Types of organisation: Choosing the Right Organisation for Success

Business Structures Explained

Have you ever wondered about the different kinds of businesses around us? From your local corner shop to multinational giants, each operates under a specific legal structure. Understanding these types of organisation is fundamental for anyone looking to start a business, invest in one, or simply grasp how the commercial world functions. It’s not just about what a company sells; it’s about how it’s owned, controlled, and financed.

This guide will demystify the various business organisation types found in the UK and beyond. We’ll explore the characteristics, advantages, and disadvantages of each. By the end, you’ll have a clear picture of how different structures impact everything from liability to accessing capital. Let’s delve into the fascinating world of business structures.

The Landscape of Business Organisations

Businesses exist across different sectors. A primary distinction lies between private sector businesses and public sector businesses.

Public Sector Organisations: These are owned and controlled by the government. Their primary goal is often to provide public services, not to maximise profit.

• Public Corporations: These are government-owned businesses. A prime example in the UK is the BBC. They operate independently of the government. However, they work towards pre-set aims and objectives.
• Municipal Enterprises: These are local government enterprises. They typically provide services within a specific local area. Think of local council leisure centres or waste collection services.

Private Sector Organisations: These are owned by individuals or groups of individuals. Their main aim is usually to generate profit. Within the private sector, there’s a diverse range of types of business organisation. These include sole traders, partnerships, private companies, public companies, and franchise organisations. Each has its own distinct characteristics and implications for owners and operations.

To truly understand how these private sector entities differ, let’s compare them across several key criteria.

Comparing Private Sector Business Organisations

Here’s a detailed comparison of the main types of private sector organisations:

Table 1: Key Characteristics of Private Sector Business Organisations

Type of Enterprise	Who Owns the Enterprise	Who Controls the Enterprise	Usual Sources of Finance
Sole Trader	1 person	1 person controls	Owner’s savings, bank loans and overdrafts, profits.
Partnership	2+ owners	The partners	Partners’ savings, bank loans + overdrafts, profits.
Company	2 to any number of shareholders	Major decisions and day-to-day running by directors.	Shares, bank loans and overdrafts, venture capital and profits.
Franchise	Franchisee’s savings, borrowing, and profits.	Franchisee with a steering guide from the franchisor	Major decisions and day-to-day running are made by directors.

This table gives us a foundational understanding. Now, let’s explore more specific criteria for judging their success and inherent structures.

Table 2: Further Comparison of Private Sector Business Organisations

	Sole Trader	Partnership	Private Co	Public Co	Franchise
Who Owns	1 owner	Partners	Shareholders	Shareholders	Franchisee
Size	Small	Fairly small	Most fairly small but some large	Large	Limited by the owner’s capital
Liability	Unlimited	Most Unlimited	Limited	Limited	Limited
Who Takes Profits	One owner	Partners	Shareholders	Shareholders	Divided between franchisor and franchisee
Access to Capital	Limited	Usually fairly limited	Less than for PLC	Extensive	Most fairly small, but some large
Disadvantage	Hard work	Disagreements between partners	Limited capital	May be taken over	Small but may be part of a very large organisation.

Let’s break down each of these types of private sector organisations in detail.

Sole Trader: The Independent Entrepreneur

The sole trader is the simplest and most common type of business organisation. It’s owned and run by one individual. Think of your local corner shop owner or a self-employed plumber. These individuals are their own boss. They make all the decisions.

Characteristics:

• Ownership: A single person owns the business.
• Control: The owner has complete control over all operations.
• Finance: Funding typically comes from the owner’s personal savings. They might also use bank loans or overdrafts. Profits are often reinvested.
• Liability: This is a crucial point. A sole trader has unlimited liability. This means there’s no legal distinction between the owner and the business. If the business incurs debts, the owner’s personal assets (like their home or car) are at risk.

Advantages:

• Easy to Set Up: Starting as a sole trader is straightforward. There are minimal legal formalities.
• Full Control: The owner makes all decisions quickly.
• All Profits to Owner: The single owner keeps all the business profits.
• Personal Touch: Customers often appreciate direct interaction with the owner.

Disadvantages:

• Unlimited Liability: This is the biggest drawback. The owner’s personal wealth is not protected.
• Heavy Workload: Running everything often means long hours and hard work.
• Limited Capital: Access to significant capital is usually limited. Growth opportunities may be constrained.
• Lack of Continuity: The business might cease if the owner becomes ill or retires.

Typical Examples: Small corner stores, newsagents, freelance graphic designers, plumbers, electricians. Many local services operate as sole traders.

