49.
Main Forms of Business Organization in private sector
Limited and Unlimited Liability
Limited liability is the owners of the limited company are financially responsible for the debt of the company
up to the amount of their investments.
This means that their responsibility for the debt of the business is limited to the amount of money they have
invested. If a shareholder has invested $5000 in a company and the company goes in to bankruptcy. He will
lose the investments but not all.
Unlimited liability is the owners of a business are liable for all the debt of the business
This means if the business is in financial difficulty and cannot pay its creditors the owner may declared
bankrupt. If this happens the owner’s personal possessions (house, car etc) may be taken to pay the debts of
the business
Liabilty
Limited Unlimited
Pvt Limited Sole trade
Public
Partnership
Limited
Sole proprietorship/sole trade
Characteristics:
Sole trade is the single owner of a business who makes all the decision o=for the business and may or
may not employ people
This business is owed and control by only one person where he/she can employ worker for their
assistant
All profits and losses go to the owner of the business (sole proprietor)
He can obtain the capital from personal saving, loans from relatives, friends or the bank
Example of sole proprietorship: Food stall, sundry shop, beauty saloon
Partnership
Characteristics
Partnership is a legal form of business where 2 or more people trade together.
This business is owned by two or more (but not more then 20) people where they combine to carry on
a business with the aim of making profit
The profit and losses are divided among the partners depending on the partnership agreement. But if
there no agreement is made, the profit and losses are divided equally among themselves
Capital is obtained from the partners’ contributions and loans
Example of a partnership: Clinics, accountants or architects’ firm
Deed of partnership
This is the formal document showing the rights and duties of partners in a partnership. It contains
Name of the partnership
Objective of partnership
Details of the partners
Nature of the business
Amount of capital invested by each partner
Duties of each partner
Amount of salary
Conditions for ending the partnership
Advantages Disadvantages
Sole Trade It is easy to set up the business - Not paperwork Limited capital – The owner has to provide
are required to set up the business, the owner the money to start or expand the business
just need to register the business name under by using his/her own saving or by borrowing
the Registration of Business Act from the banks or friends
All profit belong to the owner, so the owner has Unlimited Liability – The owner is personally
a greater interest in the success of the business liable for all debts incurred by the business
in the event of a business failure
The owner has can make decisions quickly No one will carry out the business if the
owner is ill or on holiday
The owner can give personal attention to the The firm ends when the owner dies or goes
customers bankrupt
Small amount of capital is needed There may be shortage pf certain skills. One
person cannot be expert in all area of the
business
There is no legal formalities to complete He owner may have to work long hours in
order to be successful
Partnership It is easy to set up the business - Decisions may be delayed by disagreements
because a number of people are involved
Pooling of expertise – This ensures a greater of unlimited liability expected for limited
specialization, resulting in more efficient partnership
management of the business
If one of the partners is sick or on holiday, there Death, bankruptcy, insanity or retirement of
is still someone to carry on the business a partner may end a partnership
More capital is available because of the Limited capital – Expansion of the business is
partners’ contributions and loans limited to the amount of the capital
contributed by the partners
Losses are shared among the partners Profits are shared among several people.
The decisions are better quality decisions due to
involvement in all the partners
Limited partnership
This enables the partners to put up capital and their liability for losses will be limited the amount the invested.
They sleeping or silent partners. They don’t have voting power and they don’t actively take part in the business.
Characteristics
All the partners have limited liability
They have perpetual succession or continuity
The partnership can sue or be sued in its own name
They have minimum of 2 partners
The partnership has LLP after its name.
Limited companies
A business that is registered and whose shareholders have limited liability. These companies are separate legal entities.
Separate legal entity is an organization having an identity that is separate from its individual owners.
These companies are owned by shareholders and governed by various company acts.
To set up limited company there are number of legal procedures and the records and documents must be submitted to
registrar of companies.
Main documents
Memorandum of association – This establishes the identity of the company (name, address, nature of the
business)
Article of association- Sets the rules of the company
Once these documents have been accepted the company will be granted a Certificate of incorporation.
Certificate of incorporation is the document issued to show that a company has been legally formed and has legal
existence.
Every year they must send audited accounts to registrar of companies.
The board of directors
Are group of people elected by shareholders to run the company on behalf of shareholders. Directors are often
shareholders especially in a private limited company. Board of directors are elected by shareholders at the annual
general meeting. The directors in turn elect a chairperson.
Duties
Making policy decisions
Planning for the future
Setting corporate aims and objectives
Approving annual report
presenting accounts in AGM
Types of limited companies
Private ltd company
Public ltd company
Private limited company
They can raise more capital than partnership. But they cannot sell shares to public and they must obtain shareholders by
personal contact. This type of business is suitable for people who would like to keep control within the family.
Shares are not freely transferable. Any share transfer has to be approved by existing shareholders
Characteristics of pvt ltd
Public Limited company
A large company owned by shareholders who have bought their shares on stock exchange. This type of business can raise
large sum of capital. Public limited companies can sell shares to public and should publish the annual accounts and these
accounts set should available to anyone on request from the company.
Characteristics
Advantages and Disadvantages
Advantages Disadvantages
Private Ltd Shareholders have limited liability Can not sell shares to the public
Its easy to raise capital Shares are not freely transferable.
The company has continuity of existence Its financial affairs are not private and accounts
must be audited annually and sent to registrar of
companies
Private limited company is legally separated
Shareholders have direct control over the
company
The founders can retain control over the
company
Public limited Limited liability Registering the company is costly process
Can raise more capital Lack of personal contact within the company
The company has continuity of existence Decision making ma be slow with the important
decision taken at meetings
company is legally separated Because of the size of the company its difficult to
manage
Advantage of economies of scale There is no privacy for accounts and competitors
also can be seen due to publishing
Company must comply with many regulations to
protect shareholders
Similarities between private and public ltd companies
They must be registered
Owned by shareholders and they have limited liability
The businesses are controlled by a board of directors elected by shareholders
The companies name included the word “limited”
They are both legal entities
Both the companies should submit accounts and are subject to pay tax on profit
They raise capital by selling shares
Both the companies should hold Annual General Meeting
They are incorporated (separate legal entity) under various company acts
With minimum 2 people they can start the businesses
*Trading certificate is the document issued to public ltd company when it has raised is capital by selling shares, I can now
start trading.
Factors that may affect for the choice of business form
How long the business has been in existence
The size of the business
The purpose of the business
The number of owners and whether or not family is involved
The need for large amount of capital
The need for secrecy about business affairs
