Organization and Business Ownership

Many organizations exist in the real world. They may operate in the private sector or the public sector.

They may be sole proprietorships and partnerships for which the owner has unlimited liability. Alternatively, they are limited companies where the owners are not personally liable for the business’s debts.

Likewise, business organizations come with differences in ownership. For example, they may be sole proprietorships in which one owner operates and controls the business. Or they are partnerships, which are formed by two or more partners.

Sole proprietorships and partnerships have unlimited liability. They operate as an unincorporated business.

Then, there are also limited companies. Unlike a sole proprietorship or partnership, a limited liability company has limited liability. And businesses are legal entities separate from their owners.

Some limited companies operate privately, where their shares are not traded on the stock exchange. We know them as private limited companies (private limited companies). Others have listed their shares on the stock exchange and operate as public limited companies.

Organizations in the private, public, and third sectors

Organizations can be grouped according to who owns them and their motives. Broadly speaking, they include organizations in the following:

Private sector;
Public sector;
Third sector.

Organizational ownership in the public sector may transition to private sector ownership (privatization). And conversely, private organizations are taken and controlled by the government, making them public sector organizations (nationalization).

Privatization means transferring state-owned assets or companies to the private sector. Thus, their ownership becomes under the private sector. It also includes when the government appoints private companies to provide certain public services previously delivered by state-owned entities.

A common way to privatize is with an initial public offering. State-owned companies issue their shares on the stock exchange to be owned and traded by the public. Consequently, government ownership is diluted.

Nationalization is the opposite of privatization. The government took over private companies and brought them under control. The motive may be to avoid exploitation because the private sector is motivated by maximum profit.

Another motive is to preserve strategic industries. For example, a giant company operates in a labor-intensive industry and is experiencing financial difficulties. Therefore, nationalizing it is an option to save jobs for the people.

Another reason is political. The government forces companies to be nationalized, as dictators often do.

Private sector

The private sector includes a wide range of businesses in which the ultimate owner is an individual, either one or more people. They aim to survive and make a profit.

Characteristics of business organizations in the private sector:

The ultimate owner is an individual;
Business is owned by one or more people;
Business orientation is to make a profit;
Management is more flexible (not under government bureaucracy).

Various organizations exist in the private sector with different ownership structures, including:

Sole proprietorship or sole trader, where the business is owned and controlled by one person;
Partnership, where the business is owned and managed by more than one person (referred to as a partner);
Corporation, where the organization is owned by one or more people, and each has limited liability.

Corporations are divided into two regarding whether their shares are available to the public and traded on the stock exchange, namely:

Public sector

The public sector is the economic sector under government control. That may be directly through government institutions or through state-owned entities. Goods or services provided may be free or for a small fee, e.g., public hospital services and museums.

Organizations in the public sector include:

National government
Local government

Characteristics of business organizations in the private sector:

Government-owned and controlled;
Aims to provide services to the public;
Provide widely available services, possibly at affordable prices;
Funded by taxes, except for exceptional cases;
Operating in strategic sectors such as health, education, housing, and social work.

Funding by taxes is not always the case for organizations in the public sector. A real example is a public corporation. Public corporations are state-owned businesses fully or partially funded by the state budget.

Public corporations are sometimes called national industries because one company usually monopolizes a particular industry. They typically operate in strategic sectors such as electricity and railways. Also known as state-owned enterprises (SOEs).

Unlike national and local administrative governments, state-owned enterprises operate commercially. They also have more flexible management. Some may also sell their shares to the public through the stock exchange, although the majority are still held by the government.

In addition, there are public-private partnerships (PPP). It is participatory cooperation between the government and the private sector in public projects such as infrastructure. Such cooperation is usually a solution when the government’s fiscal capacity is limited, so it is necessary to involve the private sector.

PPP takes many models. For example, private companies are involved in financing and building public facilities. When finished, they turn it over to the government, and they may also operate the facility.

Public sector vs. government sector

The government sector differs from the public sector, although the two are often used interchangeably.

The government sector includes only organizations at all administrative levels, such as central, federal, provincial, county, and city governments. In contrast, the public sector comprises those plus organizations under government ownership and control, such as state-owned enterprises. So that:

Public sector = Government sector + Organizations under government control

Third sector

The third sector is also known as the voluntary, community, and nonprofit sectors. This sector operates to create social impact rather than profit.

At a glance, it is similar to the public sector because both are motivated by non-financial motives. And this sector exists for the public interest, namely the need to help the community.

However, unlike the public sector, organizations in the third sector are not owned by the government. They operate independently.

Characteristics of organizations in the third sector:

Aims to help the community and raise awareness for a good cause;
Provide services to members;
Owned and operated voluntarily, not by the government;
Operate not for profit but by the need to help society;
Relies on money from donations, grants, gifts, or selling goods and services;
Revenues are reinvested into the organization.

Organizations in the third sector include:

Charities;
Community groups;
Social enterprise.

Unincorporated business vs. Legally incorporated business

Are the owner and business considered separate legal entities? There are two groups:

Unincorporated business. No legal distinction is between the owner and the business. Sole proprietorships and partnerships are examples.
Incorporated business. It is an entity legally recognized as separate from its owners. Examples are private limited companies and public limited companies.

Limited liability and unlimited liability

How much responsibility should the owner have for the business’s debts? There are two categories:

Limited liability
Unlimited liability

Under unlimited liability, the business owner or partner has full legal responsibility for business debts. In other words, business debt is considered owner’s debt. As a result, they may have to sell personal assets to pay off debts. Two examples are:

Sole proprietorships
Partnership

Meanwhile, under limited liability, businesses have separate legal identities from owners (shareholders), who are not personally responsible for business debts. Consequently, owners do not have to sell their personal wealth to pay off the company’s debt. And their losses are limited to the amount they invest in the business.

Limited liability structures fall into two categories:

Private limited company
Public limited company

Organization based on their orientation

Organizations have different orientations or motives. And based on this, they fall into three categories:

For-profit organizations or commercial organizations;
For-profit social organization;
Nonprofit social organization.

For-profit organizations commercialize products to make a profit. Therefore, they sell as many products as possible. Their goal is to maximize revenue at minimal operating costs.

For-profit organizations include:

Sole proprietorships
Partnership
Private limited company
Public limited company

For-profit social organizations generate profits through their operations. But, they are not motivated to maximize profits to increase the owner’s wealth. Instead, they invest the money they earn into the organization to finance operations, growing the business for a more significant impact.

For example, they use it to pay employees or members. In addition, they distribute them to members as cooperatives do. Or they use it to increase finances, hire more staff, or buy resources.

For-profit social organizations include:

Social enterprise
Cooperative
Microfinance providers

Meanwhile, nonprofit social organizations, also known as nonprofit social organizations, use the money they earn to expand their programs and fund operations. They may make money from donations, grants, or from selling products.

Unlike the two previous organizations, social nonprofit organizations do not sell products for profit. Instead, they use it to have a more positive impact through their programs.

Examples of nonprofit social organizations are:

Non-governmental organizations (NGOs)
Charities
Community groups

Organization and Business Ownership