Course 1.

What you should know

By the end of this subtopic, you should be able to:

 define the following terms: (AO1)

o private sector
o public sector
o sole trader
o partnership
o publicly held company
o privately held company
o for-profit social enterprise
o cooperative
o non-profit social enterprise
o non-governmental organization (NGO)

 distinguish between the private and public sectors (AO2)

 compare and contrast the sole trader, partnership and corporation forms of
ownership (AO3)
 examine different forms of for-profit and non-profit social enterprises (AO3)
 recommend an appropriate type of legal structure for a business (AO3)
The private sector of the economy consists of businesses owned and run by private
individuals and organizations that usually , aim to earn a profit. They operate
independently of the government, although need to operate within the rules and
regulations in the country. Examples:
 Sole traders
 Partnerships
 Privately traded companies
 Publicly traded companies
 Social enterprises, including cooperatives and non-governmental organizations
 Multinational corporations (MNCs)
 
Business organizations that operate in the public sector consist of those controlled by a
regional and/or national government, with the main aim being to provide essential goods
and services for the general public. Such businesses can, but do not always, directly
charge customers for such services.
Examples:
 Infrastructure (such as communication networks, transportation networks, road
and highway networks, waste disposable systems, and flood control systems)
 Housing (public and social housing)
 Health care services
 Education
 National defence (national security)
 Emergency services (ambulance, fire and police)

 The private sector of the economy consists of businesses owned and run by

private individuals and organizations that usually aim to earn a profit for their
owners.
 The public sector consists of those organizations controlled by a regional and/or
national government, with the main aim being to provide essential goods and
services for the general public.
A sole trader (also known as a sole proprietor) is a commercial for-profit business
owned by a single person. Although this person can employ as many people as needed,
the sole trader is the only owner of the business.

 Advantages of sole traders / sole proprietors

The advantages of setting up a business as a sole trader (or sole proprietor) as a type of
for-profit (commercial) organization include:
 The owner receives all of the profits if the business succeeds.
 Sole traders are likely to be highly motivated as the owners have a sense of
achievement from running their own business and can keep all of the profits
made.
 The sole trader (owner) has complete control without having to consult with or be
accountable to others.
 The sole trader enjoys privacy as it only needs to publish its financial accounts to
the tax authorities (rather than to the general public like a publicly held company).
 The owner can benefit from tax advantages. As a small business, many sole
traders work from home, so can claim tax concessions by using part of their home
for business purposes.

 Disadvantages of sole traders / sole proprietors

However, there are some potentially significant disadvantages of being a sole trader too.
These include:
 The finance to set up and run the business is generally provided by the owner
(from personal savings) as s/he cannot easily access external sources of finance.
 The sole trader accepts all the risks of owning and running their own business,
including any losses made or even the collapse of the organization.
 The workload for a sole trader can be extremely high. There is no one else to
share ideas or to ask questions, so all pressures, burdens and responsibilities fall
on the owner. This means the sole trader often has to work very long hours.
 Legally, a sole trader is treated as the same legal entity as the business, i.e. it is
an unincorporated business. This means the sole trader has unlimited
liability so is responsible for any debt owed to other individuals or organizations,
even if this requires the owner to pay the debts from their personal belongings and
assets.
  As sole proprietorships are usually small businesses (such as a small convenience
store owner), they are unlikely to be able to gain any economies of scale, perhaps
because they cannot buy their materials or stocks (inventory) in bulk. This means
sole traders pay more for their goods, their prices charged to customers also tend
to be higher.

A partnership is a commercial business that strives to earn a profit for its owners. It is
owned by two or more people.
For an ordinary partnership, the maximum number of partners is usually capped at
twenty owners, although this does vary from one country to another. Some organizations
can have more than 20 partners, such as law firms and health clinics. The owners of a
partnership are called partners.
The vast majority of partnerships are unincorporated businesses, so at least one of the
owners must have unlimited liability. In practice, it is usual for all the partners to share
responsibility for any liabilities made by the partnership. In some countries, it is possible
to have a limited liability partnership (LLP). Setting up an LLP protects each individual
partner from being responsible or liable for another partner’s misconduct or
shortcomings.
Most partnerships sign a Deed of Partnership (or Partnership Agreement) as this helps
to resolve potential misunderstandings and disagreements. stating their responsibilities,
voting rights, and how profits are to be shared between the owners.

