Business Organizations

Forms of Business Organization
Characteristics, advantages and disadvantages
Organization and Management (GASS005)

Learning Objectives
Having been presented with the three Forms of Business Organization,
with at least 80% accuracy, the learners should be able to:
1. Describe the general characteristics of Business Organizations;
2. Differentiate each of the business organization by enumerating its
advantages and disadvantages; and
3. Decide on which type of business is more suitable in the scenario
provided in the given activity.
At the age of 18, Alvin invented a widget that changed the way
people drive cars. Many large automobile manufacturers were
interested in purchasing the widget and offered him large, seven-figure
contracts (million-worth). Alvin, who was an expert in automobiles,
knew little about negotiating contracts, running a business and
marketing.
He decided to go to his attorney friend and ask him how he should
structure his business. His friend told him there are three main types
of business organizations: sole proprietorship, partnership, and
corporation.
Business defined
Brown et al (1997) says:
“Business is all of the activities of an individual or group of

individuals in producing and distributing
goods and services to customers.”
Business defined
Business wants to know people’s
NEEDS’
WANTS,
PREFENCES,
VALUES, etc.
hence,
What? How? For Whom?
Characteristics of Business
A business has some or all of these:
Exchange sale or
transfer of goods
and services.
Profit motive.
Dealing in goods
and services.
Uncertainty and
risk bearing/taking.
Continuity and
regularity.
Objective of Business
1. Profit
2. Survival
3. Growth
4. Market share
5. Productivity
6. Innovation
7. Employee’s welfare
8. Service to consumer
9. Social responsibility
At the age of 18, Alvin invented a widget that changed the way people
drive cars. Many large automobile manufacturers were interested in
purchasing the widget and offered him large, seven-figure contracts
(million-worth). Alvin, who was an expert in automobiles, knew little
about negotiating contracts, running a business and marketing.
He decided to go to his attorney friend and ask him how he should
structure his business. His friend told him there are three main types
of business organizations: sole proprietorship, partnership, and
corporation.
Forms of Business
Sole Proprietorship
• Sole Trader; “one-man business”
• A person who enters business working for him/herself
• Mostly found in retailing business
• Represents many things: he is a capitalist because he, himself owns
the business, he is a laborer because he performs most of the work,
he is the entrepreneur because he takes the risks, and he is the
manager because he has the burden and privilege to decide.
Forms of Business: Sole Proprietorship
Features of a Sole Trader
Ownership Owned by one person
Liability Unlimited liability – if the owner is indebted, both personal
and business
Asset may be at used for settlement
Source of Capital / Fund Provided by the owner
Legal Entity It is not a legal entity
Motive Profit
Method of Withdrawing The owner can withdraw his capital anytime
Capital
Board of Director No Board of Directors; he performs everything
Its Nature Simplest and most common type of business
Forms of Business: Sole Proprietorship
Advantages Disadvantages
It requires small capital Bear all losses and risks alone
Easy to establish Limited financial resources
Ownership of all profit Unlimited liability
Quick decision-making Lack of continuity
Easy to with draw his asset/s Absence of specialization
Single handedly formulates his policies Limitation on expansion
He’s the Boss!
Flexibility
Personal Satisfaction
Cordial relationship with workers and customers
Tax saving
Privacy
Forms of Business
Partnership
• Association of two to twenty (2-20) persons carrying on a business
with the view of making profit.
• Relationship that exist when two or more persons who contribute

small money or money’s worth in order to establish, own and manage
a business organization with the sole aim of making profit.
Forms of Business: Partnership
Features of Partnership
Ownership 2-20 people and 2-10 persons in the case of banks
Capital Contribution by partners
Liability Unlimited liability except for limited partnership
Formation motives For profit
Sources of Capital contributions, bank loans, borrowed from relatives, etc
Method of Withdrawal Must be approved by other members as agreed in their
partnership deed.
Legal personality No separate legal identity
Board of Directors None
Types of Partnership
1. Ordinary Partnership
2. Limited Partnership
Kinds of Partners
1. Active
2. Dormant/sleeping
3. Normal/passive
4. Silent
5. Secret
Advantages Disadvantages
Greater financial resources Unlimited liability
Combined abilities and skills The business is not a legal entity
Greater continuity Disagreement and resignation
Ease of formation Decline in pride of ownership
Joint and better decision Bureaucracy leads to slow decision and policy making
Creation of employment opportunities Risk of mandatory dissolution
Employment of valued employees Limited capital
Tax advantage Restriction on sale of interest
Division of labor
Privacy
Forms of Business
Joint Stock Company (Corporation)
3 kinds of companies:
1. Unlimited liability
2. Limited liability by guarantee
3. Limited liability by shares
2 types of limited liability companies:

4. Private Limited
5. Public Limited
Forms of Business: Corporation
Features Private Public
Membership Min of 2 max of 50 Min of 7 and no maximum, but article of
association could specify the limit
Issuance of Shares Cannot sell shares to the public Can sell share to the public
Transferability of Can only be transferred with the consent of Shares can be transferred without the
Shares other shareholders consent of other shareholders
Quotation Not quoted on the floor of the stock Quoted on the floor of the stock exchange
exchange
Publication of Not required to publish annual accounts. Required by law to publish annual accounts
Accounts However they must send a copy of their and to send a copy of audited account to
audited account to the registrar of the registrar of companies each year
companies each year
Limited Liability Each shareholder possesses limited liability Each shareholder possesses limited liability
Forms of Business: Corporation
Private Public
Advantages Disadvantages Advantages Disadvantages
Limited Liability Taxes Legal Entity Double taxation
Privacy Shares Limited Liability Hard to establish
Continuity Ease of raising Capital No privacy
More Capital Expansion is unlimited Non-flexibility
Legal Entity Continuity Govt. regulated
Adaptability Cooperation is non existent
Capital Transfer Owners are separate from managers
Flexibility Huge capital is needed
Enjoyment of large scale production Delay in policy and decisions
Share Holders interest is safeguarded Suppression of individual initiatives
No managerial responsibility
Employees may become co-owners
Democratic management

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Forms of Business Organization

Characteristics, advantages and disadvantages

Organization and Management (GASS005)

“Business is all of the activities of an individual or group of

• Relationship that exist when two or more persons who contribute

2 types of limited liability companies:

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