Types of Business

Organisation
Chapter 4
Part 1
Unincorporated Businesses in the
Private Sector
Learning Objectives:

Identify the two

Classify the forms of Define the term
types of
Business under the unincorporated
unincorporated
Private Sector. business.
Business.

List the List and explain the List and explain the
characteristics of benefits of running drawbacks of running
Sole Trader and businesses in the businesses in the
Partnership business. unincorporated form. unincorporated form.
 Recall:
Complete the Classification of business by identifying the two
types of business ownership.

Classification of Business

By Ownership

Private Public
Sector Sector
 The main types of Business in the Private Sector

Private Sector Businesses

Unincorporated Incorporated Other Forms of

Businesses OR Business
Limited Companies

Sole trader Franchise

Private Limited
Companies
Partnership
Joint Venture
Public Limited
companies

LO:1 Classify the forms of Business under the Private Sector.

 Unincorporated Business does not have a separate legal identity
from its owners. The owners have the disadvantage of unlimited
liability for business debts.

Unlimited Liability – If a business fails then the owners lose all the money
invested in the business and will also be forced use their personal wealth to
finance the business debts.

LO: - Define the term unincorporated business.

 Definition: It is a business that is owned
and controlled by just one person (even if
others are working for the owner) who
takes all the risks and receives all the
profits.

This is the most common form of business

organization. The owner is called the sole
proprietor.

One of the essential reasons it ’s very

common is the ease of setting up the
business due to the few legal requirements
it needs.

LO: List the characteristics of a Sole Trader.

 Case Study: Scenario
Elizabeth works in a large organisation as a ‘recycling officer’. She
works morning and evening shifts and has a hectic schedule in
between looking after her family. Although money is not a very
important issue, she feels that she would still like to work and provide
extra income for holidays and other luxuries.
Whilst watching a programme on television about young
entrepeneurs, she has been inspired to give up her job as a
‘recycling officer’ and to start up this business as a sole trader in the
world of desserts. This would involve producing an original high-
quality home-made ice-cream. She would sell this ice-cream from
her own ice-cream shop in her hometown. She called the business
Cream Treats.
She has discussed it with her family and has decided to go ahead.
She has been told that she will need a minimum of $8000 to start up
as a sole trader.

LO: List the characteristics of a Sole Trader.

 a) How could Elizabeth raise the finance needed?
Her Own savings, borrow from family and friends or a bank loan.
b) With the $8000, what would Elizabeth need to spend this money on?
rent of ice-cream shop, buy the equipments to make the ice-creams,
raw materials for the ice-creams, advertising costs.
c) After all costs have been paid, would Elizabeth have to split the profits with
anyone once she starts the business?
No one – she would keep them all to herself.
d) If things went wrong, who would be responsible for the debts?
Elizabeth because she is the owner of the business.
e) What could happen to Elizabeth’s business if she became ill or was unable
to work for a long period of time?
She may have to get someone else to run it for her or she has to close
it.
f) What could Elizabeth do to try not to lose custom/profits during a long
period of absence?
Make sure that she has trained someone to run the business whilst she
is ill or on holiday.
LO: List the characteristics of a Sole Trader.
Advantages or Benefits of operating as a Sole trader

Ø It is quick and easy to set up because it has very few legal

regulations.
Ø He / She is his/her own boss, having complete control.
Sole trader has freedom to make all decisions on how to
run the business.
Ø The business can often be set up with a small amount
of start-up capital.
Ø Running and owning the business gives them the
benefit of keeping all the profit which is an Incentive to
work.
Ø Close contact with customers.
Ø Enjoy complete secrecy in business matters.

LO:1 List and explain the benefits of running an unincorporated business (Sole trader)
Disadvantages or Drawbacks of operating as a Sole-Trader

Ø No one to discuss business matters with.

