Table of Contents
IGCSE Business Studies: Ownership and Internal Organisation
Ownership and Internal Organization
The Legal forms of business organization
This chapter introduces the main types of lega forms of business in the UK. These businesses can be classified as: sole traders, partnerships, limited liability companies, franchises, and multinationals. Each business has its own merits and drawbacks, which help the owners to determine the best type of legal form for their business organization.
Sole Traders
A sole propietorship is a business owned by a single person (also known as sole trader). This person can employ as many people as needed, but remains the only owner of the business. The advantages of being being a sole trader include:
- Set up the business easily. This is because sole propietorships are the cheapest and easiest type of business to set up- there are very few legal procedures needed to start the business.
- Have autonomy (also known as independence) in decision making, e.g. the owner is the boss and does not need to consult anyone about his or her decisions. This makes the business relatively easy to run.
- Keep all the profits made by the business. This also gives an incentive for the sole trader to work hard as he/she is rewarded with more profits as the business becomes more successful.
- Have the benefit and luxury of tax advantages as a small business.
- Ensure privacy as the business does not need to publish its accounts to the general public. Only the tax authorities need to see the financial information of the sole trader.
- Be flexible in what the business does. E.g., the owner has some flexibility in the choice of working hours. Also, if one business idea does not work out, the sole trader can quite easily introduce new trading activities or close down the business and start another.
- Have a sense of achievement from running their own business.
The disadvantages of being a sole trader include:
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- The owner bears all the risks and chances of failing when running the business on his/ her own. There is no one else to share the burden or responsibilities.
- The added workload from having to run the business as a sole proptietor. Being the only person in the business, the sole trader often has to work long hours, especially during the early stages of the business being set up.
- Limited specialization. Unlike larger companies, sole traders cannot rely on the marketing, finance, production and human resource management expertise of the others. This limits the extent to which sole proprietors can benefit from specialization and the division of labour.
- Access to a variety of sources of finance is limited. Being a small business, the sole proprietorship represents high risk. This limits the extent to which the sole trader can raise finance from banks and other sources.
- Lack of continuity- if the owner is ill and wishes to have a day off, or have a holiday, then the organization will struggly to continue. If the owner dies, the business will cease to operate in its current legal form.
- Restricted ability to exploit economies of scale- large businesses are usually able to enjoy economies of scale, e.g. lower unit costs of production resulting from large scale companies. This means that sole traders struggle to gain cost advantages and therefore have to charge higher prices of their products.
- The owner has unlimited liability, meaning that even if the business goes intro debt and makes a loss, the owner is the only one responsible and liable for repaying the debts, even if personal assets have to be sold to do so. This is because there is no legal difference between the sole trader and the sole proprietorship.
Partnerships
A partnership is a business organization owned by more than one person. In an ordinary partnership, there are between 2 and 20 owners- the co- owners of the partnership. At least one of these partners will have unlimited liability, although it is usual practice for all the partners to share responsibility for any losses made by the business. The government does allow some businesses, such as law firms and health clinics, to operate with more than 20 partners.
To prevent potential misunderstandings and conflict, most partnerships draw up legal contract between the partners, known as deed of partnership. The contents of the partnership deed include the names of all partners, the amount of capital invested bu each partner- and hence their stake in the partnership, their responsibilities, voting rights, arrangements for dismissing a partner or approving a new partner and how profits are to be shared between the owners. If a deed of partnership is not prepared, then The Partnership Act of 1890 applies, stating that legally all partners have an equal share in the running of the business and the distribution of its profits.
The advantages of partnerships include:
- As there are up to 20 owners, a partnership is usually able to raise far more capital to run its business than sole traders
- Similarly, as there are more owners, the business can benefit from having more ideas and expertise. Most partnerships can also benefit from specialization and division of labour.
- Like sole traders, the business affairs of partnerships are kept confidential. Again, only the tax authorities need to know about the financial position of the business. This makes it appropriate for businesses such as private health care providers, accountancy firms and law firms to operate as partnerships as they need to keep their business affairs confidential.