 Advantages of partnerships
The advantages of partnerships as a type of for-profit (commercial) business organization
include:
 Partnerships can raise far more finance than sole traders, especially as there can
be up to 20 partners (subject to the laws in different countries) in the
business. Silent partners (also known as sleeping partners) can provide
additional capital without having any role in the actual running of the business.
 Having partners enables the firm to benefit from having more ideas and different
skills and expertise.
 Unlike a sole trader, partners can share the burden of their workload and
responsibilities.
  Hence, unlike a sole trader, partnerships benefit from continuity as the partnership
can remain in operation if a partner is unwell or wants to go on a family vacation.
 As with sole traders, business affairs of a partnership are kept confidential, so
only the tax authorities need to know about the financial position of the
partnership.

 Disadvantages of partnership
However, there are limitations to setting up a business as a partnership. These potential
drawbacks include:
 As the business has more than one owner, this can easily lead to disagreements
and conflict between the owners, which can seriously damage the running of the
partnership.
 Unlike with a sole trade, the profits made by a partnership must be shared
between all the owners.
 In general, partners have unlimited liability so are liable for any debts, fines,
penalties or law suits against the business, even if this these were caused by
another partner in the firm.

Limited liability protects shareholders who cannot lose more than the amount they
invested in the business. This is because shareholders are not personally liable for the
debts of the company should it go into debt or bankruptcy.
In legal terms, there is a divorce of ownership and control as the owners (shareholders)
are treated as separate legal entities from those who control and run the business (the
board of directors and CEO). It is the board of directors and the CEO (or managing
director) who are responsible for the strategic direction of the company.
There are two categories of companies: privately held companies and publicly held
companies.
Features of privately held companies
 The shares of privately held companies cannot be advertised for sale nor sold via
a stock exchange. Shares are not available on an open stock exchange such as the
New York Stock Exchange.
 Most privately held companies (sometimes referred to as private limited
companies) are small businesses, with shares typically owned by family,
relatives, and friends.
 The company and its owners are separate legal entities, i.e., there is a legal
divorce (separation) of ownership and control, with the owners (shareholders)
appointing a board of directors to run the company on their behalf.
 Owners have limited liability, so if the business experiences a financial collapse,
then the owners will only be liable for the capital they invested in the company.
 The number of shareholders in a privately held company may be limited
 There is usually no legal requirement for the company to publish detailed
financial accounts for the general public (this is only needed for corporate tax
purposes).
Examples of well-known privately held companies include:
 Dell
 Deloitte
 Dyson
 Ernst & Young
 IKEA
 Lego
 Mars
 Pricewaterhouse Coopers
 Advantages of privately held companies
The advantages of establishing a business as a privately held companies as a type of for-
profit (commercial) organization include the following points:
 There is better control of a privately rather than publicly held company, as shares
in a privately held company cannot be bought or sold without the agreement of
existing shareholders.
 Significantly more finance can be raised compared with a sole trader (one owner)
or a partnership (up to 20 owners).
 Privately held companies have greater privacy compared to publicly held
companies; the latter must make their final accounts available to the general
public.
 Shareholders have limited liability, so cannot lose more than what they invest in
the company. Owners are protected against any misconduct or misjudgments of
those who run the company.

 Disadvantages of privately held companies

However, the potential limitations of being a privately held company include the
following :
 Privately held companies can only sell their shares to family, friends, and
employees, with the approval of the majority of existing shareholders. This can
make it difficult to buy and sell shares in the company.
 They are more expensive to operate than a sole trader or partnership. For
example, there are higher legal fees and auditing fees (for checking and approving
of the financial accounts).
 A privately held company can become a target for a takeover by a larger company
which purchases a majority stake, although other owners have to agree to the sale
of the company.
Features of publicly held companies
 A publicly held company is owned by shareholders. The shares in such companies
can be bought and sold by the general public, without prior approval of existing
owners.
 Shares in a publicly held company can be bought and sold via a stock
exchange (or stock market), such as the New York Stock Exchange (NYSE),
London Stock Exchange, Tokyo Stock Exchange, and Shanghai Stock Exchange.

The New York Stock Exchange (NYSE)

 When a company first sells its shares to become a publicly held company, it does
so through an initial public offer (IPO) via a stock exchange.
 In order to protect shareholders, publicly held companies are strictly regulated and
are required to publish their final accounts each year.
 As there is no legal limit placed on the maximum number of shareholders in
a publicly held company, the company can raise a significant amount of finance
so long as it can attract investors.

