Chapter 3: Forms of business organization
Almost every country consists of two business sectors, the private
sector and the public sector. Private sector businesses are operated and
run by individuals, while public sector businesses are operated by the
government. The types of businesses present in a sector can vary, so
lets take a look at them.
Sole traders are the most common form of business in the world, and
take up as much as 90% of all businesses in a country. The business is
owned and run by one person only. Even though he can employ people,
he is still the sole proprietor of the business. These businesses are so
common since there are so little legal requirements to set up:
• The owner must register with and send annual accounts to the
government Tax Office.
• They must register their business names with the Registrar of
• They must obey all basic laws for trading and commerce.
There are advantages and disadvantages to everything, and here are
ones for sold traders:
• There are so few legal formalities are required to operate the business.
• The owner is his own boss, and has total control over the business.
• The owner gets 100% of profits.
• Motivation because he gets all the profits.
• The owner has freedom to change working hours or whom to employ,
• He has personal contact with customers.
• He does not have to share information with anyone but the tax office,
thus he enjoys complete secrecy. Cons:
• Nobody to discuss problems with.
• Unlimited liability.
• Limited finance/capital, business will remain small.
• The owner normally spends long hours working.
• Some parts of the business can be inefficient because of lack of
• Does not benefit from economies of scale.
• No continuity, no legal identity.
Sole traders are recommended for people who:
• Are setting up a new business.
• Do not require a lot of capital for their business.
• Require direct contact for customer service.
A partnership is a group consisting of 2 to 20 people who run and own
a business together. They require a Deed of Partnership or
Partnership Agreement, which is a document that states that all
partners agree to work with each other, and issues such as who put the
most capital into the business or who is entitled to the most profit.
Other legal regulations are similar to that of a sole trader.
• More capital than a sole trader.
• Responsibilities are split.
• Any losses are shared between partners.
• Unlimited liability.
• No continuity, no legal identity.
• Partners can disagree on decisions, slowing down decision making.
• If one partner is inefficient or dishonest, everybody loses. • Limited capital, there is a limit of 20 people for any partnership.
Recommended to people who:
• Want to make a bigger business but does not want legal complications.
• Professionals, such as doctors or lawyers, cannot form a company, and
can only form a partnership.
• Family, when they want a simple means of getting everybody into a
business (Warning: Nepotism is usually not recommended).
Note: In some countries including the UK there can be Limited
Partnerships. This business has limited liability but shares cannot be
bought or sold. It is abbreviated as LLP.
Private Limited Companies
Private Limited Companies have separate legal identities to their
owners, and thus their owners have limited liability. The company has
continuity, and can sell shares to friends or family, although with the
consent of all shareholders. This business can now make legal
contracts. Abbreviated as Ltd (UK), or Proprietary Limited, (Pty) Ltd.
• The sale of shares make raising finance a lot easier.
• Shareholders have limited liability, therefore it is safer for people to
invest but creditors must be cautious because if the business fails they
will not get their money back.
• Original owners are still able to keep control of the business by
restricting share distribution.
• Owners need to deal with many legal formalities before forming a
private limited company:
oThe Articles of Association: This contains the rules on how the
company will be managed. It states the rights and duties of directors,
the rules on the election of directors and holding an official meeting, as well as the issuing of shares.
oThe Memorandum of Association: This contains very important
information about the company and directors. The official name and
addresses of the registered offices of the company must be stated. The
objectives of the company must be given and also the amount of share
capital the owners intend to raise. The number of shares to be bought b
each of the directors must also be made clear.
oCertificate of Incorporation: the document issued by the Registrar
of Companies that will allow the Company to start trading.
• Shares cannot be freely sold without the consent of all shareholders.
• The accounts of the company are less secret than that of sole traders
and partnerships. Public information must be provided to the Registrar
• Capital is still limited as the company cannot sell shares to the public.
Public Limited Companies
Public limited companies are similar to private limited companies, but
they are able to sell shares to the public. A private limited company can
be converted into a public limited company by:
1. A statement in the Memorandum of Association must be made so that
it says this company is a public limited company.
2. All accounts must be made public.
3. The company has to apply for a listing in the Stock Exchange.
A prospectus must be issued to advertise to customers to buy shares,
and it has to state how the capital raised from shares will be spent.
• Limited liability.
• Potential to raise limitless capital.
• No restrictions on transfer of shares.
• High status will attract investors and customers.
Cons: • Many legal formalities required to form the business.
• Many rules and regulations to protect s