CHAPTER ONE-BASIC FORMS OF BUSINESS
ORGANISATIONS
BASIC FORMS OF BUSINESS ORGANISATIONS
There are two basic distinctions, which underlie the
organisation of business enterprise in the private sector
–non-corporate and corporate.
Non-Corporate Organisations
Non-corporate organisations are those which do not
have a separate legal identity from their owners. This
means that the owners are fully liable for the actions of
the organisation, including any debts. The main forms
of non-corporate organisation are:
(a)Sole proprietors, still often known as sole traders
though they are found in activities other than trade
(b)Partnerships.

CHAPTER ONE-BASIC FORMS OF BUSINESS ORGANISATIONS
Corporate Organisations
 Corporate organisations are those which have a separate
legal identity of their own.The most common corporate
business organisations are:
 (a)Public limited companies, which can usually be
recognised, as their official title normally ends with the
common abbreviation ‘plc’

CHAPTER ONE-BASIC FORMS OF BUSINESS ORGANISATIONS
 (b)Private limited companies, which can usually be
recognised as their official title normally ends with the word
"limited" or with the common abbreviation "Ltd". This can
sometimes be confusing, however, since many private
limited companies are, in fact, subsidiaries of large public
limited companies or of foreign companies. Consequently,
you may think you are dealing with a small private
company, when in reality you are dealing with a minor
offshoot of a giant multinational organisation. The legal
independence of the limited company, however, can enable
the giant to disown its offshoot if it becomes a financial
liability.

CHAPTER ONE-BASIC FORMS OF BUSINESS
ORGANISATIONS
Limited and Unlimited Liability
 The term ‘limited’ in public or private limited companies means that the
organisation enjoys ‘limited liability’. This exists where the owners of a business
have their individual responsibility for its debts limited in some way should it fail.
 In practical terms this means that the shareholders, who are its legal owners, are
not liable for any debts of the organisation beyond the amount they have paid or
agreed to pay for their shares. They may lose all the money they have invested in
the company, but cannot be called upon to pay any more.
 The importance of limited liability is that it allows enterprises to raise very large
amounts of capital from a great number of investors who need take no part in the
running of the business. In contrast to this protection for limited company
shareholders, partners (usually) and sole traders have unlimited liability for their
business debts and may lose everything if their business fails.

Advantages
 Ability to raise large capital
 Membership is transferable
 Limited liability
 Enjoy economies of scale.
 Assured continuity
 Can expand easily
 Quality decisions are produced.

Disadvantages
 Difficult to adapt to change
 Complicated process when registering.
 Decisions take long to make.

CHAPTER ONE-BASIC FORMS OF BUSINESS ORGANISATIONS
THE SOLE TRADER
 Also known as the sole proprietor, this is the oldest and simplest form of
business enterprise.
 The proprietor is the sole person who provides the financial resources and
who makes the decisions –i.e. he/she both owns and runs the business.
 There may be employees in the firm, and decision-making may be
delegated to some of them, but the final success or failure of the business
rests with the proprietor, who provides the funds and takes the profits or
the responsibility for any losses.
 The business is not a legal entity separate from the owner, so the proprietor
has unlimited liability and all contracts with the business are made with the
individual proprietor, not with the firm.
 The business is a separate accounting entity which has accounts prepared
for it, but these do not need to be a full set of accounts and need only be
sufficient to satisfy tax liabilities.

CHAPTER ONE-BASIC FORMS OF BUSINESS ORGANISATIONS
Advantages and Disadvantages
 There are a number of benefits from being a sole trader as opposed to any other
form of business organisation.
i. A sole trader business can be established with the minimum of formalities, there
are few legal procedures and book-keeping and accounts are straightforward.
ii. The owner has independence and control –there is no need to consult with
others about decisions.
iii. The business can respond flexibly to market changes and to customers' demands
as decisions can be taken quickly.
iv. Any profit goes to the proprietor.
v. Personal supervision by the owner should mean that good customer relations
can be established and that employees are well motivated.

