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Forms of business ownership
Purpose, ownership, scale and size.
Business exist for different purposes, some exist to make a profit while other are non-profit making organisations. Profit making business will charge its customers for buying goods or using services because to make a product or provide a service cost money, and this type of business must have money coming in to make a profit. Non-profit organisations provide goods or services considered as essential to everyone like healthcare, social services, emergency services or education. These organisations are supported by government or local councils. Ownership means that business is owned by private individuals who risk their own money to run a business. Most of a small businesses are sole traders or partnerships and have unlimited liability which means the owners are responsible for debts and may have to sell personal possessions to repay the debts. Bigger companies have limited liability which means the owner and the company have separate identity in law. The owner can loose only his investments even if the company has a huge debts. A business which operates on small scale and only sells locally will have different type of ownership than one which operates on a large scale and sells its goods all over the world. Most organisations are owned privately, this means they owned by individuals rather than the government. Owners of private business take the risk involved in running the business and if it is successful then the owner make a profit which is a reward for the risk and effort they took to run the business. They are four main types of privately owned organisations: Sole traders
Private limited company
Public limited company
In addition to that there are two other types of businesses, which are less common: Franchise
Each type of organisation has different benefits and drawbacks. Some are more appropriate for small businesses whereas others are better for large scale companies. Sole traders – this type of business is owned by one person who is personally responsible for every aspect of the business. A sole trader is someone who decides to own and run his business and usually uses personal savings as start-up capital. If the company is successful then the owner `s reward is the profit. The owner can keep the profit after all expenses and income tax are paid. If the business is unsuccessful than the owner loses money , and because his business has unlimited liability the owner may also lose his personal possessions and be made bankrupt. Benefits for a sole trader:
The business can be easy to set up
Independence in decision making
Minimum of paper work
The sole trader may have flexible working hours
Knowing customers helps to avoid bad debts
Unlimited liability means the owner is responsible for all debts
Long working hours
In case of illness the business is closed and makes no money
Difficult to rise capital for start up or to expand business
Partnerships – are set up by two or more people , but no more than twenty. The partners jointly own the business and take responsibilities and risks for running the business. Partnership is often formed by people with different skills so a grater range of services can be offered. Similar to sole trader the partners are personally responsible for business debts, and the profit they making is equally shared to all partners.
Benefits for the owners:
Start up capital is easer to rise
Problems and ideas can be shared and discussed
The partners can specialise in their own particular area of expertise
The partners may not always agree or contribute equally
Profit is shared between partners
The partners have unlimited liability
Death of a partner means shares needs to be repaid
Private Limited Company – many private limited companies start out as sole traders and partnerships. Limited companies are usually small, family run businesses. The owners each own shares of the business and if the business is successful they receive financial reward. In family run businesses the shareholders are also directors and run the business. Unlike the sole traders and partnerships the owners of limited company have separate identity in law and are not personally for the company debts. If the business fails the company goes into liquidation.
Benefits for limited companies:
Limited liability – owners are not personally responsible for the company debts
Its easer to rise capital or borrow from bank
Easy to set up
Its not possible to sell shares to general public
Limited companies have to comply with more regulations than sole traders or partnerships
If the company cannot repay its debts it goes to liquidation which can be difficult process
Public Limited Company – is the largest type of business and usually starts as a private limited company.
A private limited company must have satisfactionary financial track record and there must be enough people interested in buying shares before can be made public. The shares are usually traded on Stock Exchange and can be purchased by members of general public. Shareholders in public limited companies are free to choose whether or not to own shares, and directors are paid salary to run the company.
Benefits for PLC:
Public limited companies have limited liability
Easy to increase capital as many people or organizations can buy shares
Shares increase in value if the company is successful
Operating on large scale can lower the cost per unit
Many regulations to comply with
The original owner may loose control of the business
Specific accounts must be prepared and published each year
Franchise – is a way of owning a business without taking the normal risk of starting out on your own. Franchise is started by using the name of well known organisation. The person who runs the business is called franchisee and the organisation which gives the franchisee the right to operate under its name is called franchisor. The franchisee gets the benefits of the franchisor which often supply materials or stock for sale and give help and advice to the franchisee. Franchisee has the responsibility of running the business on day to day basis and can keep most of the profits, however he must pay a share of the profit and a fee to use trade name.
