1.4 - Different Business Forms
Public and private sector organizations
Organizations fall into two main categories: those in the public sector and those in the private sector. These categories differ in ownership, funding, and primary goals.
Public sector organizations
Public sector organizations are owned and operated by the government. Their main goal is to deliver services to the community, rather than generating profit. Funding comes from taxes collected by the government. Examples include schools, hospitals, and local councils, which focus on public welfare.
Private sector organizations
Private sector organizations are owned and managed by individuals or groups. They vary in size, from small operations run by one person to large corporations. Most aim to generate profit, though some, like charities, have different priorities. These organizations operate independently of government control and rely on their own revenue sources.
Non-profit businesses and their types
Non-profit businesses operate without the primary goal of making profit. Instead, they focus on supporting people, communities, or specific causes. Any surplus funds are reinvested rather than distributed to owners.
Characteristics of non-profit businesses
- Revenue from sources like donations or trading activities does not become personal profit for owners or shareholders.
- They often receive tax benefits due to their structure, which helps them focus on their objectives.
Types of non-profit businesses
- Charities - These raise funds through donations and activities such as running shops. They use the money to support causes like helping the vulnerable or protecting the environment.
- Social enterprises - These function like regular businesses by trading goods or services and generating profit, but they direct profits towards social or environmental goals, such as community projects or sustainability initiatives.
- Mutual organizations - These prioritize providing maximum value to customers. Profits are reinvested to improve services or lower prices, often seen in building societies or cooperatives.
Limited and unlimited liability
Liability refers to the responsibility for paying business debts. It can be limited or unlimited, affecting how much personal risk owners face.
Unlimited liability
Unlimited liability treats the business and its owner as the same legal entity. If the business cannot pay its debts, these become the owner's personal responsibility. Owners, such as sole traders, may have to sell personal belongings to settle them.
Limited liability
Limited liability protects owners from personal responsibility for business debts. The business is a separate legal entity, so owners, like shareholders in a company, only risk losing what they have invested. This separation encourages investment by reducing personal financial danger.
Sole traders and their advantages and disadvantages
A sole trader is a self-employed person who owns and runs their business alone, often under their own name or a trading name. Examples include local shop owners, plumbers, or consultants. They handle all aspects, including finances, costs, and investing money to start or expand the business. Sole traders face unlimited liability and have few legal requirements to begin trading, though they must follow rules like the Companies Act 2006 if using a trading name.
Advantages of sole traders
- Complete control - Owners make all decisions independently, acting as their own boss.
- Full profit retention - All earnings belong to the owner, with no need to share.
- Simple setup - Minimal paperwork compared to companies, avoiding complex legal processes.
- Cost savings - No fees for formal agreements or legal advice on ownership.
Disadvantages of sole traders
- High personal risk - All responsibilities rest on one person, with no support for decisions.
- Long working hours - Meeting demands often requires extended time commitment.
- Limited skills - Owners may lack expertise in areas like accounting or marketing.
- Restricted funding - Access to capital is limited to personal savings or loans.
- Illness vulnerability - No backup if the owner is unable to work.
- Unlimited liability - Personal assets are at risk for business debts.
Private and public limited companies
Limited companies offer limited liability and are owned by shareholders, with day-to-day operations managed by directors. The company's value is split into shares that can be traded. All must comply with the Companies Act 2006, submitting documents like a memorandum and articles of association to Companies House to receive a certificate allowing trading. They also produce annual financial reports.
Private limited companies (Ltd)
- Shares cannot be sold publicly and are not listed on stock exchanges.
- Selling shares requires approval from other shareholders.
- Often family-run or small businesses with no minimum capital needed.
- Name ends in 'Limited' or 'Ltd'.
Public limited companies (PLC)
- Shares can be sold to the public via a prospectus and are listed on stock exchanges for easy trading through brokers or banks.
- Typically begin as private companies before going public to access more funds.
- Require at least $50,000 in share capital, with 25% available to the public if listed.
- Name ends in 'PLC'.
Ownership and control in limited companies
In small private companies, directors are often the shareholders. In larger ones, shareholders elect directors to a board. This can lead to a separation where owners (shareholders) do not control daily operations, known as the divorce of ownership and control.
Share capital and dividends
Ordinary share capital comes from selling shares and funds long-term investments. Shareholders receive dividends, which are shares of profits per share owned. Dividends are not guaranteed, as debts like loans take priority.
Market capitalisation measures a company's value and is calculated as:
Where:
- Number of issued shares = Total shares sold by the company
- Current share price = Market value of one share (£)
Worked example - Calculating market capitalisation
A public limited company has issued 750,000 shares, with each share currently priced at £3.20. Calculate the market capitalisation.
Step 1: Identify the values
- Number of issued shares = 750,000
- Current share price = £3.20
Step 2: Apply the formula
Choosing and changing business structures
Entrepreneurs select a business structure based on factors like size, funding needs, and risk tolerance. As businesses evolve, they can change structures to suit growth.
Common changes in business structures
- Sole traders may form private limited companies to gain limited liability and attract investors.
- Private limited companies can become public limited companies to raise large sums through public share sales.
- Public limited companies might revert to private status, often through a takeover that removes public trading.
Impact of ownership on mission and objectives
The form of ownership influences a business's mission (its overall purpose) and objectives (specific goals).
How ownership affects missions and objectives
- Non-profit organizations - Focus on community benefits or social causes, such as aiding those in need.
- Private sector for-profit organizations - Prioritize profit maximization to benefit owners or shareholders.
- Public sector organizations - Aim to serve society, like providing essential services for public good.
- Sole traders - Have full control to set personal missions and objectives.
- Public limited companies - Directors may focus on long-term goals, such as expansion, even if it means lower short-term profits.