 Advantages of publicly held companies

The advantages of establish a business as a publicly held company as a type of
for-profit (commercial) organization include the following points:
 Additional finance can be raised through a share issue (the process of
subsequently selling more shares in a company). Hence, it is easier for publicly
held companies to obtain finance from a stock exchange to fund its growth and
evolution by selling additional share capital. In 2010, Brazil’s state oil company
Petrobras raised $70 billion, in the world’s largest share issue.
 It is also easier for large publicly held companies to borrow money from bank
loans and mortgages, due to their lower level of risk for financial lenders.
 As with privately held companies, the shareholders of publicly held companies
enjoy limited liability.
 Large publicly held companies get to enjoy the benefits of operating on a large
scale, such as opportunities to exploit economies of scale, market share, and
market power.
 As with privately held companies, publicly held companies enjoy continuity even
if a principal or major shareholder leaves the organization or passes away.

 Disadvantages of publicly held companies

The limitations or drawbacks of being a publicly held company include the
following points:
 There is a lack of privacy because the general public have access to the financial
accounts of  publicly held companies.
 Publicly held companies are the most administratively difficult and expensive
form of commercial for-profit business to set up and run. For example, there are
high costs of complying with the rules and regulations of the stock market.
 As the general public can buy and sell share freely, there is always a potential
threat that a rival company will make a takeover bid.
 Large companies can suffer from diseconomies of scale. Being too large can
cause inefficiencies in the company, and hence higher average costs of
production.

 Companies (also known as corporation) are commercial for-profit businesses

owned by shareholders.
 A Deed of Partnership (or partnership deed) is a formal partnership agreement
or contract between the owners, which includes legal agreements such as the
formal responsibilities of each owner, their voting rights, and how profits are to
be shared between the partners.
 An ordinary partnership has a minimum of 2 partners and up to twenty owners
(although this does vary from one country to another).
 Partners are the co-owners of a partnership business.
 A partnership is a commercial (for-profit) business that strives to earn a profit
for its owners.
 Privately held companies are limited liability companies owned by shareholders
but the shares in the business cannot be advertised or traded on a stock exchange.
  Publicly held companies (or joint-stock companies) are limited liability
companies owned by shareholders with the shares in the business being traded
(bought and/or sold) on a public stock exchange (or stock market).
 Shareholders are the owners of a limited liability company.
 Silent partners (also known as sleeping partners) are inactive owners of a
partnership business, who provide additional capital without having any role in
the actual running of the organization.
 A sole trader (or sole proprietor) is the single owner of a business organization,
so makes all the decisions and takes all the risks in running the enterprise.
 A stock exchange (or stock market) is a marketplace where shares in publicly
held companies can be bought and/or sold, such as the New York Stock Exchange
(NYSE).
 Unlimited liability means that if the sole proprietorship fails, the sole trader is
personally held responsible for all the debts of the business. As there is no limit to
the amount of losses, this means that the sole trader could lose their personal
possessions to pay for the organization's debts.

Social enterprises are an example of social purpose organizations (SPOs). They aim to

primarily provide a solution to important social or environmental issues. They exist to to
create a better world due to the role they play to improve society overall. As they are not
always revenue-generating, SPOs often need financial funding and suitable human
resources. Other SPOs include charities, cooperatives, and non-governmental
organizations (NGOs).Although there is no universally accepted definition of a social
enterprise (and the legal definition differs between countries), it is essentially an
organization that focuses on meeting social objectives (such as improving social and
environmental well-being) and not only commercial business objectives such as profit
maximization or maximizing shareholder returns (see Case Study 2 - M-Pesa below).
Traditional, for-profit organizations strive to maximise profits or financial gains for their
owners (shareholders). In other words, whilst traditional businesses might donate money
to charitable causes or have ethical objectives, they primarily aim to earn a profit.
Unlike traditional commercial for-profit businesses, social enterprises combine
social and  commercial agendas in order to achieve their social and environmental
agenda, i.e., they strive to gain a financial surplus to facilitate social gain. Their activities,
by definition, purposely create social benefits.
Some differences between social enterprise, traditional commercial (for-profit business
entities), and charitable organizations are outlined below.

Charities Social enterprises Traditional businesses

Mission driven Purpose driven (social Vision driven

(charitable mission) purpose) (commercial vision)

Funded by owners,
Funded by internal and investors, and
Funded by donations
external sources internal and external
sources

Profits distributed to
Surplus reinvested Profits reinvested owners
and/or redistributed

Corporate social
Purely charitable Focus on social benefits
responsibilities*

Focus on social impact and

Focus on societal gains Focus on financial returns
financial gains

* Whist traditional businesses may allocate some funds to CSR, it is not their main or
most important focus. Instead, the main drivers for such businesses is profit, growth,
and protecting shareholder value. A growing number of traditional businesses are
reporting on the triple bottom line to as part of their CSR and sustainability goals.
Traditional businesses focus on their mission whereas social enterprises focus on
their purpose. The differences between an organization's mission and purpose are
outlined in the table below.