Less risky than starting own business
Selling a well known name to the public
Advice and help available
Owners keeps most of the profits
Some of the profit must be paid back to the franchisor
The owner is not free to make all of the decisions
Only franchisor products can be sold
Success depends on popularity of products
Cooperatives – societies which operate for the benefit of their members. Each member has a share in the business and equal voice in making decisoans.
Owners have equal share of the profits
Can have limited liability
Workers can decide whether to be owners
Obtaining finance may be difficult
Decision making can take long time if everyone is involved
“equality” may be hard for good workers or leaders
Public ownership – the public sector relates to all the institutions and organisations which are owned and run by the state and are overseen by the government, these includes:
In all these cases finance or funding comes from government and is raised thorough taxation. There are many government departments and all are dealing with different matters, each department is overseen by government minister and has its own budget.
Government departments deal with different matters at national level and local authorities are responsible for local comunity services. The money to provide local services is raised mainly thorough council tax, business rates and council houses.
Public corporations are businesses owned by government, these businesses are operating for profit just like private organizations.
There are very few public corporations in Britain today, which includes:
The Post Office
The Bank of England
The British Broadcasting Corporation – BBC
Many of the public corporations were privatised by the 1980s, examples are: British Telecom, British Airways, British Gas.
Size and scale of businesses
Some businesses are very small and may only consist of one or few staff, other are very large and employ thousand of people.
There are four categories of business size:
Micro – type of business which have no more than 10 employees and its turnover is less than €2 million. Micro businesses are usually sole traders who operates locally.
Small - consist up to 50 employees and have turnover no greater than €10 million. Small businesses are usually family run limited company or partnerships who operate locally or regionally.
Medium – this type of business will employ up to 250 people and have turnover no more than €50 million. Medium size businesses trade as private limited company and operate regionally or nationally.
Large – businesses who employs more than 250 people and have turnover greater than €50 million. These organisations usually trade as public limited company and operates nationally or globally.
The scale relates to the area over which the business operates. Some businesses operate only locally and other trade across a region or all over the country or even globally. There are few factors which influence the scale of business:
size of the market
type of product or service
cost of expansion
ambitions of the owner
Some businesses operate only regionally or nationally , this is because they provide service specific to a region or country for example solicitors or accountants or they produce perishable goods like bread or cakes which are expensive to transport over long distance.
Services or goods required worldwide such banks , cinemas ,hotels, cloths, computers or cars enable many of these businesses operate globally .
Examples of different types of businesses and their purpose Tesco – is Public Limited Company, which means members of the public can buy shares on Stock Exchange. Tesco is profit making organisation and its the world`s third largest grocery retailer with 4,331 stores in 14 countries, and employs 470,000 people worldwide. In UK Tesco has 2306 stores and employs 286,394 people. UK sales are £41.5 bln . This global business also offers non food range of products and services like: electrical goods, sport equipment, clothing and personal finance. Subway – is a franchise with 31845 restaurants in 91 countries with £6 bln of sales every year. Subway is the fastest growing franchise in the world and was created to make a profit. The core product is submarine shaped sandwiches. Subway is privately owned by Doctors Associates Inc – DAI and located in Milford ,Connecticut. DAI is the franchisor who seeks franchisees to partner with, the franchisees can buy the right to operate under Subway trademark according to DAI contract.
Oxfam – charitable trust , organised by trustees but owned by its charitable aims. Oxfam International was formed in 1995 by a group of independent organisations. Their aim was to work together for greater impact to reduce poverty and injustice. Oxfam is confederation of 13 organisations working together and with partners around the world to bring a lasting change. Oxfam is non – profit making business. Beauty by Us – is a small local business working for private profit. Is owned by Ela Bieluga who is a sole trader, which means she takes all the risk involved in running the business but also gets all the profit and has a full control of how its run. Beauty by Us is located in Luton, the business was established 15 years ago and offers its customers a wide range of beauty treatments like : facial and eye treatments , hair removal, body spa treatments, therapeutic body massage , reflexology.