Activity 1: Types of Business Organisation

• These notes cover the advantages and disadvantages of different business structures.

Sole Trader

• A sole trader is a business owned and controlled by one person.
• This individual receives all profits but is also personally liable for all business debts.

Advantages:

• Simple to set up with minimal legal requirements.
• The owner has full control over business decisions.
• All profits go directly to the owner.
• Financial information remains private.
• Easy to close down the business if desired.

Disadvantages:

• The owner has unlimited liability, risking personal assets.
• Raising capital can be difficult, often limited to personal funds or loans.
• The business's existence is tied to the owner, making continuity challenging.
• Expansion may be limited by the owner's resources and capabilities.
• Can face intense competition from larger businesses.

Partnership

• A partnership involves two or more people who agree to share in the profits or losses of a business.
• Partners contribute resources and expertise, sharing responsibilities.

Advantages:

• Easier to raise capital compared to a sole trader, as partners pool resources.
• Partners can bring diverse skills and experiences.
• Simple to establish with fewer formalities than corporations.
• Partners can share the workload and responsibilities.

Disadvantages:

• Partners have unlimited liability, risking personal assets.
• Disagreements among partners can lead to conflicts and business disruption.
• Profits are shared among partners.
• The actions of one partner can create liabilities for all.
• If a partner leaves, the partnership may dissolve.

Private Limited Company

• A private limited company is a business organization that is legally separate from its owners (shareholders).
• Shares are not offered to the general public.

Advantages:

• Shareholders have limited liability, protecting personal assets.
• Easier to raise capital through the sale of shares to private investors.
• The company has a separate legal identity, ensuring continuity beyond its owners.
• Can attract and retain employees with benefits like stock options.

Disadvantages:

• More complex to set up and run than sole proprietorships or partnerships due to increased legal and administrative requirements.
• Financial information is less private compared to sole traders.
• Shareholders have less direct control compared to partners in a partnership.
• Shares cannot be traded on public exchanges.

Public Limited Company

• A public limited company can offer its shares to the general public via the stock exchange.
• This structure allows for raising significant capital.

Advantages:

• Can raise substantial capital through public offerings of shares.
• Shareholders have limited liability.
• The company has a separate legal existence, ensuring continuity.
• Shares can be easily bought and sold on the stock exchange.
• Easier to acquire other companies through the exchange of shares.

Disadvantages:

• Complex and expensive to set up and maintain.
• Subject to extensive regulation and reporting requirements.
• Management can be influenced by shareholders.
• Greater public scrutiny of company performance and activities.
• Risk of hostile takeovers if the company performs poorly.