Mission Purpose

What we do Why we do it

Operating a business Sharing a dream

Strategic Cultural

Creates buy-in Instils ownership

 Provides focus Fuels passion

Builds a company Builds a community

 In reality, it is up to each business to determine its preferred approach to its mission or
purpose.Nevertheless, social enterprises generate revenue like any business organization,
but hold community objectives for the wellbeing of others in society, rather than
primarily aiming to earn profit for their owners.
To be classified as a social enterprise, a business must:
1. have a clear social or environmental mission set out in its governing documents
and be controlled in the interest of that mission
2. be independent of state or government control, and earn more than half of its
income through trading
3. re-invest or donate at least half of its profits or surpluses towards their mission
4. be transparent in the way they operate and the impact they have.
 For-profit social enterprises (AO3): (i) Private sector companies, (ii) Public sector
companies, and (iii) Cooperatives.
 Non-profit social enterprises (AO3): (iv) Non-governmental organizations
(NGOs)

Note that social enterprises can, and often are, for-profit organizations. However, the
difference is their existence (or social purpose) is beyond profitability as its very
existence generates social benefits. In other words, profit follows as a consequence of its
social and environmental goals, rather than as a result of its commercial activities.

A for-profit social enterprise uses commercial business practices in order to achieve

social goals, such as improving the environment, building better communities and
developing social wellbeing. Such organizations do not focus on generating profits for
their shareholders but strive to build and improve communities.

There are three main types of for-profit social enterprises

  Private sector companies
 Public sector companies
 Cooperatives.

Private sector companies are for-profit business organizations that operate in

the private sector. They differ from those that operate in the public sector in terms of
ownership, and control, the purpose of their existence, how they raise finance, how they
are managed, and how any profits (financial surplus) are distributed or how losses dealt
with.
For-profit social enterprises can operate in as private sector companies in the private
sector of an economy. Examples of for-profit social enterprises that operate as private
sector companies include:
Examples of private sector for-profit social enterprises include:
 Change Please - The British coffee chain with outlets in London and Manchester
donates all of its profits to tackle the problems of homelessness (see Case Study 1
below).
 KASHF Foundation - This organization provides financial and social-support
services to female entrepreneurs to empower them to set up their own businesses
in food production, cloth making, and other industries in Pakistan.
 M-Pesa - A multinational mobile phone-based money transfer, financing, and
microfinance service provider that also provides mobile banking services (see
Case Study 2 below).
 SECLO Foundation - Financial company that provides sustainable energy
solutions, such as solar-powered lightning, to low-income households and small
businesses in India.
 TOMS Shoes, known for giving away one pair of shoes (to those in need) for
every pair the private sector social enterprise sells.

A for-profit social enterprise operating as a private sector company is a revenue-

generating, profit-seeking organization but the purpose of its existence is mainly
concerned with social goals which are at the center of its operations. This differs from
commercial or traditional for-profit companies that aim to maximize earnings for their
shareholders (owners). For-profit social enterprises have social objectives and use ethical
practices to achieve these goals.
Therefore, for-profit social enterprises in the private sector earn their revenues and profit
in socially responsible ways and uses the surplus to directly benefit the society or
environment rather than distributing the profit to owners in the form of dividend
payments.
A further example is microfinance providers. Microfinance providers are for-profit
social enterprises that operate as private sector companies. They offer a financial service
to those without a job or on very low incomes. These members of society would not
ordinarily be able to secure bank loans.
The aim of providing microfinance is to help entrepreneurs, especially women, struggling
to finance their business start-ups to gain access to loans of a small amount. Microfinance
can give these people the opportunity to become self-sufficient and empower them to run
their businesses. As with the majority of loans, interest is charged on the amount
borrowed, although these are typically lower than what commercial banks would charge.

