49.

Main Forms of Business Organization in private sector

Limited and Unlimited Liability
Limited liability is the owners of the limited company are financially responsible for the debt of the company
up to the amount of their investments.
This means that their responsibility for the debt of the business is limited to the amount of money they have
invested. If a shareholder has invested $5000 in a company and the company goes in to bankruptcy. He will
lose the investments but not all.
Unlimited liability is the owners of a business are liable for all the debt of the business

This means if the business is in financial difficulty and cannot pay its creditors the owner may declared
bankrupt. If this happens the owner’s personal possessions (house, car etc) may be taken to pay the debts of
the business

Liabilty

Limited Unlimited

Pvt Limited Sole trade

Public
Partnership
Limited

Sole proprietorship/sole trade

Characteristics:

 Sole trade is the single owner of a business who makes all the decision o=for the business and may or
may not employ people
 This business is owed and control by only one person where he/she can employ worker for their
assistant
 All profits and losses go to the owner of the business (sole proprietor)
 He can obtain the capital from personal saving, loans from relatives, friends or the bank
 Example of sole proprietorship: Food stall, sundry shop, beauty saloon
Partnership
Characteristics

 Partnership is a legal form of business where 2 or more people trade together.

 This business is owned by two or more (but not more then 20) people where they combine to carry on
a business with the aim of making profit
 The profit and losses are divided among the partners depending on the partnership agreement. But if
there no agreement is made, the profit and losses are divided equally among themselves
 Capital is obtained from the partners’ contributions and loans
 Example of a partnership: Clinics, accountants or architects’ firm

Deed of partnership

This is the formal document showing the rights and duties of partners in a partnership. It contains

 Name of the partnership

 Objective of partnership
 Details of the partners
 Nature of the business
 Amount of capital invested by each partner
 Duties of each partner
 Amount of salary
 Conditions for ending the partnership
 Advantages Disadvantages
Sole Trade  It is easy to set up the business - Not paperwork  Limited capital – The owner has to provide
are required to set up the business, the owner the money to start or expand the business
just need to register the business name under by using his/her own saving or by borrowing
the Registration of Business Act from the banks or friends
 All profit belong to the owner, so the owner has  Unlimited Liability – The owner is personally
a greater interest in the success of the business liable for all debts incurred by the business
in the event of a business failure
 The owner has can make decisions quickly  No one will carry out the business if the
owner is ill or on holiday
 The owner can give personal attention to the  The firm ends when the owner dies or goes
customers bankrupt
 Small amount of capital is needed  There may be shortage pf certain skills. One
person cannot be expert in all area of the
business
 There is no legal formalities to complete  He owner may have to work long hours in
order to be successful

Partnership  It is easy to set up the business -  Decisions may be delayed by disagreements

because a number of people are involved
 Pooling of expertise – This ensures a greater of  unlimited liability expected for limited
specialization, resulting in more efficient partnership
management of the business
 If one of the partners is sick or on holiday, there  Death, bankruptcy, insanity or retirement of
is still someone to carry on the business a partner may end a partnership
 More capital is available because of the  Limited capital – Expansion of the business is
partners’ contributions and loans limited to the amount of the capital
contributed by the partners
 Losses are shared among the partners  Profits are shared among several people.
 The decisions are better quality decisions due to
involvement in all the partners
Limited partnership

This enables the partners to put up capital and their liability for losses will be limited the amount the invested.
They sleeping or silent partners. They don’t have voting power and they don’t actively take part in the business.

Characteristics
 All the partners have limited liability
 They have perpetual succession or continuity
 The partnership can sue or be sued in its own name
 They have minimum of 2 partners
 The partnership has LLP after its name.

Limited companies
A business that is registered and whose shareholders have limited liability. These companies are separate legal entities.
Separate legal entity is an organization having an identity that is separate from its individual owners.

These companies are owned by shareholders and governed by various company acts.
To set up limited company there are number of legal procedures and the records and documents must be submitted to
registrar of companies.

Main documents
 Memorandum of association – This establishes the identity of the company (name, address, nature of the
business)
 Article of association- Sets the rules of the company

Once these documents have been accepted the company will be granted a Certificate of incorporation.

Certificate of incorporation is the document issued to show that a company has been legally formed and has legal
existence.
Every year they must send audited accounts to registrar of companies.

The board of directors

Are group of people elected by shareholders to run the company on behalf of shareholders. Directors are often
shareholders especially in a private limited company. Board of directors are elected by shareholders at the annual
general meeting. The directors in turn elect a chairperson.

Duties
 Making policy decisions
 Planning for the future
 Setting corporate aims and objectives
 Approving annual report
 presenting accounts in AGM

Types of limited companies

 Private ltd company
 Public ltd company
Private limited company
They can raise more capital than partnership. But they cannot sell shares to public and they must obtain shareholders by
personal contact. This type of business is suitable for people who would like to keep control within the family.

Shares are not freely transferable. Any share transfer has to be approved by existing shareholders

Characteristics of pvt ltd

Public Limited company

A large company owned by shareholders who have bought their shares on stock exchange. This type of business can raise
large sum of capital. Public limited companies can sell shares to public and should publish the annual accounts and these
accounts set should available to anyone on request from the company.

Characteristics
Advantages and Disadvantages

Advantages Disadvantages
Private Ltd  Shareholders have limited liability  Can not sell shares to the public
 Its easy to raise capital  Shares are not freely transferable.
 The company has continuity of existence  Its financial affairs are not private and accounts
must be audited annually and sent to registrar of
companies
 Private limited company is legally separated
 Shareholders have direct control over the
company
 The founders can retain control over the
company

Public limited  Limited liability  Registering the company is costly process

 Can raise more capital  Lack of personal contact within the company
 The company has continuity of existence  Decision making ma be slow with the important
decision taken at meetings
 company is legally separated  Because of the size of the company its difficult to
manage
 Advantage of economies of scale  There is no privacy for accounts and competitors
also can be seen due to publishing
 Company must comply with many regulations to
protect shareholders

Similarities between private and public ltd companies

 They must be registered
 Owned by shareholders and they have limited liability
 The businesses are controlled by a board of directors elected by shareholders
 The companies name included the word “limited”
 They are both legal entities
 Both the companies should submit accounts and are subject to pay tax on profit
 They raise capital by selling shares
 Both the companies should hold Annual General Meeting
 They are incorporated (separate legal entity) under various company acts
 With minimum 2 people they can start the businesses
*Trading certificate is the document issued to public ltd company when it has raised is capital by selling shares, I can now
start trading.

Factors that may affect for the choice of business form

 How long the business has been in existence
 The size of the business
 The purpose of the business
 The number of owners and whether or not family is involved
 The need for large amount of capital
 The need for secrecy about business affairs