Partnership: Sharing the Load

A partnership involves two or more individuals. They agree to own and run a business together. Doctors’ surgeries and legal firms often operate as partnerships. These structures allow shared expertise and resources.

Characteristics:

• Ownership: Two or more people own the business. They share the responsibilities.
• Control: The partners collectively control the enterprise. Decisions are made jointly.
• Finance: Capital comes from partners’ savings. Bank loans and overdrafts are also common. Profits are typically shared amongst them.
• Liability: Most partnerships have unlimited liability for their partners. However, some might form as Limited Liability Partnerships (LLPs). In an LLP, personal assets are protected from business debts.

Advantages:

• Shared Workload: Responsibilities are divided. This eases the burden on individuals.
• More Capital: Partners can pool their financial resources. This generally provides more capital than a sole trader.
• Diverse Skills: Partners bring different expertise to the business.
• Easy to Set Up: Partnerships are relatively simple to establish, much like sole traders.

Disadvantages:

• Unlimited Liability (mostly): Unless an LLP, personal assets are at risk.
• Disagreements: Partners can have disagreements. This can hinder decision-making.
• Shared Profits: Profits are divided among partners.
• Lack of Continuity: The partnership might dissolve if a partner leaves or dies.

Typical Examples: Doctor’s surgeries, dental practices, solicitors’ firms, accountancy practices.

Companies: The Power of Limited Liability

Companies are distinct legal entities. They are separate from their owners. This legal separation offers a significant advantage: limited liability. This means shareholders can only lose the amount they invested in the company if it fails. Every company must register with the Registrar of Companies. It must also have an official address.

There are two main types of companies in the private sector: private companies and public companies.

Private Companies (Ltd)

Private companies have ‘Ltd’ after their name. This signifies limited liability. They are typically smaller than public companies. However, some, like Portakabin and Mars, are very large businesses.

Characteristics:

• Ownership: Shareholders own the company. This can range from two to any number. Often, they are family members. This keeps control within the family.
• Control: Major decisions and day-to-day running are handled by directors. These are often the shareholders themselves.
• Finance: Sources include shares, bank loans, overdrafts, and profits. Shares can only be bought or sold with the Board of Directors’ permission. This restricts public trading.
• Liability: Shareholders benefit from limited liability.

Advantages:

• Limited Liability: Owners’ personal assets are protected.
• Easier to Raise Capital: Can raise more capital than sole traders or partnerships by selling shares.
• Greater Stability: The company continues to exist even if the owners change.
• Professional Image: Often perceived as more credible.

Disadvantages:

• Limited Capital (compared to public companies): Access to capital is less extensive than for Public Limited Companies (PLCs).
• More Regulation: Subject to more legal and administrative requirements than sole traders or partnerships.
• Complexity: More complex to set up and run.
• Less Confidentiality: Financial information must be filed publicly.

Typical Examples: Many small to medium-sized family businesses. These include local manufacturing firms or regional service providers.

Public Companies (PLC)

A public company has ‘PLC’ (Public Limited Company) after its name. Their shares are traded on a stock exchange, such as the London Stock Exchange. Cadbury Schweppes was a prime example.

Characteristics:

• Ownership: Shareholders own the company. There can be a very large number of shareholders.
• Control: Directors make major decisions. They also handle the day-to-day running.
• Finance: The main advantage is raising large amounts of capital very quickly through share sales on the Stock Exchange. They also use bank loans, overdrafts, and profits.
• Liability: Shareholders have limited liability.
• Regulation: To create a public company, directors must apply to the Stock Exchange Council. This body carefully checks the accounts.

Advantages:

• Extensive Capital Access: Can raise significant capital from the public.
• Increased Profile: Public listing boosts reputation and visibility.
• Liquidity: Shares are easily bought and sold.
• Growth Potential: Access to capital supports major expansion plans.

Disadvantages:

• Loss of Control: Original shareholders can lose control through takeover bids if many shares are purchased.
• High Costs: Expensive and complex to set up and maintain.
• Increased Scrutiny: Subject to intense public and media scrutiny.
• Short-Term Focus: Pressure from shareholders for short-term profits can arise.

Typical Examples: Well-known national and international companies. Vodafone and Corus are good examples.

Franchising: The Business Blueprint

Franchising is an increasingly popular type of organisation in the UK. In the United States, almost half of all retail sales happen through franchise systems, like McDonald’s. Franchising is essentially the ‘hiring out’ or ‘licensing’ of a proven business idea to other companies.