The public sector is the part of the economy composed of government-owned and/or

government-controlled enterprises. It does not include any private sector enterprises (sole
traders, partners, limited liability companies, and private sector social enterprises).
Public sector companies operate in a commercial-like way (selling goods and/or
services in order to generate a financial surplus) but are owned and/or controlled by
government authorities. They can be owned wholly or partially by the government. They
are set up as legal business entities to partake in the commercial business activities,
enabling successful public sector companies to earn a financial surplus for the
government to be used for the benefit of society as a whole.
An example is Canada Line, which is a mass rapid transit operator in British Columbia,
Canada. It was opened in 2009 and is owned by TransLink, the statutory authority
responsible for the regional transportation network in British Columbia. As with all
transportation operators, Canada Line's main revenue stream is from commuters who use
their train services. It is also funded by the Canadian government, government agencies,
and private partners.
Quite often, the public sector is unable to provide the necessary resources and finances to
operate an enterprise, so some of the funding required comes from the private sector. In
such a case, a public-private partnerships (PPP) is established. A PPP is a jointly
established enterprise by a government and one or more private sector
businesses. According to the World Bank, a PPP is defined as a long-term contract
between a private company and a government agency for providing a public asset or
service, in which the private party bears significant risk and management responsibility
(not necessarily the majority stake though). The exact arrangements will differ from case
to case and from country to country, but often involve the public sector having a majority
share in the joint venture. In any case, the public sector company exists to create
employment and to reinvest profits (financial surplus) back into the business and the local
community.
Other examples of service providers in the public sector that operate as for-profit social
enterprises include:
 Broadcasting services, such as national broadcasters of television and radio
services.
 Educational establishments, such as schools, colleges, and universities.
 Housing associations to provide social housing for people.
 National health service providers that charge for some of their services although
provide free basic healthcare services to the vast majority of the population.
 Public transport providers, such as buses and mass rail transit.
 Sports and leisure centres, including public swimming pool.
 Advantages of public sector companies
The advantages of establishing public sector enterprises as a form of for-profit social
enterprise include:
 Providing a viable solution for the government to finance projects that it simply
does not have enough money for unless it is able to charge for the services
provided.
 As the product is provided by the government, there are fewer risks involved.
 By being able to charge for their services, public sector companies help to reduce
the debt burden of the economy and  taxpayers in particular.
 Public sector companies create secure employment opportunities and have a
positive impact on local communities and the country’s overall economic growth
and development.
 Limitations of public sector companies
However, there are potential drawbacks of establishing public sector enterprises. These
limitations include the following points:
 By funding a particular public sector enterprise, the government gives up the
option of financing other items of government expenditure, such as road
maintenance, flood defence systems, and developing communications networks.
 In addition, most public sector enterprises are expensive to operate (involving
high set-up costs and running costs). This means they can be high-risk businesses
with unpredictable rates of return on the investments. For example, Hong Kong
 Disneyland opened in 2005 but took seven years to declare a profit (the annual
profit in 2012 was only US$13.97 million).
 Hence, it can be difficult to persuade private sector partners or investors to help
fund public sector companies. Investors could be unsure and unwilling to form a
PPP, for example, due to the uncertainty of such businesses being able to generate
any long-term profit.
 Public sector companies are often associated with bureaucratic policies and
procedures, which can cause inefficiencies and delays to decision making.

Cooperatives are for-profit social enterprises that are owned and managed by their
members. Examples are employee cooperatives, producer cooperatives, managerial
cooperatives and customer cooperatives. Cooperatives exist throughout the world, but are
predominant in the agricultural and retail sectors of the economy in many parts of
Europe.

Features of cooperatives
 As a category of for-profit social enterprises, cooperatives strive to provide a
service for the members, providing and creating value, instead of seeking to earn
a desired level of profit margin for their member-owners. However, any profits of
the cooperative are shared with its members.
 Most cooperatives are registered as limited liability organizations. Like limited
liability companies, cooperatives have a separate legal entity from their
shareholder owners. Hence, shareholders, directors, managers, and employees are
not held personally liable for any debts incurred by the cooperative.
 All member shareholders are expected to help run the cooperative, although it is
overseen by an elected board of directors that makes long-term strategic
decisions.
 All members of a cooperative have equal voting rights, irrespective of their role in
the business or their level of investment in the cooperative.
 Members of a cooperative have limited liability, restricted to the amount they
invested in the business.
 Cooperatives tend to have a democratic culture, with empowerment of its
members to make decisions. The organizational structure is rather flat as there is
decentralized decision making
  Advantages of cooperatives
The advantages of establishing cooperatives as a form of for-profit social enterprise
include:
 Cooperatives are not difficult or expensive to set up.
 Cooperatives are tax exempt because the focus of the business is on serving the
collective interests of its member-owners and the community (such as home care
associations for the elderly).
 As all member shareholders are expected to help run the cooperative, it is more
likely to succeed.
 Similarly, as the owners have equal voting rights, the cooperative is more
democratic so the members feel equally important to the success of the business.
This is likely to lead to a harmonious working environment.
 There is an absence of pressure from external investors and shareholders, so the
member-owners of the cooperative can run the business that best suits their own
interests.
 As cooperatives strive to benefit their members and society, they often qualify for
government financial support.
 Unlike partnerships or sole traders, there is continuity in a cooperative should a
key owner leave the organization, for whatever reason.

