There are 2 main sectors in the economy: the private and the public sector. The 4 main types of businesses in the private sector are:
- Sole traders (also called private proprietorship)
- Private limited companies (Ltd.)
- Public limited companies (Plc.) or Incorporated (USA)
There are also special forms of enterprises in the private sector:
- Co-operative societies
- Holding companies
In the public sector there are public enterprises which are run by central or local government. The 2 main types are:
– Municipal undertakings
– State undertakings
Before starting to examine the types one by one there is need to define the terms unlimited liability and limited liability.
Unlimited liability: in case of a bankruptcy the personal possessions of the owner(s) of the firm can be used to pay the debts owed.
Limited liability: the liability of the shareholders is limited in the amount they have invested in the business. Their personal possessions cannot be taken to pay the debts owed.
Lets see the different types of businesses and their features!
Sole trader (private proprietorship)
The private proprietorship is owned by one person. This person provides all the capital to form and run the business. This type is very simple and is the most common type of business.
- Only a small amount of capital needed
- No sharing profits
- No consulting partners before making a decision
- Maximal oversight in business matters
- Unlimited liability
- Shortages of capital (may be)
- Cannot raise money from the public (difficult to borrow money)
- Shortage of view-points by making decisions
- When the owner is absent it is difficult to continue business
2 to 20 members can form a partnership. Basically the partnership has unlimited liability, but it is possible to set up a limited partnership, but in this case minimum one of the partners must be unlimited liable.
- Only small amount of capital
- There are more people providing
- Responsibility and liability are
- There are more viewpoints by making decisions
- Unlimited liability
- Membership is limited (maximal 20 people)
- Possible conflicts by decision making may cause inefficient operation
Private limited company (Ltd)
2 to an unlimited number of persons can form an Ltd. It is also called a Joint Stock Company because the capital needed to set up the company is divided into shares. Each share represents a certain proportion of the capital. The shares cannot be traded on the SE (Stock Exchange).
- Membership is not limited, so more people can contribute the capital needed
- Limited liability
- Shares cannot be offered for public sale
Public limited company (Plc)
2 to an unlimited number of shareholders can set up a Plc. The shares of the company represent a certain proportion of the capital, just like by the Ltd. The shares entitle the shareholders to a proportion of the company’s profit and some other rights like which are up to the type of the share. The owner of the share is called shareholder. The shares of a Public limited company are allowed to be traded on the SE, and because of this they are (sometimes) subject to speculation.
Company policy is decided by the board of directors elected by the shareholders. There is also a chairman elected who regulates board meetings.
- Limited liability
- Easy to raise capital (even in large sums)
- Easy to borrow money
- Economies of scale
- Large amount of money needed for setting up the company
- Annual accounts are open to public inspection
Municipal undertakings are businesses, which are run by local authorities and are financed by local rates and charges made for the use of the service.
State undertakings are businesses run by the government on behalf of the public. They are all legal entities separate from the government. Usually they provide commercial or industrial functions.
These were the types of businesses. It might be useful to think over the terms related with company structure, company founding, changing ownership and bankruptcy. Topics concerning special business relationships might also emerge when you are taking the exam, so let’s go through them:
Franchising is an agreement between the franchiser and the franchisee. The franchisee pays a sum certain in money to the franchiser. In return for the franchising fee the franchiser provides the products or techniques (or both) needed to run the franchisee’s company. By paying the franchising fee the franchisee obtains also the right to operate under the trade name of the franchiser getting so a ready made business opportunity. The best example for franchising is McDonalds.
Companies can form a temporary or permanent combination in order to achieve a certain aim (for example to bring together several separate processes into one production unit) . The members of the holding retain their legal entity.
Small units of agriculture or manufacturing combine together in order of sharing labour and enjoying the benefits of economies of scale and buying in bulk.
And finally, here are some terms related to the founding of a company:
- Memorandum of Association: It is called Certificate of Incorporation in the US. It states the company’s name, purpose, the authorized share capital, registered premises etc.
- Articles of Association: It is called Bylaws in the US. It sets up the rights and duties of directors, shareholders etc.
- Premises: it is the term for the places in which the company does work (shop, office, factory etc).
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