorporate
the IB Learner Profile?
Plenary
◦ What are the most famous Franchises in the world?

◦ What is the difference between A Franchise and Franchisee?

◦ Why have Franchise Business Models become so successful?

Joint Ventures
◦ Joint venture is an agreement between two or more businesses to work together on a project. The foreign
business will work with a 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
Private Limited Companies
◦ There is one essential difference between a company and an unincorporated business, such as
a sole trader or partnership. A company is a separate legal unit from its owners – it is an
incorporated business. This means that:
◦ • a company exists separately from the owners and will continue to exist if one of the owners
should die
◦ • a company can make contracts or legal agreements
◦ • company accounts are kept separate from the accounts of the owners.
◦ Companies are jointly owned by the people who have invested in the business. These people
buy shares in the company and they are therefore called shareholders. These shareholders
appoint directors to run the business. In a private limited company, the directors are usually
the most important or majority shareholders. This is usually not the case in a public limited
company, as we shall see in the next section.
Task: Find out the advantages and disadvantages
of running a Private Limited Company.
Advantages
◦ • Shares can be sold to a large number of people (in some countries there is a maximum number). The sale of
shares could lead to much larger sums of capital to invest in the business than the two original partners could
manage to raise themselves. The business could therefore expand more rapidly.
◦ • All shareholders have limited liability. This is an important advantage. It means that if the company failed with
debts owing to creditors, the shareholders could not be forced to sell their possessions to pay the debts. The
shareholders could only lose their original investment in the shares – their liability is limited to the original
investment. Shareholders in a company have less risk than sole traders and partners. Limited liability encourages
people to buy shares, knowing that the amount they pay is the maximum they could lose if the business is
unsuccessful. It is important that the people and other businesses that deal with a private limited company know
that it is not a sole trader or a partnership. Creditors, for example, need to be aware that if the business does fail,
then they cannot take the owners to court to demand payment from their savings. For this reason all private limited
company names must end with ‘Limited’ or ‘Ltd’ as an abbreviation. In some countries, although not the UK, this
title is amended to ‘Proprietary Limited’ or ‘(Pty) Ltd’.
◦ • The people who started the company are able to keep control of it as long as they do not sell too many shares to
other people.
Disadvantages
◦ • There are significant legal matters which have to be dealt with before a company can be formed. In
particular, two important forms or documents have to be sent to the Registrar of Companies:
◦ • The Articles of Association – this contains the rules under which the company will be managed – the
rights and duties of all of the directors; rules concerning the election of directors and the holding of
official meetings; and the procedure to be followed for the issuing of shares.
◦ • The Memorandum of Association – this contains very important information about the company and
the directors. The official name and the address of the registered offices of the company must be stated.
The objectives of the company must be stated as well as the number of shares to be bought by each of the
directors.
◦ • Both of these documents are intended to make sure that companies are correctly run and to reassure
shareholders about the purpose and structure of the company. Once these documents have been received
by the Registrar of Companies, a Certificate of Incorporation will be issued to allow the company to start
trading.
◦ • The shares in a private limited company cannot be sold or transferred to anyone else without the
agreement of the other shareholders. This rule can make some people reluctant to invest in such a
company because they may not be able to sell their shares quickly if they require their investment back.
◦ • The accounts of a company are less secret than for either a sole trader or a partnership. Each year the
latest accounts must be sent to the Registrar of Companies and members of the public can inspect them.
Shareholders have to be prepared to allow more information about their business to be known to other
people.
◦ • Most importantly for rapidly expanding businesses, the company cannot offer its shares to the general
public. Therefore it will not be possible to raise really large sums of capital to invest back into the
business.
Public Limited Companies
◦ This form of business organization is most suitable for very large businesses. Most large, well-known
businesses are public limited companies as they have been able to raise the capital to expand nationally
or even internationally.
◦ Students often make two mistakes about public limited companies:
◦ 1. Public limited companies are not in the public sector of industry, as many students believe. They are
not owned by the government but by private individuals and as a result they are in the private sector.
◦ 2. The title given to public limited companies can cause confusion. This is why in the UK, public
limited companies are given the title ‘plc’ after the business name, for example, J Sainsbury plc. In other
countries, the title ‘Limited’ is used. This must not be confused with the UK use of ‘Limited’ which
refers only to private limited companies.
Advantages
◦ • This form of business organization still offers limited liability to shareholders.
◦ • It is an incorporated business and has a separate legal identity to the owners or shareholders. Its
accounts are kept separately from those of the owners and there is continuity should one of the
shareholders die.
◦ • There is now the opportunity to raise very large capital sums to invest in the business. There is no
limit to the number of shareholders a public limited company can have.
◦ • There is no restriction on the buying, selling or transfer of shares.
◦ • A business trading as a public limited company usually has high status and should find it easier to
attract suppliers prepared to sell goods on credit and banks willing to lend to it than other types of
businesses.
Disadvantages
◦ • The legal formalities of forming such a company are quite complicated and time-consuming.
◦ • There are many more regulations and controls over public limited companies in order to try to protect
the interests of the shareholders. These include the publication of accounts, which anyone can ask to
see.
◦ • Selling shares to the public is expensive. The directors will often ask a specialist merchant bank to
help them in this process. It will charge a commission for its services. The publication and printing of
thousands of copies of the prospectus is an additional cost.
◦ • There is a very real danger that although the original owners of the business might become rich by
selling shares in their business, they may lose control over it when it ‘goes public’. This is an important
point which we will investigate further
Research Task
◦ Can Private limited companies go Public? And why?
Other Organizations
◦ The public sector is a very important part of the economy of all mixed economies. The term ‘public
sector’ includes all businesses owned by the government/state and local government, and public services
such as hospitals, schools, fire services and government departments.
◦ Public corporations are owned by the government but it does not directly operate the businesses.
Government ministers appoint a Board of Directors, who will be given the responsibility of managing the
business. The government will, however, make clear what the objectives of the business should be. The
directors are expected to run the corporation according to these objectives.

◦KNOW THE DIFFERENCE