1.2 Types of Business Entities

Revision Notes: Types of Business Entities

1. Distinction between Private and Public Sectors

Private Sector

• Ownership: Owned and controlled by private individuals or groups.

• Objective: Profit maximisation.

• Characteristics:

• More flexible in decision-making.

• More competitive due to market forces.

• Survival depends on efficiency and ability to attract customers.

Public Sector

• Ownership: Owned and controlled by the government.

• Objective: Provide essential goods and services (not always profit-based).

• Characteristics:

• Funded mainly by taxation.

• Aim is accessibility and fairness rather than profit.

• May operate in areas unattractive to private investors (defence, public transport).

2. Profit-Based Organizations

2.1 Sole Traders

• Definition: Business owned and operated by one individual.

• Start-up finance: Personal savings, loans, or borrowing.

• Liability: Unlimited (the owner is personally responsible for debts).

Advantages:

• Few legal formalities, easy to set up.

• Owner keeps all profits.

• Full control and independence.

• Personalized services due to small scale.

• Privacy (financial records not publicly disclosed).

• Quick decision-making.

Disadvantages:

• Unlimited liability exposes personal assets to business risk.

• Limited sources of finance.

• Heavy workload and stress on owner.

• Limited economies of scale.

• No continuity – business ends if the owner dies or retires.

2.2 Partnerships

• Definition: Business owned by two or more people (partners).

• Legal agreement: Deed of Partnership outlines profit-sharing, responsibilities, and rules.

• Liability: At least one partner has unlimited liability.

Advantages:

• More finance through pooled funds.

• Shared workload and responsibilities.

• Specialisation and division of labour.

• Financial privacy compared to corporations.

• Generally cost-effective compared to companies.

Disadvantages:

• Unlimited liability for general partners.

• Disagreements may lead to conflicts.

• Decision-making slower due to consultation.

• Lack of continuity (death/withdrawal of a partner can dissolve the partnership).

2.3 Limited Liability Companies

• Definition: Businesses incorporated as separate legal entities, owned by shareholders.

• Liability: Shareholders have limited liability.

• Types:

• Private Limited Company (Ltd)

• Shares owned by family/friends.

• Shares not traded on stock exchange.

• Permission needed to transfer shares.
  

• Public Limited Company (PLC)

• Shares can be traded openly on the stock exchange.

• Ownership spread across the general public.

Advantages:

• Ability to raise large capital (especially PLCs).

• Limited liability reduces risk for investors.

• Continuity (separate legal identity).

• Economies of scale from expansion.

• Potential tax benefits.

Disadvantages:

• Increased compliance costs and bureaucracy.

• Disclosure of financial information reduces privacy.

• Communication issues with larger workforce.

• Possible loss of control (especially in PLCs where shares are widely held).

3. For-Profit Social Enterprises

• Definition: Businesses that aim to generate revenue but have social objectives as their core purpose.

• Key Aims:

• Generate surplus revenue.

• Reinvest surplus into social causes or community projects.

• Operate ethically using frameworks like the Triple Bottom Line (Profit, People, Planet).

3.1 Private Sector For-Profit Social Enterprises

• Operate similarly to traditional businesses but reinvest profits in social causes.

• Do not depend entirely on donations.

3.2 Public Sector For-Profit Social Enterprises

• State-owned enterprises that function commercially to generate revenue for governments.

• Help fund essential public services while ensuring efficiency.

3.3 Cooperatives

• Ownership: Owned and operated by members who are also employees/customers.

• Principle: Democratic – each member has equal voting rights.

• Profit: Shared among members, not external shareholders.

Advantages:

• Strong motivation and sense of belonging.

• Democratic decision-making.

• Social responsibility and ethical operations.

• Public support due to community-focused approach.

Disadvantages:

• Limited finance compared to corporations.

• Slower decision-making due to participation.

• Disincentive effects if profits are spread too thin.

• Limited promotion and growth opportunities.

4. Non-Profit Social Enterprises

Non-Governmental Organizations (NGOs)

• Operate in the private sector but provide services usually linked to public responsibilities.

• Funded through donations, grants, and voluntary contributions.

• Focus on humanitarian aid, education, environment, health, and poverty reduction.

• Role: Fill the gaps where government provision is insufficient.

Characteristics:

• Non-profit objective – any surplus is reinvested into achieving social goals.

• Independent of government control (though may receive support).

• Wide range of stakeholders including volunteers, donors, and beneficiaries.

5. Key Comparisons and Exam Focus

• Private vs. Public Sector: Ownership and purpose differ significantly.

• Liability: Sole traders and partnerships = unlimited; companies = limited.

• Continuity: Higher in incorporated companies.

• Finance Access: Limited for sole traders/partnerships, greater for companies.

• Social Enterprises: Combine revenue-making with ethical or social objectives.
  
  

• NGOs: Do not operate for profit but for community welfare.