Key definitions
Limited liability — The owner's legal identity is separate from the business. Only the assets belonging to the company are risked.
Unlimited liability — The owner's legal identity is not legally separated from the business. The assets belonging to the owner AND the business are risked.
Forms of business organisations
Sole trader
A business with only 1 owner.
| Advantages | Disadvantages |
|---|---|
| Profit is kept by the owner | Unlimited liability |
| Easy to set up | Less capital |
| No continuity (the business will die if the owner dies) |
Partnerships
A business with 2–20 owners.
| Advantages | Disadvantages |
|---|---|
| More range of skills to work with | If a partner leaves, business is dissolved |
| More capital can be raised | Conflict can occur between partners |
| Easy to set up |
Private and public limited companies
A company registered with the government to become a separate legal identity, owned by multiple shareholders. They can sell shares (a % of their company) to raise capital; people who own shares are shareholders.
Private limited company
| Advantages | Disadvantages |
|---|---|
| Shareholders have limited liability | Expensive and has many legal formalities |
| Easy to raise capital | Cannot sell shares on the stock market — can only sell to friends, family and known people |
| Shared decision making | Profit is shared |
| Has continuity |
Public limited company
| Advantages | Disadvantages |
|---|---|
| Limited liability | Many legal formalities (more than private), e.g. accounts must be made public |
| Easier to raise capital | Expensive to start |
| Can sell shares to the public on the share market | General meeting for shareholders must be held |
| Has continuity |
Franchises
Franchise — a business (the franchisor) agrees to another business (the franchisee) opening a branch, a franchise, of the mother business, using their business idea. E.g. KFC.
Advantages and disadvantages to the franchisor
| Advantages | Disadvantages |
|---|---|
| They are paid royalty fees for the use of the business idea | Loss of control over business |
| They build brand reputation and spread globally (expansion) without managing the new businesses | Reputation can be affected |
| The franchisee will run the franchise | Materials and support will need to be provided |
| The franchisee may understand the country's local market better |
Advantages and disadvantages to the franchisee
| Advantages | Disadvantages |
|---|---|
| They have an existing customer base to begin with | It is expensive to set up |
| They do not need much experience as they will be receiving support | Profit must be shared |
| Less risk | There is no full control over business decisions |
| Raw materials and products are supplied by the franchisor | Advertisements and promotion must be done by the franchisee |
Joint ventures
Joint venture — an agreement where 2 or more businesses work together for a specific cause/business activity.
| Advantages | Disadvantages |
|---|---|
| Reduces risk of failure | Conflict may arise during decision making |
| Ideas can be shared | |
| Market and product knowledge is shared | |
| Costs will be shared by both businesses |