 Disadvantages of cooperatives
However, there are potential drawbacks of establishing a business as a cooperative. These
include the following points:
 As cooperatives are not profit-driven, it can be difficult to attract investors,
financiers and member-shareholders.
 Similarly, employees and managers of cooperatives may lack the financial
motivation to excel, due to the absence of a profit motive.
 Most cooperatives have very limited sources of finance as their capital depends on
the amount contributed by their members.
 Most cooperatives are unable to hire a range of specialist managers to run the
business, due to the lack of financial rewards and sources of finance to remunerate
their senior staff. This can limit the success of the cooperative.
 A democratic culture is not always effective. Despite some members having more
to contribute to the organization and greater responsibilities, they only get one
 vote as do all other members. This can be somewhat inefficient and perceived as
unfair for some members.
 Common mistake
Students often confuse charities with social enterprises. Whilst there are similarities,
there are legal differences regarding the funding and operations of these different
business entities.
Unlike traditional or mainstream charities, social enterprises are funded by commercial
(trading) activities for the majority of their revenue streams whereas traditional charities
rely on donations, government grants, and/or endowments (such as a financial gift of
money or other asset or a scholarship given to a person or to an institution).
 Cooperatives are for-profit social enterprises that are owned and managed by
their members.
 A for-profit social enterprise uses commercial business practices in order to
achieve social goals, such as improving the environment, building better
communities and developing social wellbeing.
 Microfinance providers are for-profit social enterprises that offer a financial
service to those without a job or on very low incomes.
 Private sector companies are for-profit business organizations that operate in the
private sector.
 Public-private partnerships (PPP) are an example jointly established by a
government and one or more private sector businesses.
 Public sector companies operate in a commercial-like way (selling goods and/or
services in order to generate a financial surplus) but are owned and/or controlled
by government authorities. They can be wholly or partially owned by the
government.
 Social enterprises are organizations that use commercial business principles and
practices to achieve social and/or environmental objectives by competing with
other rival businesses.
Some social enterprises are not run for profit, such as non-governmental
organizations (NGOs). However, even these non-profit organizations must earn a
financial surplus from their business in order to continue operating. The difference is that
the surplus is reinvested back in the social enterprise and/or the community.
Recall that social enterprises generate revenue like any business organization, but hold
community objectives for the wellbeing of others in society, rather than primarily aiming
to earn profit for their owners. Non-profit social enterprises operate in a commercial-
like way but they do not distribute any profits or financial surplus to their owners or
shareholders. Instead, the surplus they may earn is completely reinvested in the
organization in order to pursue their vision and/or mission. Two examples include:
 Kiva - An international company that operates in more than 80 countries around
the world with the mission to expand financial access to help underserved
communities thrive. This helps students to pay for their education, women to start
their own businesses, farmers to invest in capital equipment, and families to
afford emergency healthcare.
 Malala Fund - This social enterprise was established by Malala and Ziauddin
Yousafzai in 2013 to help empower women and girls by advocating and spreading
access to education (by providing 12 years of free, safe, quality education and
campaigning for gender equality). The Malala Fund is a registered charity in the
UK.
Social enterprises are an example of social purpose organizations (SPOs) that aim to
primarily provide a solution to important social or environmental issues, and not only
commercial gains for its owners. Irrespective of whether they are for-profit or non-profit,
all social enterprises leverage their ability to connect the work carried out by employees
with a social goal. This provides employees with a sense of social purpose and the feeling
of being able to make a positive difference to the social cause.
Examples of non-profit social enterprises run as NGOs include the following
organizations. For example, Doctors Without Borders is an international humanitarian
medical NGO, free from direct control of any local or national government.
 Doctors Without Borders
 Human Rights Campaign
 Friends of the Earth International
 World Wildlife Fund

 Advantages of non-profit social enterprises

The advantages of establishing a business as a non-profit social enterprise include the
following points (which apply to both NGOs and charities):
 Non-profit social enterprises exist for the benefit of local communities and
societies. Examples include fundraising events and donations to meet social aims
of a community.
 Non-profit organizations, including non-profit social enterprises, are exempt from
paying corporate and profits taxes.
 Many NPOs also qualify for government assistance in the form of grants and/or
subsidies, thereby reducing their costs of production.
  There can be a positive impact on employees and donors who feel that the non-
profit enterprise is pursuing a socially meaningful ambition.

