Basic Forms of Business Organisation

There are three main types of business ownership in the private sector of the economy: a joint stock company or limited company (AmE corporation), partnership and sole trader. The choice depends on what is to be produced, how capital is to be raised, and the size of the enterprise.

Sole trader (proprietorship). One person owns and runs the company. A single person provides the capital and takes all the risks. Since the proprietor is solely responsible for the success or failure of the business, he or she gets the profit and enjoys all the fruits of success. Likewise, a sole trader has unlimited liability for business debts, even if this means selling personal assets to meet creditors demands in the event of bankruptcy. The one-person business is the easiest to set up and to dissolve but it is usually good only for small business, e.g. in farming, retailing, repair work, personal services such as hairdressing.

Partnership. A group of people provide capital, set up the company and manage it together. Partners usually share both the risks and the profit of the enterprise. If the business fails, they are fully liable for all debts, and may even have to sell personal assets. A partner need not play an active role: there may also be sleeping partners who supply capital and share in the profits, but do not participate in the management of the company. They have limited liability, and in the event of bankruptcy only lose their investment, not their personal assets. Partnerships are a common form of business organization in such professions as law, accountancy or medicine.

Joint stock company or Limited company (Corporation Inc.). Most people doing business form limited companies. Basically, the joint stock company consists of an association of people who contribute towards a joint stock of capital for the purpose of carrying on business with a view to profit. A limited company is a legal person separated from its owners, and is only liable for the amount of invested capital. The capital is divided into shares, which are held by shareholders or stockholders. The liability of shareholders for debts of the firm is limited to the amount of money they had invested in the company to buy shares. Shareholders can vote at the annual general meeting to elect the Board of Directors.

There are two types of limited companies:

1) In a private limited company (Ltd), all shareholders must agree before any shares can be bought or sold. Most companies begin as private limited companies. They are often small firms consisting of the members of one family.

2) Public limited company (Plc) or Corporation is the most important form of business organization. Public companies are much larger units and can raise tremendous sums of money. A corporation is created by a legal document, called a charter, which is issued by the state. The basic distinction between a private and a public company is that a public company can offer its shares for sale to the general public on the stock exchange.

Some corporations are multinationals with subsidiaries and assets in different countries and they generally engage in mergers with other companies and acquisitions in order to expand. However, the large corporation is increasingly under threat from the growing number of dotcoms set up by entrepreneurs.

Since no one form of business organisation is perfect, so-called hybrids have been devised like: franchises, limited partnerships, cooperatives, and joint ventures.

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