CHAPTER ONE-BASIC FORMS OF BUSINESS ORGANISATIONS
On the other hand, there are disadvantages.
i. Finance is usually limited to any money the proprietor can provide or borrow
from the bank, building society or family and friends, and this limits the scale of
the business.
ii. Unlimited liability means that, if the business gets into trouble, the owner
stands to lose everything, including the family house if it has been put up as
security for loans.
iii. Expansion is limited to ploughing back the profits, and lack of finance may
prevent the business from reaching a viable size.
iv. The firm depends on the sole proprietor, so there may be problems in taking
holidays or if the owner is ill,and the business is likely to cease with the death of
the owner.
v. Any one person's range of expertise is limited, so the sole trader may be reliant
on others for certain aspects of the business –for example, a sole trader may be
good at repairing the bodywork of damaged cars, but completely lacking in
financial and marketing skills and need to contract with others for these
activities.

CHAPTER ONE-BASIC FORMS OF BUSINESS ORGANISATIONS
PARTNERSHIPS
The key features of a partnership are:
1) All partners have unlimited liability for the debts of the firm, just as
sole traders do, so a partner could lose his/her personal wealth if
the business folds. This very heavy liability for the whole of a
firm's debts applies to each partner no matter what agreement the
partners may have made between themselves for sharing losses.
Thus, one partner could be in a position of losing everything, if the
other partners do not have sufficient assets, even though the
losses may have been caused entirely by one of those unable to
pay. It is not difficult to see why a limited company structure is
likely to be preferable if there is any risk of substantial financial
losses.
2) Any partner can bind the partnership to a contract with third
parties.

CHAPTER ONE-BASIC FORMS OF BUSINESS
ORGANISATIONS
3) All partners are jointly liable for meeting the obligations of
contracts on behalf of the partnership. The partners
usually have joint and several liability, which means
someone could take legal action against the partners
jointly or against each partner individually –for example, in
a claim for damages due to negligent performance of the
partnership's obligations under a contract.
4) A partnership, like a sole proprietorship, is not a separate
legal entity like a limited company, so it is the partners
who are personally liable.

CHAPTER ONE-BASIC FORMS OF BUSINESS
ORGANISATIONS
5) All partners share profits according to agreed arrangements.
6) The name of each partner and the business address(es) must
be shown clearly on all business documents and full names
of partners must be displayed at the place of business.

CHAPTER ONE-BASIC FORMS OF BUSINESS
ORGANISATIONS
Advantages and Disadvantages
1) The advantages of partnerships stem from the fact that their
organisational structure lies between that of a sole proprietor and a
company, so that in a sense they can obtain the best of both worlds.
2) Like the sole proprietor and the very small limited company, they are
small enough to be flexible and the partners are close enough to the
"grass roots" of the business to know what is going on. The principle of
professional accountability to clients and customers is retained.
3) The legal and financial procedures are relatively simple –for example,
the accounts of the business need only be prepared for the information
of the partners and for the calculation of tax liabilities. There is no
obligation to publish accounts.
4) There can be division of labour between the partners so that each can
specialise and benefit from each other's expertise in the running of the
business. Such working arrangements are based on trust and mutual
confidence between partners.

CHAPTER ONE-BASIC FORMS OF BUSINESS ORGANISATIONS
5. Partnerships need not be too bureaucratic, and systems
and controls in the enterprise need not be too complex.
6. Partners may cultivate a degree of interchangeability so
that if one is ill or away from the business, other partners
can take over the work.
7. While operating as individuals, the partners can share the
cost of common premises, staff and services, as in the cases
of doctors, dentists and solicitors.
8. It is easier for partnerships to raise extra resources in
order to expand or develop –unlike the sole proprietor, the
partnership is likely to have more assets to use as security
for loans. A partnership can also raise more capital by
adding new partners.

CHAPTER ONE-BASIC FORMS OF BUSINESS ORGANISATIONS
DISADVANTAGES
1) Partners have unlimited liability –financial failure of the partnership can
spell personal financial ruin for the partners.
2) The withdrawal or death of a partner may dissolve the firm.
3) Any partner can enter into an agreement which binds the others.
4) Decision making may be difficult and slow as all the partners have to
agree –one difficult partner could create problems.
5) For a variety of reasons partnerships are not as stable as sole trader firms.
Shared control means the possibilities of disagreements and delays.
Partners are human beings with human feelings; some partners may be
dishonest, some may be lazy or there may be clashes of personality.