Types of business organisation
The main types of business organisation in the private sector in the UK are:
- sole traders
The sole trader
The sole trader is the most common form of business ownership and is found in a wide range of activities (e.g. window cleaning, plumbing, electrical work, busking). In the UK about 20 percent of sole traders operate in the construction industry, a further 20 percent in retailing, and about 10 percent in finance, and 10 percent in catering.
No complicated paperwork is required to set up a sole trader business. Decisions can be made quickly and close contact can be kept with customers and employees. All profits go to the sole trader, who also has the satisfaction of building up his or her own business.
But there are disadvantages. As a sole trader you have to make all the decisions yourself, and you may have to work long hours (what do you do if you are ill or want a holiday?) You do not have limited liability, and you have to provide all the finance yourself. As a sole trader you need to be a jack-of-all-trades, and just because you are a good hairdresser does not necessarily mean you have a head for business strategy.
An ordinary partnership can have between two and twenty partners. However, the Partnership Act of 2002 has made it legal for some forms of partnership e.g. big accountancy firms to have more partners who also enjoy limited liability. People in business partnerships can share skills and the workload, and it may be easier to raise the capital needed. For example, a group of doctors are able to pool knowledge about different diseases, and two or three doctors working together may be able to operate a 24 hour service. When one of the doctors is ill or goes on holiday, the business can cope.
Partnerships are usually set up by writing out a deed of partnership which is witnessed by a solicitor and sets out the important details such as how the profits and losses will be shared. Partnerships are particularly common in professional services e.g. accountants, solicitors, vets.
A company is owned by shareholders who appoint Directors to give direction to the business. The Chief Executive is the senior official within the company with responsibility for making major decisions. Specialist managers will be appointed to run the company on behalf of the Board.
A company is a legal body in its own right with an existence that is separate in law from its owners. The company will thus be sued and can sue in its own name.
Shareholders put funds into the company by buying shares. New shares are often sold in face values of £1 per share but this does not have to be the case.
Limited liability is a form of business protection for company shareholders (and some limited partners). For these individuals the maximums sum they can lose from a business venture which they have contributed going bust is the sum of money that they have invested in the company – this is the limit of their liability.
Every company must register with the Registrar of Companies, and must have an official address.
Private companies have Ltd after their name. They are typically smaller than public companies although some like Portakabin and Mars are very large. Shares in a private company can only be bought and sold with permission of the Board of Directors. Shareholders have limited liability.
A public company like Cadbury-Schweppes or BT can sell shares to the public and to financial institutions and have their shares traded on the Stock Exchange. The main advantage is that large amounts of capital can be raised very quickly. One disadvantage is that control of a business can be lost by the original shareholders if large quantities of shares are purchased as part of a takeover bid. In order to create a public company the directors must apply to the Stock Exchange Council, which will carefully check the accounts.
In the United States almost half of all retail sales are made through firms operating under the franchise system like McDonald’s which has a brand franchise. Franchising is becoming increasingly popular in this country.
Franchising is really the ‘hiring out’ or licensing of the use of ‘good ideas’ to other companies. A franchise grants permission to sell a product and trade under a certain name in a particular area. If I have a good idea, I can sell you a licence to trade and carry out a business using my idea in your area. The person taking out the franchise puts down a sum of money as capital and is issued with equipment by the franchising company. The firm selling the franchise is called the franchisor and a person paying for the franchise is called the franchisee.
Where materials are an important part of the business (e.g. confectionary, pizza bases, hair salons) the franchisee must buy an agreed percentage of supplies from the franchisor, who thus makes a profit on these supplies as well as ensuring the quality of the final product. The franchisor also takes a percentage of the sales of the business, without having to risk capital or become involved in the day-to-day management.
The franchisee benefits from trading under a well-known name and enjoys a local monopoly. Training is usually arranged by the franchisor. The franchisee is his or her own boss and takes most of the profits.