Forms of Business Organization

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    Ok, guys I am back once again with more interesting stuff about business Studies. So now that we have covered the influences, constraints, costs and accounts of a business we are going to learn more about Business Organization.

    Businesses can be in the form of multinationals with outlets all over the world or they can be in the form of little shops that supply utility goods to people. This variation in business activity is due to the arrangement of different businesses or their different forms of organization. There are several forms of business organizations in the private sector:

    1. Sole Trader: This involves the ownership and management of business by one person alone. In most cases, the person is also the worker i.e a taxi driver.
    2. Partnership: This form of business organization is managed and jointly owned by anywhere from 2 to 20 people.
    3. Ltd. Company: Yes, you must have seen this form of organization written on buildings’ walls or on TV. This is a form of business that has no particular owners, rather the owners are all those people who have bought the shares of the company, however it is managed by a board of directors appointed by the owners to run the company.
    4. Public limited Company (PLC): A public limited company is the largest form of business organization. Most private limited companies become PLCs after their initial success. It has the same features a private limited company has however it does give the owner the permission to sell the shares publicly. Remember people, don’t mistake PLC to be under government administration, it is a fully private form of business organization.

    All of these organizations have their own advantages and disadvantages.

    Sole Trader

    A “sole trader” is a form of business organization that is run and owned by one person, however in many cases there are other workers who work under the owner of a sole trader business.

    This has the considerable advantage of:

    1. Fewer legal regulations than those for other forms of business organisations.
    2. Owner gets to keep all or most of the profit for himself rather than sharing it with others.
    3. There is lesser responsibility as the business would be easier to handle if to was restricted t just one or two shops rather than under different owners altogether.
    4. There is also a comfortable amount of secrecy involved in the business as the accounts of a business will be restricted to the owner himself and the owner will not be obliged to show them to the public.

    But with advantages come disadvantages.

    1. There is no one whom the owner can share his business problems, goals or ideas with. So the businesses is limited to his entrepreneurship only.
    2. There is also not enough capital with the owner to put into the business himself.

    Partner Ships

    Of course partnerships come with their own share of advantages and disadvantages.

    The advantages are that:

    1. A business would have more capital as more no. of owners will put in some of their own capital in the business.
    2. Responsibilities of the business are shared.

    Disadvantages are that:

    1. The partners might disagree about certain decisions and thereby hinder the progress of the business
    2. Limited liability is also a major disadvantage, this. If the business makes loss, the debtors could force the business owners to sell all their belongings if need be o make up for the lost money.

     

     

    Now that we are done with partnerships, lets finish the last two forms.

     

    Private Limited Companies      

     

    This form of organization has a marked lead over the sole traders and partnerships. This lead is in the form of limited liability. Limited liability means that if a business dissolves with debts, the shareholders (owners) cannot be legally forced to sell of their personal possessions in order to compensate for the loss.  Other advantages are that a Pvt. Ltd. Company exists as a separate entity, this means that it has a separate account and makes transactions on its own; most importantly this means that even if one or all of the owners die, the company will not end, as it is a separate entity.

    Shares, are a very convenient and large source of finance, a private limited company can use this option to raise large amounts of money. Something which sole traders and partners cannot do.

    As always disadvantages also exist. Firstly, the conversion of a business from partnerships to private limited companies involves a lot of legal processing and regulations. Two important documents namely the ‘Articles of Association’ and ‘ The Memorandum of Association’ have to be sent to the Registrar General( in the UK) along with various other deeds before a company is properly established.

    The shares can be sold in a Pvt. Ltd. Company. But these shares cannot be sold publicly and consent of other shareholders has to be taken before selling off any shares.

    Public Limited Companies

     

    Last but not the least, public limited companies are the largest forms of business organization in the food chain. They are very much like the Private limited companies except that, they reserve the right to sell their shares publicly and also require some additional legal formalities. Consequently their advantages and disadvantages are almost similar to those of private limited companies.

     

    Other forms of business organisation…..

    The types I told you are the major types of business organisation, there are other less popular forms of business organisations. Close corporation, Which has upto ten members and is very similar to a partnership, is also an example of such forms of business organization.  Similarly Franchises are also becoming popular. Such businesses base their brand names, promotional and training methods on an existing successful business. This has the considerable advantage of ensuring a business’s success and leaving the owner of the franchise(franchisee) with lesser responsibilities. However, the franchisee cannot keep all the profits for himself and has to obey the rules of central management.

    Famous examples of franchises are outlets of McDonald’s and The Body Shop around the world in different countries. This means that it is not the original outlet rather it is an extension of the original restaurant chain.    

     

    FAQs

     

    Q:1  (a) Define the term limited liability.

    Ans. Now to answer this question you have to remember what I said about liability, liability itself means being prone or responsible, whereas limited implies reduced. So in a way the phrase itself tells us the meaning that limited liability is reduced responsibility on the owners’ part if the business dissolves due to high debts.

    (b) Explain the benefits and drawbacks of a partnership.

    Ans. A partnership is a form of business organisation where there can be owners from anywhere between 2 and 20, and the business is jointly owned by the owners who share the responsibilities.

    Such a form has various benefits such as the sharing of responsibilities which reduces the load on each of the owners. This helps each of them manage the business easily and thus a business improves. Also, there is additional capital invested in the business as each owner invest some of his or her money in the business, this creates capital and reduced dependence on other external sources.

    However,  it also has drawbacks like disagreement between partners which could delay a decision and cause loss to a business. Another disadvantage is that of unlimited liability, this means that if a business ends due to debt problems, the creditors could force its owners to sell their personal property for the compensation of the formers’ loss.

     

    That’s it for now. See you later….