How Franchising Works: A franchise grants permission to sell a product. It allows trading under a specific name. This happens in a particular area. If someone has a good idea (the franchisor), they can sell a licence. This allows another person (the franchisee) to use that idea to run a business in their area.

The franchisee invests initial capital. They receive equipment from the franchisor. If materials are vital (e.g., confectionery, pizza bases, hair salons), the franchisee must buy an agreed percentage of supplies from the franchisor. The franchisor profits from these supplies. This also helps ensure the final product’s quality. The franchisor also takes a percentage of the business’s profits. They do this without risking capital or day-to-day management involvement.

Characteristics:

• Ownership: The franchisee owns their specific business unit. They operate under the franchisor’s brand and system.
• Control: The franchisee controls daily operations. However, they follow a steering guide from the franchisor.
• Finance: The franchisee uses their own savings or borrows for initial capital. They share profits with the franchisor.
• Liability: Franchisees typically have limited liability, as their business is often structured as a limited company.

Advantages for the Franchisee:

• Established Brand: Benefits from trading under a well-known name. This reduces marketing risk.
• Local Monopoly: Often enjoys a local monopoly in their given area.
• Training and Support: The franchisor usually arranges training. Ongoing support is also provided.
• Own Boss: The franchisee is their own boss. They take most of the profits.
• Reduced Risk: A proven business model reduces failure risk.

Advantages for the Franchisor:

• Rapid Expansion: Can expand quickly without significant capital investment.
• Increased Brand Presence: Expands brand reach across locations.
• Revenue Streams: Profits from initial fees, ongoing royalties, and supply sales.
• Motivated Operators: Franchisees are typically highly motivated entrepreneurs.

Disadvantages for the Franchisee:

• Shared Profits: The franchisee must share profits with the franchisor.
• Lack of Independence: Less freedom in decision-making due to franchisor rules.
• Ongoing Fees: Royalties and other fees must be paid.
• Brand Reputation Risk: The Performance of other franchisees can affect their business.

Disadvantages for the Franchisor:

• Loss of Control: Less direct control over daily operations than company-owned branches.
• Reputation Risk: Poor franchisee performance can damage the overall brand.
• Support Costs: Providing training and ongoing support can be expensive.

Typical Examples: Quick Service Restaurants like McDonald’s, other food outlets (e.g., Subway, Domino’s Pizza), and services (e.g., 24-hour plumbing services, hair salons, gyms).

Key Concept: Limited vs. Unlimited Liability

A fundamental concept in understanding types of organisation is liability.

• Limited liability is a form of business protection. It applies to company shareholders and some limited partners. For these individuals, the maximum sum they can lose is their invested money. This is the limit of their financial responsibility. This protection encourages investment, as personal assets are safe.
• Unlimited liability, conversely, means there is no legal distinction between the owner’s personal assets and the business’s debts. If the business fails, creditors can claim the owner’s personal property to recover losses. Sole traders and partners in traditional partnerships face this risk.

Why Does Organisational Structure Matter?

The choice of business organisation type is critical for several reasons:

• Risk Management: The chosen structure directly impacts the owner’s personal financial risk. Limited liability offers crucial protection.
• Access to Capital: Different structures provide varying access to funding. Public companies, for instance, can tap into vast public markets.
• Control and Decision-Making: The structure dictates who makes decisions and how. Sole traders have full control, while company directors manage on behalf of shareholders.
• Taxation: Each structure has different tax implications for profits and owners.
• Administrative Burden: The complexity of setting up and running the business varies greatly. Companies face more regulatory hurdles.
• Growth Potential: Some structures are better suited for scaling up operations and attracting further investment.
• Continuity: The chosen structure affects how easily the business can continue if an owner leaves or dies.

For anyone starting a business, this decision is one of the most important early choices. It shapes the company’s future trajectory, its resilience, and its ability to achieve its goals. Existing businesses might also revisit their structure as they grow or adapt to new market conditions.

Conclusion: Navigating the Business Landscape

The world of business organisation types is diverse. From the independent sole trader to the globally expansive public company and the systematic franchise model, each structure offers unique benefits and challenges. Understanding these distinctions is not just academic; it’s a practical necessity for entrepreneurs, investors, and consumers alike.

The private sector, with its myriad of structures, drives innovation and provides goods and services that shape our daily lives. Whether a company opts for the simplicity of a partnership or the capital-raising power of a PLC, its chosen structure underpins its operations, financial health, and long-term viability. By carefully considering factors like liability, access to capital, and control, businesses can select the optimal legal form. This ensures they are well-positioned for success in the competitive marketplace.