Ownership, control, decision-making, advantages and disadvantages of different types of organisation.

The organisations listed below operate in the private sector as they are owned and controlled by private individuals or groups of individuals.  They can each operate in any sector of industry – primary, secondary or tertiary.

• Sole Traders
• Partnerships
• Private Limited Companies

Sole Traders

• Sole traders are owned by one person.
• The owner has control over all decisions made in the business. They may employ others to help operate the business but the owner has the final say.
• Start-up finance can come from the owner’s own savings which they invest in the business. They may receive grants from the government, or loans from family, friends or banks.  Once the business is established the owner may reinvest profit he/she makes to help finance future growth of the business.

Advantages

Disadvantages

It is simple business structure to set up as no legal documents are required. The owner has control over all decision making so there is no conflict of interest in the direction of the business. As the owner makes all decisions, they can respond quickly to changing circumstances. The owner gets to keep all the profits. As businesses tend to be smaller, the owner can offer a personal or specialist service to customers.

Having all the responsibility can be stressful and it can be hard for the owner to take a holiday. If the owner is unwell, the business may not be able to continue trading. It can be hard to raise enough finance for business start-up as banks may be unwilling to lend. Unlimited liability – if the business goes into debt the owner is personally liable for all the debt and may have to sell personal possessions and use savings to pay off debt. If debts cannot be covered, the sole trader will be declared personally bankrupt.

Partnerships

• Partnerships are owned by 2-20 people – more in the case of some professions eg law, civil engineering.
• Partners share control of the business – details of how much control each partner has may be outlined in a Deed of Partnership. Control may be shared equally or may be different depending on how much finance each partner has invested.
• Finance to start up a partnership may come from partners’ own investment, or from grants, loans, reinvested profits (as per sole trader). The more partners there are, the greater the amount of start-up finance available.

Advantages

Disadvantages

Partners may specialise in areas of the business, sharing responsibility and making for better decision making. Partners can raise more start-up finance between them. Partners can share ideas and responsibilities and can cover for each other if someone is unwell or on holiday. Partnerships are still relatively simple to set up in terms of legal documents.

Individual partners have unlimited liability for debts of the business so risk losing everything they own.  If a partner makes a bad decision, all the partners must live with the consequences of that decision.  Partners may disagree on how the run the business so there may be conflict in the direction. Profits will be shared out between more partners, so less for each.  If a partner dies or wants to leave, the partnership cannot continue trading and must be dissolved and re-formed with new partners.

Private Limited Companies

• Limited liability companies are owned by shareholders who buy shares of ownership in the company. For each share of ownership, a shareholder will receive a share of profit – the dividend.  Limited companies can have 1- 50 shareholders.
• In a private limited company shares can only be sold to people whom existing shareholders agree upon.
• ‘Limited’ stands for limited liability. Each shareholder can only lose the finance they invested – they are not personally liable beyond that.
• Day to day control is in the hands of the Board of Directors who are elected by the shareholders at the Annual General Meeting. Members of the Board of Directors must be shareholders. Board positions include Managing Director, Marketing Director, Finance Director, Operations Director, Human Resource Management Director.
• To set up a private limited company Articles of Association and a Memorandum of Association must be prepared. These include details of finance and control.  The business must – by law – operate in accordance with the information in these documents.
• Finance to start a private limited company comes from sale of shares, grants, loans, reinvested profits.

Advantages

Disadvantages

Shareholders have limited liability and so cannot lose more than their original investment. Private limited companies can control who buys their shares, so they are not vulnerable to be taken over against their will. The business can sell shares to up to 50 people to raise finance for major projects. There will be scope for directors to specialise and make better decisions. There is continuity of business as trading continues even if shares of ownership change hands.

Companies must be registered with the Registrar of Companies and submit financial statements. It is costly to establish a limited company – lawyers and accountants need to get involved. It may be difficult to get existing shareholders to agree who to sell share to. The greater the number of shareholders, a smaller the share of profit a shareholder receives.

Objectives of A Private Sector Organisation

• Make a profit
• Social or environmental responsibility
• Survival
• Customer Satisfaction
• Increase market share