Ø The owner is responsible for any debt the business may have and
this is termed as Unlimited liability. This means that if the business
cannot pay its debts, or the business fails then the owner is likely
to lose the money invested in the business and their personal
belongings.
Ø Lack of capital to expand the business. The owner only has his
savings which is limited and it is quite difficult to raise funds as a sole
trader.
Ø No one to share responsibilities as the owner is forced to do
many jobs at the same time and some of them he is not skilled at.
Ø It is a small business and the owner cannot afford to expand, so
the owner is unable to hire specialist or highly paid workers.
Ø No continuity of the business after the death of the owner.
LO: List and explain the drawbacks of running an unincorporated business (Sole Trader)
 EXIT TICKET:

owned
Sole-trader business is __________and controlled by just
_________
one person who takes all the risks and receives all
___________
profits
the____________.
An advantage to this form of business is that it is easy to set
freedom
up. Sole trader has ___________ to make all decisions on
how to run the business.
Unlimited Liability
A main Disadvantage is _____________________where the
owner has to give up on his or her business and personal
belongings to pay back debts if the business failed.
This form of business is classified as unincorporated business
___________________
under the private sector as it does not have
separate legal identity
a__________________________________.

LO: List and explain the drawbacks of running an unincorporated business (Sole Trader)
 When two or more people (2-20) form a group or
association and agree to own and run a business
together.
1. Both partners will invest capital into the business
2. Have a say in the running of the business
3. Share the responsibilities and risks in the business

Partnership business can be set up very easily.

Agreements need to be stated between partners. They
could be:
1. Verbal agreement: partners agree verbally
2. Written agreement: a Partnership Agreement or Deed of
Partnership. The written agreement documents the amount of
capital, terms of the businesses and sets guidelines to avoid
disagreements.

LO: List the characteristics of Partnership Business.

 Advantages or Benefits of operating as a
Partnership Business

Ø More capital invested leads to a greater expansion of

the business.
Ø The responsibilities of running the business were now
shared.
Ø Both partners were motivated to work hard because
they would both benefit from the profits.
Ø Any losses made were now shared by the partners.

LO: List and explain the benefits of running an unincorporated business (Partnership)
 Disadvantages or Drawbacks of operating as a
Partnership Business
Ø The partners did not have limited liability.
Ø The business did not have a separate legal identity. If one of
the partners died, then the partnership would end.
Ø Conflicts can arise while decisions are taken and consulting
all partners takes time.
Ø If one of the partners is inefficient or dishonest, the other
partners will suffer.
Ø Most countries limit the number of partners to twenty which
means that business growth is limited to the capital
invested and cannot expand further.
LO: List and explain the drawbacks of running an unincorporated business (Partnership)
 Exit Ticket
Identify the advantages and Disadvantages of Partnership

Disadvantage Advantage Disadvantage

Advantage Advantage Advantage

Advantage Disadvantage Advantage

Advantage Advantage
Disadvantage

LO: List the benefits and drawbacks of running an unincorporated business (Partnership)
Case Study – Paper 1 Style Question
When Jameel lost his job in a fruit and vegetable shop that closed down, he decided to open
his own store. He had good contacts with suppliers. They said they would give him one
month’s credit before he paid for supplies.
Jameel had $5000 in savings to invest in the shop. He thought this would be sufficient to
start the business. He is an independent man – he never liked taking the manager’s orders
in the food shop! He wanted to operate his new business as a sole trader.

a Define ‘sole trader’. [2]

It is a business that is owned and controlled by just one person who takes all
………………………………………………………………………………………………………………………………………………
the risks and receives all the profits. It is the easiest form of business
………………………………………………………………………………………………………………………………………………
operation but has the disadvantage of unlimited liability.
………………………………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………………………………

b Identify the two forms of ‘unincorporated business’. [2]