 Disadvantages of non-profit social enterprises

However, there are potential disadvantages of establishing businesses as non-profit social
enterprises. These include the following points (which apply to both NGOs and
charities):
 There are strict guidelines and restrictions that non-profit social enterprises must
follow; not all trading activities are permitted. This is to ensure the general public
is protected against fraudulent activities by dishonest charities or non-
governmental organizations.
 NPOs depend on the goodwill of the general public and donors to fund their
operations. As a result, business survival is often difficult for many smaller, less-
known non-profit social enterprises.
 There is a lack of financial and cost control because, unlike in a for-profit
organization, managers at NPOs are not expected to earn a profit for their owners
or shareholders.
 As a non-profit organization, the wages and remuneration of workers are often
lower than in commercial, for-profit organizations. Whilst it might be socially
acceptable that the managers at a bank or private law firm is paid an annual
bonus, gets to travel on business class and is offered a company car, the
equivalent benefits for a person working for a charity might be deemed to be
rather unethical.
 Top tip!
Although NGOs are not-for-profit social enterprises, this does not mean that they do not
aim to make a financial surplus. However, the surplus is not treated as ‘profit’ for tax
purposes simply because it does not get distributed to the owners or taxed by the
government, but is reinvested in the charity.
A non-governmental organization (NGO) is a type of non-profit social enterprise that
operates in the private sector of the economy. Therefore, it is not part of a government
organization. Instead, it is operated a voluntary group to promote a social cause, such as
the protection of human and animal rights, protection of the environment, and
development aid. They operate at a local, national, or international level and put pressure
on governments to adopt policies in support of their social cause.
They are usually funded by a combination of sources:
 Government grants or donations
  International organizations
 Charitable organizations
 Commercial businesses, as part of their corporate social responsibilities (CSR),
and
 Private donors and philanthropists.

Examples of non-governmental organizations include: Oxfam, the Wikimedia

Foundation, Amnesty International, Doctors Without Borders, the World Wildlife Fund,
and World Vision International.
 Amnesty International
 Doctors Without Borders
 The International Organization for Standardization (ISO)
 Oxfam
 Wikimedia Foundation
 World Vision International
 World Wildlife Fund

 A non-governmental organization (NGO) is a type of non-profit social

enterprise that operates in the private sector as  a voluntary group to promote a
social cause.
 Non-profit social enterprises operate in a commercial-like way but they do not
distribute any profits or financial surplus to their owners or shareholders.
 Social enterprises are business entities that generate revenue just like any
business organization, but hold community objectives for the wellbeing of others
in society, rather than primarily aiming to earn profit for their owners.
Case Study 1

Flowers by Cam is a small business in London, UK. It was set up as a sole trader in
2010 by Cam Tran. At the time, she had three young school-aged children, and operated
her business from home and a small stall that she rented at a local market.
The business relies on repeat customers in the local area, but also prepares bespoke
flower arrangements for weddings, funerals, graduations, and special occasions. Sales
fluctuate on a weekly basis, but she enjoys the flexibility of being able to work from
home when needed. Now that her children have graduated from high school and
university, she is keen to expand the business. However, with the devastation of the
coronavirus pandemic in the UK, her business has struggled with liquidity issues and she
is seeking to borrow a significant amount of money from her bank. Valentine's Day
should have been her busiest day of the year in 2021, but with national lockdowns still in
force, sales were the lowest they have been since she set up Flowers by Cam.

a.  Define the term sole trader.  [2 marks]

b.  Explain one advantage and one disadvantage of establishing Flowers by Cam as a sole

trader.     [4 marks]

Case Study 2

(a) Define the term non-profit organization (NPO).

(b) Distinguish between a non-profit organization and a charity.

Case study 3

In the past ten years, the United Arab Emirates (UAE) has built state-of-the-art
infrastructure, health care and education systems. The UAE provides a highly developed
health care system through both the private and public sectors, and the level of care is
high. In 2018, a Bloomberg health efficiency survey ranked the UAE in the top 10 most
efficient health care systems in the world. Technology-advanced medical facilities are of
excellent quality. While UAE citizens receive free health care in the public system,
expatriates (people from abroad working in the UAE) usually receive care in the private
sector, where English is commonly spoken and many of the medical professionals have
been trained in other countries.

