Types Of Business
Businesses can be divided into 3 sectors, the private, public and voluntary sector. The voluntary sector covers organisations such as charities and businesses that do not make a profit. People who work for these organisations do not get paid for their work although they do have a total annual income of over i?? 15bn. i?? 4bn of this money comes from private donations, fundraising and charity shops. This money is then used by the charity for things such as medical research. The private sector divides into 3 further parts.
These are: The financial sector The personal sector makes economic decisions and finds out information about individuals and households such as how much income people earn, how they spend their money and how much they save. All this information directly affects the economy as it generates demand for goods and services. The corporate sector includes businesses privately owned. Almost all businesses are in the private sector except for charities.
Finally, the financial sector deals with the financial side of things. This includes financial institutions such as banks and some building societies. Their role is to make and receive payments on behalf of customers as well as acting as the link between those groups that have the money to save and those that need to borrow. Private sector businesses are said to be ‘Privatised’. The public sector therefore, covers activities that are carried out and owned by local and central government such as schools and sports centres.
They are funded by the general public through taxes. Public sector services are said to be ‘Nationalised’. These are the most common forms of business and also the easiest to set up. They are owned by one person and so that person funds the business through his/her personal money. There are fewer regulations and there is also more freedom to make decisions and no need to consult anyone else. The owner can also take all of any profit that is made. However, there are many disadvantages to being a sole trader.
The owner has what is called ‘unlimited liability’ so this means that if the business gets into trouble and runs up a debt, then the owner has to take responsibility to pay the creditors himself. If they cannot, the owner could lose some of their own personal property as a result. The owner must also rely on their own business expertise, even though they may employ several people. The owner also cannot afford to be ill for too long and may have to work long hours to keep the business going. Sole traders are usually small businesses such as small retailers, plumbers and electricians.
Partnerships Partnerships can be anything between two and twenty partners. They are very common in professional services such as accountants, solicitors and doctors. The advantages of being in a partnership are that the partners can pool all their money and expertise together, money is easier to borrow and also more partners means that more capital is available than a sole trader. Losses are also shared between the partners and there are few regulations. There are also many disadvantages to being a part of a partnership.
For a start, partners have unlimited liability, so they are personally responsible for any debts. Limited liability is available in a partnership, but that only applies when a partner invests money into the business but does not take part in management decisions. However, at least one partner must have limited liability. Another is that all the partners have to be consulted when making business decisions, so that can make the process a lot slower, partners can have arguments and disagree over things and the profits also have to be shared between all the partners.
Private Limited Companies (LTD’s) Private companies are usually smaller than public companies and are usually family businesses, such as a small family leisure business. There must be at least two shareholders but no maximum number, and the shares cannot be exchanged on the Stock Exchange, often only with the permission of the board of directors. The shareholders choose the board, who in turn choose a managing director to run the business day by day. Private companies have limited liability so they do not lose everything, only what they put in to the business.
The major disadvantages are that the profits have to be shared out, decisions take longer to make and they cost more to set up. Public Limited Companies (PLC’s) Public Limited Companies are much larger than Private companies and can also be known as ‘PLC’s’. They are called public companies because they are owned by shareholders as the shares can be traded on the Stock Exchange. By selling the shares, the company can raise large amounts of capital very quickly.
Deciding to sell shares on the Stock Exchange can be quite risky as it is quite expensive to ‘float’ in the first place and the Exchange can have many good and bad days. If new shares become available on a bad day, when many people want to sell, the company can find itself in difficulties. The shareholders have limited liability, so they can only lose whatever they have invested into the company. Another advantage is that when a shareholder decides to discontinue his investment they can sell their shares on to someone else while the company still has the money permanently.
A public company may have thousands of shareholders and it is these shareholders who elect a board of directors to look after their interests. The board can then appoint specialists in a certain field for their expertise if they wish. A major disadvantage of PLC is that control of the business can be lost by the original shareholders if lots of shares are bought by one individual or consortium as part of a take-over bid. Other disadvantages are that many criteria and legal requirements must be met in order to set up and accounts and financial records must be made public.
A PLC must also hold an AGM (Annual General Meeting) every year where they must explain poor results and unpopular decisions to the shareholders. Co-operatives Co-operatives have become popular in the UK recently. They used to be found only in agriculture and retailing but recently the biggest growth has been in service occupations and small-scale manufacturing. A Co-operative is basically where people work together to share profits and make decisions.