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Types of businesses

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The basic economic institution in different economics systems is the business, Businesses determine much of how the economy operates. Businesses produce goods and services, and they come in every shape and size. Although the vast majority of the world’s companies are small, in many countries the economy is dominated by large firms. Large business differ from small ones in a wide variety of ways. In many countries there are nationalized companies belonging to the state, as well as private companies. A private company might be a small firm with just one owner or a very large firm with thousands of shareholders “ownig” he firm.

Main types of business in nowadays economic world are sole proprietorships, partnerships, public and private limited companies (corporations in the USA), and cooperatives.

Starting a business requires more than natural resources, labor, and capital. An entrepreneur must organize these resources. Many entrepreneurs start their own business as sole proprietorships. A sole proprietorship is a one –owner business. The advantages of sole proprietorships (they are easy to organize, decisions can be made quickly, owners receive all profits, etc.) explain why so many people start business and try to run them alone. However, a sole proprietor sometimes encounters difficult problems in starting a business. One person has limited resources to start and operate a business. The owner has only personal savings and funds that can be borrowed. Because capital is lacking, most sole proprietors begin small and fail. Even those that succeed often stay small.

A sole proprietorship also must deal with the problem of unlimited liability. According to the law, the owner and the business are one and the same. If the business fails, the owner must pay the debts. The personal property of the owner, such as a home or a car, can be taken to pay the debts of the business. No limit is placed on the amount the owner can lose. High profits can make an owner wealthy, but high losses can ruin an individual.

To increase their chances of success entrepreneurs often choose partnership is an association of two or more people in order to run a business. Partners generally contribute equal capital, have equal authority in management, and share profits or losses. In many countries, lawyers, doctors and accountants are not allowed to form companies, but only partnerships with unlimited liability for debts – which should make them act responsibly. A partnership has many of the characteristics of the sole proprietorship. Partnerships are easy to organize, decisions can be made quickly, profits are shared with only a few people, and the owners are responsible for success or failure of the business.

Like proprietorships, partnerships are not free of problems. Liability is still unlimited. Like sole proprietors, partners are responsible for the debts of the business, Liability then can actually be greater in a partnership than in a sole proprietorship, since each partner is responsible for all the business debts. Partnerships also have limits life. If one partner dies, the business must be dissolved.

Consequently, the majority of businesses are limited companies (US - corporations), in which investors are only liable for the amount of capital that have invested. If a limited company goes bankrupt, its; assets do not cover the debts, they remain unpaid (i.e. creditors do not get their money back).

Often one person does not have enough money to start a business. Combining the resources of a number of people and forming a corporation is a way to raise the large amount of money needed. A corporation is a business, that although owned by one or more investors, legally has the rights and duties of an individual. Corporations have the right to buy, sell, and own property. Corporations may make legal contracts, hire and fire workers, set prices, and be sued, fined and taxed. A business must obtain a charter of incorporation from the state legislature to be legally recognized as a corporation.

Corporations have some advantages over sole proprietorships and partnerships. First, a corporation has limited liability. Thus if the corporation goes bankrupt or is sued, the stockholders lose only the value of their stock. The stockholders, who are the corporations owners, cannot be held personally responsible for any money the corporation owes. Second, corporations have the ability to raise very large amounts of money. They use this money to change models, replace obsolete equipment, and build new factories. Corporations can raise money by selling bonds, as well as stocks. Third, a corporation has an unlimited life. That is the corporation continues to function despite death, transfer, or changes in ownership, management, or labor. The work of sole proprietor or partners can end abruptly in such circumstances. This stability attracts small investors. The fourth advantage of corporation is the ease of ownership transfer. Selling a small business may be difficult; selling shares of stock is relatively easy. The investor also has an advantage. The ability to get out of one business, by selling stock, and into another quickly, by buying stock, is quite useful to small investors.

Corporations have disadvantages as well as advantages. First, complex forms must be filed with the state or federal government. Second, a corporation's profits are subject to double taxation. Third in corporations with many owners or stockholders the individual share of profits in the form of dividends is comparatively small. Fourth, a corporation's owners do not directly control the business. Most individual stockholders take little interest in management decisions. In contrast, sole proprietors or partners manage their own business.

A cooperative may also be defined as a business owned and controlled equally by the people who use its services or by the people who work there.


11. Private company: the structure of the authorized capital, Risk of a takeover. (Harper&Grant ltd. overcomes the risk of a take-over and ensures the favorable redistribution of the share capital).

The death of Ambrose Harper, one of the two men who founded the company Harper & Grant ltd., causes a crisis in the firm. H&G is a private company. It was started originally by Hector Grant's father and the late Ambrose Harper together. A private company can be formed by two or more people. They sign Memorandum of Association, stating the number of shares they agree to take, and their signature is followed by the signatures of anyone else, often members of the family, who will also take shares in the company. In a private company there cannot be more than fifty members, or shareholders. The authorized capital of H&G Ltd was originally P5000, but the company has grown, and each 1 share is now worth about P100. Each share carries a vote at a shareholder's meeting.

Wenthworths, a large and successful firm who manufacture mattresses for beds, own 10% of H&G shares. Mr. Wentworth senior was a personal friend of Ambrose Harper. His firm now has an opportunity of buying some of the shares formerly belonging to Harper. Hector Grant wants to stop Wentworth getting as many shares as he owns himself for fear of upsetting the voting power at shareholder's meetings. If Wentworth owned fifty-one per cent of the shares they would have a controlling interest, and would be in a very good position to take over H&G completely. This being done, it will become a fully owned subsidiary.

Hector Grant does not want Alfred Wentworth to own too many of the shares. Having raised a loan, he buys enough of the shares to outvote Wentworth. It is a personal loan. It is also a short-term loan. Obtaining a loan he does not only have to pay back the money he borrowed, he also has to pay interest on it: in this case 9 per cent, this is the rate of interest. The bank manager asked Hector Grant for security. He wanted to hold the deeds of the Grant's house. But a building society lent him money long ago to buy the property, and every year he repays a proportion of the loan to them, plus interest. By now, a lot of this loan has been paid back to the building society. Probably for this reason the bank agreed to a second mortgage. If Grant could not pay back the loan within the time limit his house would have to be sold and the first mortgage paid up. Then the remainder would go to the holder of the second mortgage, in this case, the bank. Very few banks will give an unsecured loan, one without any security or guarantee they will get their money back.

Hector Grant and Peter Wiles' mother has 20% of the capital each. Ambrose Harper - 50 %, 10% in the hands of Wentworth.



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