Questions

1. Distinguish between the private sector and the public sector. [4 marks]
2. Explain why health care provided by the private sector might be more expensive
than that provided by the public sector in the UAE.  [2 marks]
Case study 4

Mars Inc. is a privately held company in the United States, producing pet food, pet care
and food products such as M&Ms, the Dolmio brand and more.  With close to 40 billion
USD in annual sales, it is one of the largest privately held companies in the world, owned
entirely by the Mars family.

Mars is committed to being a privately held company and has no plans to become a
publicly held company. The company is famous for its secrecy. Its former chairman,
Steven Badger, says that remaining a privately held company allows Mars more freedom
to pursue its business activities in the way it wants, enabling it to take a long-term
perspective.

Thinking and acting for the long-term health of a business is often not possible in
publicly held businesses that have to report earnings to shareholders every quarter. Mars
has the advantage of being able to see the actions and earnings of their publicly held
competitors, without revealing their own information to the public. This can give the
company a strategic advantage. It may also be possible for Mars to reach decisions more
quickly than would be the case if there were more shareholders.

Questions

1. Define the term privately held company. [2 marks]

2. Explain one advantage and one disadvantage for Mars Inc. as a privately held
company, instead of a publicly held company. [4 marks]
Case Study 5

Originating in North Africa, argan trees are now being introduced into other areas that
have hot, dry climates. Inside the fruit of the argan tree is a nut containing a kernel (seed),
which can be used to produce a rich oil. Argan oil has traditionally been used in
medicine, cooking and cosmetics. More recently, argan oil has become a popular export,
in demand for use primarily in skincare and haircare products.
Breaking the argan nuts to reveal the kernels from which oil can be extracted is a difficult
process that has not yet been mechanized successfully. So, it is done by hand, most often
by women. Over the last twenty years or so, cooperatives have been set up to manage the
production and sale of argan oil. Women often run these organizations themselves, and
may negotiate directly with international buyers of their oil. The cooperatives not only
provide employment in rural areas but they also empower women, many of whom are
earning incomes for the first time. The development of argan oil also benefits the
environment by increasing the value of these trees that protect against desertification and
that were previously often cut down for wood. The oil may be priced at the equivalent of
30–50 USD per litre in local areas, but on international markets it can sell for up to 250
USD per litre.
Most argan oil is produced by cooperatives of Berber women near the Moroccan cities of
Essaouira, Taroudant and Agadir. The Taitmaitine cooperative near Taroudant employs
about 100 women to produce the argan oil. They receive a salary, health insurance,
childcare and literacy instruction.
Questions
1. Describe the type of cooperative mentioned in the case study. [2 marks]
2. Explain two advantages for the Berber women of this local cooperative.
[4 marks]
Exam tip

Make sure that you are well aware of the challenges facing social enterprises. Especially
for HL students, Paper 3 is focused on social enterprise. It is likely that you will be asked
to identify and discuss challenges faced by these organizations, and to provide some
recommendations about how to overcome them.

Top tip!
Although NGOs are not-for-profit social enterprises, this does not mean that they do not
aim to make a financial surplus. However, the surplus is not treated as ‘profit’ for tax
purposes simply because it does not get distributed to the owners or taxed by the
government, but is reinvested in the charity.

Common mistake 
Whilst it is common in many countries for the government or local authorities to own
shares in a public limited company (PLC, it is technically incorrect to say that a PLC is
‘owned by the government’. The term 'public' in public limited company refers to a
business that has shares traded on a public stock exchange, i.e., shares can be bought and
sold by the general public. It does not refer to the public sector (the government).

Top tip!
Students often claim that the difference between business organizations operating in the
private sector and public sector is that the former aims for profit whilst the latter aims to
provide a service. Whilst this is not entirely incorrect, there are businesses that operate in
the private sector that do not primarily aim to earn a profit for their owners, such as
traditional charities, non-governmental organizations (NGOs), and not-for-profit social
enterprises.
 Top tip!
HL students should learn this section of syllabus thoroughly as the focus of the Paper
3 exam (HL only) is on a social enterprise. The examination addresses three key aspects:
The Paper 3 examination also requires students to do three main things:
1. identify and describe a human need (worth 2 marks)
2. explain the potential organizational challenges facing the social entrepreneur
wanting to meet this need (worth 6 marks), and
3. write a decision-making document that includes a business recommendation or
plan of action (worth 17 marks)