Sole Trader and Partnership
………………………………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………………………………
Case Study – Paper 1 Style Question
When Jameel lost his job in a fruit and vegetable shop that closed down, he decided to open
his own store. He had good contacts with suppliers. They said they would give him one
month’s credit before he paid for supplies.
Jameel had $5000 in savings to invest in the shop. He thought this would be sufficient to
start the business. He is an independent man – he never liked taking the manager’s orders
in the food shop! He wanted to operate his new business as a sole trader.
c Define ‘Partnership’. [2]
Partnership is when two or more people (2-20) form a group or
………………………………………………………………………………………………………………………………………………
association and agree to own and run a business together. Partners
………………………………………………………………………………………………………………………………………………
bring in capital to expand the business but they have the
………………………………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………………………………
disadvantage of unlimited liability.

d Outline two benefits to Jameel of operating his business as a sole trader. [4]
He will be his own boss so he does not have to listen to anyone
Benefit 1: ………………………………………………………………………………………………………………………………
or take orders from anyone. He makes his own rules and makes
………………………………………………………………………………………………………………………………………………
decisions for the business independently.
………………………………………………………………………………………………………………………………………………
He does not have to share his profits with anyone as he is the
Benefit 2: ………………………………………………………………………………………………………………………………
sole owner of the business and can keep all the profit with him..
………………………………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………………………………
Case Study – Paper 1 Style Question
When Jameel lost his job in a fruit and vegetable shop that closed down, he decided to open
his own store. He had good contacts with suppliers. They said they would give him one
month’s credit before he paid for supplies.
Jameel had $5000 in savings to invest in the shop. He thought this would be sufficient to
start the business. He is an independent man – he never liked taking the manager’s orders
in the food shop! He wanted to operate his new business as a sole trader.
e Explain two drawbacks to Jameel of operating his business as a sole trader. [6]
Unlimited Liability
Drawback 1: …………………………………………………………………………………………………………………………
Jameel has the disadvantage of unlimited liability. If the business fails and if
………………………………………………………………………………………………………………………………………………
Jameel had to pay his suppliers then they will force him to sell his assets in
………………………………………………………………………………………………………………………………………………
business and his personal belongings.
………………………………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………………………………
No one to share responsibilities
Drawback 2: ……………………………………………….…………………………………………………………………………
Jameel has no one to share responsibilities. He will have to manage the
………………………………………………………………………………………………………………………………………………
shop and take decisions on his own. He has to buy the supplies for the shop
………………………………………………………………………………………………………………………………………………
and arrange the stock and talk to customers and convince them to buy
………………………………………………………………………………………………………………………………………………
things. If he appoints people for the job then he will have to pay a salary
………………………………………………………………………………………………………………………………………………
and that will reduce his profits.
After few years of operating the business successfully Jameel has planned to expand his
business by opening a branch in another part of the country. However, he does not have
sufficient capital. His friend Ahmed was willing to invest in the business as his partner.

f Do you think Jameel should take in a partner to open a new branch of his business? Justify
your answer. [6]
If Jameel takes on a partner then he will have more capital to open his new
………………………………………………………………………………………………………………………………………………
branch as the partner comes with his share of money to invest in the
………………………………………………………………………………………………………………………………………………
business. Also, Jameel can now share responsibilities with his partner and
………………………………………………………………………………………………………………………………………………
does not have to do all the work by himself which gives him more time to
………………………………………………………………………………………………………………………………………………
plan for the business. However, conflicts may arise between him and his
………………………………………………………………………………………………………………………………………………
partners while taking decisions on where to locate the new branch and it
………………………………………………………………………………………………………………………………………………
will take time for them to resolve or come to an agreement. Additionally,
………………………………………………………………………………………………………………………………………………
Jameel and his partner should be careful of the drawback of unlimited
………………………………………………………………………………………………………………………………………………
liability where they might be forced to sell their assets in business and
………………………………………………………………………………………………………………………………………………
personal belongings if the business failed. In my opinion, It will be ideal for
………………………………………………………………………………………………………………………………………………
Jameel to take the risk and bring in a partner as the new partner can come
………………………………………………………………………………………………………………………………………………
in with new ideas to expand the business successfully.
………………………………………………………………………………………………………………………………………………