The four business organizations in the private sector are sole proprietorships, partnerships, private limited companies, and public limited companies. They also have different advantages and disadvantages.
Business organizations in the private sector operate in various industries. But they share something in common: They are profit-oriented. They make a profit and money by selling goods and services to satisfy consumers.
The private sector contributes greatly to the economy. By providing goods and services, businesses create jobs for households. Thus, an increase in their output contributes to more jobs and income.
Then, business organizations in the private sector also have a variety of operating scales. They range in size from small businesses targeting a local market and few employees to giant multinational corporations with millions of dollars in revenue and recruiting many employees.
The areas of operation in the private sector are also diverse. Some businesses operate in the primary sector and produce agricultural and mining commodities. Others operate in the secondary sector and process inputs from the primary sector into various products such as food, beverages, clothing, and automotive. Then, there are also businesses in the tertiary and quaternary sectors, which provide services such as finance, information technology, trade, tourism, and hotels.
The private sector is profit-driven. Businesses produce goods and services for sale. They create value by processing inputs into higher-value outputs. Then, they sell them at a higher price to make a profit.
Different from the public sector, business organizations in the private sector face competition. They try to outperform each other to satisfy consumers. It then forces them to be more efficient and productive to be competitive.
Common business organizations in the private sector
There are various types of business organizations in the private sector. The four most common are:
- Sole proprietorship
- Partnership
- Private limited company
- Public limited company
The business organizations in the private sector above differ in the extent of the owner’s responsibilities to operations and financial and legal obligations. Each has advantages and disadvantages.
Alright, let’s discuss each one individually. For the last two, I combined both in one subheading: limited companies.
Sole proprietorship
A sole proprietorship is owned by one person. The owner is responsible for all operations and functional areas. The other four characteristics are:
- Owners and businesses are not considered legally separate entities.
- Owners have unlimited liability, which can lose personal assets to pay off business debts.
- Business liability also applies to business legal obligations.
- The scale of business operations is small, with few employees, and usually serves the local market.
The advantage of a sole proprietorship is flexibility. Owners can make all business decisions independently and are free to run the business as they see fit. Therefore, they can stop business at any time and pursue business in other areas.
Then, the owner is also entitled to all the business profits because, in essence, the business money is the owner’s money. Businesses are easy to set up and have fewer rules and regulations than other business organizations in the private sector.
However, sole proprietorships also have a major disadvantage, namely unlimited liability. First, the owner takes all the business risks, including failure to make a profit. Then, they are also responsible for business debts, which risk losing personal assets to pay off business debts.
The next disadvantage is limited resources. Businesses usually rely on money from owners. Creditors such as banks are also reluctant to lend money because businesses have a high-risk profile. Businesses are also unable to access alternative sources of funding, such as stocks and bonds.
Limited resources also make competitive capacity low. As a result, sole proprietorships are vulnerable to competitive pressure from more established competitors. Owners also find it difficult to recruit experienced employees because they prefer to work in more established companies.
Stress and tiring is another disadvantage. Owners are in charge of the entire operation, requiring them to play different functional areas and work long hours.
Partnership
Partnerships are established by two or more owners. We call them partners. This business can be found in professional services such as lawyers and real estate agents.
Each partner shares responsibility for the operations, obligations, and profits of the business. They work according to partnership arrangements and deeds.
In general, partners have unlimited liability – under a general partnership. However, in specific cases, partners may have limited liability. The variations can be Limited Partnership, Limited Liability Partnership (LLP), and Limited liability limited partnership (LLLP).
Unlike a sole proprietorship, a partnership has more resources. Each partner can contribute capital and bring different skills to the business. They work together to make the business a success. In contrast, under a sole proprietorship, the success of the business depends entirely on one person.
However, partnerships also contain drawbacks. Decision-making becomes more difficult as partners have to come to a mutual understanding. As a result, it doesn’t always run successfully. For example, some partners arguing and disagreeing with other partners about the future direction of their business could lead to conflict. In contrast, under a sole proprietorship, the owner is the sole decision-maker.
Another drawback is the profit-sharing of the business. Partners must share the profits, making less money each one receives than operating as a sole proprietorship.
Limited company
Limited companies are more complex than the other two business organizations in the private sector. However, the organization is more structured because the functional areas are clearly divided.
Another characteristic is limited liability. The business is a separate entity from the owner. Therefore, corporate finances are separate from the personal finances of the owners (also called shareholders). Likewise, the legal and financial obligations of the company are not attached to the owner but to the business. Thus, owners are not personally responsible for paying off business debts, not at risk of losing their personal assets.
Limited companies fall into two categories:
Both differ in the aspect of whether the company’s shares are publicly available or not. Public limited companies are publicly available and traded on a stock exchange, whereas private limited companies are not (they are closely held).
When it needs capital, a private limited company can list its shares on the stock exchange for the first time (known as an initial public offering). Once active, the company turns into a public limited company.
Limited liability companies have several advantages, such as:
- Owners have limited liability and are not personally obligated to settle business debts or lawsuits against the company.
- The company has a higher competitive capacity because it has more resources than the other two business organizations in the private sector.
- Organizations are more structured where operations are clearly divided into functional areas.
- Companies have better access to capital by issuing shares or debt securities, making it easier for future expansion.
But, limited companies also have disadvantages such as:
- Setting up a business is expensive, more complex, and difficult because it must comply with many rules and paperwork.
- Agency problems arise because owners typically delegate day-to-day operations to management, who may not act in their best interests.
- Management may not distribute dividends for reasons such as strengthening internal capital, which means no income for the owners.
- Owners’ wealth may fall due to negative speculative activity, which lowers the company’s stock price (applies specifically to public limited companies).
Business sectors in the private sector
Private sector businesses operate in a wide range of industries, also known as business sectors. These sectors categorize companies based on their economic activities. Here’s a breakdown of the major sectors:
- Primary sector: This sector deals with the extraction of raw materials from nature. It includes businesses involved in activities like agriculture, mining, forestry, and fishing.
- Secondary sector: This sector focuses on transforming raw materials into finished goods. It encompasses manufacturing companies that produce a variety of products, such as food, beverages, clothing, furniture, and automobiles.
- Tertiary sector: This sector provides services to consumers and businesses. It includes a vast array of industries such as finance, information technology, retail, transportation, healthcare, education, tourism, and hospitality.
- Quaternary sector: This is a relatively new sector that deals with the development and application of knowledge. It includes businesses involved in research and development, information technology consulting, and education technology.
Understanding these sectors helps us grasp the diversity of the private sector, the various roles of businesses within those sectors, and the impact of different business organizations in the private sector on the economy.
As mentioned earlier, competition compels business organizations in the private sector to be efficient. Businesses within a sector may compete directly by offering similar products or services. For instance, numerous companies compete in the smartphone sector, each striving to provide the best features and functionalities to attract customers.
This competition also encourages innovation. Businesses constantly seek ways to improve their offerings and gain an edge over competitors. This drive for innovation can lead to the development of new products, services, and production methods, ultimately benefiting consumers with greater choices and potentially lower prices.
