1.4. Types of business organisation
- Syllabus
- 0264–2027–2028
- Topic
- 1.4
- Level
- —
Learning objectives
Choose a suitable business organisation
A suitable business organisation matches the owners' need for finance, control, expertise, continuity and protection from risk. No form is always best: each changes who owns the business, who decides, how capital is raised and who bears losses.
| Form | Main features | Advantages | Disadvantages |
|---|---|---|---|
| sole trader | one owner; unincorporated; owner usually has unlimited liability | quick decisions, direct control, keeps profit, simple to establish | limited finance and expertise, heavy workload, no separate continuity, personal assets at risk |
| partnership | two or more owners share decisions, capital and profit; generally unincorporated | more capital, skills and workload sharing than one owner | profit and control shared, disputes, partners may create liabilities, continuity can be uncertain |
| private limited company | incorporated; separate legal identity; privately held shares; shareholders have limited liability | protects personal assets, continuity, can raise share capital while retaining closer control | legal formalities, financial disclosure, profit shared; shares cannot be offered to the general public |
| public limited company | incorporated; limited liability; shares may be offered to the public | access to much larger share capital, continuity and growth finance | expensive regulation and disclosure, ownership/control may separate, takeover pressure and dispersed profit |
| Form | Relationship | Main gain | Main risk or cost |
|---|---|---|---|
| franchise | franchisor licenses its brand and business system; franchisee pays fees and operates under agreed rules | a tested format, brand and support for the franchisee; faster expansion using franchisees' capital for the franchisor | fees and less freedom for the franchisee; quality-control, support cost and reputation risk for the franchisor |
| joint venture | two or more businesses cooperate in a separate project or operation | shares cost and risk and combines technology, skills, distribution or local knowledge | profit and control are shared; conflict, cultural differences or leaked knowledge may damage the venture |
| social enterprise | trades as a business to pursue social or environmental objectives as well as financial sustainability | commercial income can fund the mission and benefit stakeholders | balancing mission with costs and revenue can restrict choices or financial returns |
| Decision-maker | Advantages | Disadvantages |
|---|---|---|
| franchisor selling franchises | rapid expansion, initial fees and royalties, franchisees fund local outlets | less direct control, support/training costs, one weak outlet can damage the brand |
| franchisee buying a franchise | recognised brand, established methods, training, marketing and supplier support | initial fee and royalties, restricted decisions, dependence on franchisor and other outlets' reputation |
For a recommendation, identify the decisive circumstances: capital required, owners' willingness to share control and profit, liability risk, need for specialist or local knowledge, desired speed of expansion, continuity, administrative cost and any social purpose. Then explain why the chosen form fits those circumstances better than the strongest alternative.
Limited liability protects shareholders' personal assets beyond their investment; it does not guarantee that the company will succeed or that lenders will provide finance. A franchise is not the same as a branch: the franchisee owns the outlet but must follow the franchisor's system.