In the first section, this page discussed business organizations based on their ownership structure: sole proprietorship, partnership, and limited liability company. Next, I will discuss other types: for-profit and non-profit social organizations. In addition, I have added discussion on multinational companies, franchises, joint ventures, strategic alliances, holding companies, and family-owned businesses.
A sole proprietorship or sole trader is a business organization in which ownership and control are under one person, the owner. The owner has full responsibility for the business. Thus, success or failure depends on them.
Photographers, hairdressers, bloggers, electricians, and graphic designers usually operate as sole proprietorships.
Capital usually relies on the owner’s savings. Or they obtain loans from friends or family. Some may also access bank loans.
Owners may hire employees to help them operate the business. But, in general, they are few in number.
Then, the owner has unlimited liability. Thus, business debts become their personal responsibility, which may force them to sell personal assets to pay off. Likewise, they can lose their personal property if the business fails.
A sole proprietorship has the following characteristics:
- Owned, operated, and controlled by one person;
- Unincorporated business;
- Does not require legal formalities;
- Unlimited liability;
- Small size with limited operating scale;
- Limited capital;
- Subject to pass-through tax;
- Unstructured organization.
- Easy and fast to set up
- Less capital to set up a business
- Has no legal formalities
- Complete control over the business and all decisions
- All profits go directly to the owner
- Faster decision-making process
- Privacy, not required to publish financial reports
- No double tax
- Closer contact with customers and employees
- Easy to close or dissolve
- Unlimited liability for the owner
- Limited capital and challenging to raise funds
- Requires multiple skills to operate the business
- Low scale of operation
- Low business continuity when the owner dies
- Potential to lose personal assets if the business fails
- Heavy workload, involving long hours to handle multiple jobs
- Poor management and decision making
- Difficulty in attracting qualified employees
A partnership is a business organization in which two or more parties (partners) form a business, share ownership, and operate it. For example, real estate agents, lawyers, and doctors often operate as partnerships.
Partners share contributions – capital and resources and usually share responsibility for managing the business. Likewise, profits are shared between them.
The agreement deed forms the basis for the establishment of the partnership. It details:
- Business entity name
- The type of business to be run
- Capital invested by each partner
- Partner rights and obligations
- The role each partner has
- Salary to be paid to each partner
- Procedure for dissolving the partnership
- Profit sharing ratio
Types of partnership
Partnerships can be:
- General Partnership (GP);
- Limited Partnership (LP);
- Limited Liability Partnership (LLP);
- Limited liability limited partnership (LLLP).
Under a General Partnership (GP), each partner has unlimited liability. Whereas, under Limited Partnership (LP), general partners have unlimited liability while limited partners do not.
Another variation is the Limited Liability Partnership (LLP), where each partner has limited liability. And every partner is actively involved in managing and making business decisions.
Meanwhile, Limited Liability Limited Partnership (LLLP) has general and limited partners. General partners actively manage the business, while limited partners do not. However, unlike LPs, general partners have liability protection.
Several features characterize the partnership, including:
- Two or more people act as founders;
- Business is an unincorporated entity;
- Capital and resources come from partners;
- Responsibilities are divided among partners;
- Partnerships are subject to a pass-through tax;
- Profits are shared among partners.
- Relatively easy setup at a low cost
- Additional contribution for resources and capital
- Larger scale than a sole proprietorship
- Bringing different skills to the business
- Quality decisions made
- Sharing responsibility for the business
- No need to publish financial reports
- Share the risk among partners
- Low continuity, may end when the critical partner dies
- Disagreements and conflicts between partners
- Less flexible in making decisions compared to a sole proprietorship
- Slower decision-making compared to a sole proprietorship
- Profit sharing among partners
- Unlimited liability for certain partners
- Responsibility for each other’s negligence
- May still lack the capital to scale up
Limited liability company
A limited liability company or limited company, a corporation for short, is a business organization incorporated legally and with limited liability. Ownership interest in the company is represented by the shares held. Therefore, the owner is also called the shareholder.
Shareholders may not be founders. Instead, they may buy stock from the founder and hold a controlling stake, which gives them a decisive vote at shareholder meetings.
Under a limited liability company, corporate debt is separate from shareholder’s debt. So, suppose a company experiences financial difficulties. In that case, shareholders’ personal assets are safe and will not be at risk of being confiscated by creditors.
Several features characterize a limited liability company, including:
- The company is a legally incorporated business
- Shareholders have limited liability
- Ownership is represented by the number of shares owned
- The number of shares held determines the power
- Daily operations are delegated to the board of directors
- The board of directors is elected by shareholders to represent their best interests
- Shareholders are entitled to receive dividends
- There is double taxation: corporate income tax and individual owner income tax
Limited liability companies fall into two distinct types:
The two differ based on whether their shares are offered to the public by being listed on a stock exchange.
- The owner has limited liability
- Capital is greater than sole proprietorships and partnerships
- Businesses have a greater scale by having more resources and employees
- Organizations are more structured than sole proprietorships and partnerships
- There are specializations with tasks and roles divided between business functions
- The number of owners is not limited
- Decision-making is better through the division of roles, tasks, and delegation
- It’s easier for businesses to get additional funds
- The business has more employees with various skills
- There is continuity even if the owner dies
- Establishments are more complex and more expensive
- Business requires more administration, such as taxation and other regulatory compliance
- Double taxed at the corporate and individual levels
- Agency problems when directors do not act in the best interest of shareholders
- Too focused on profit, often ignoring other aspects such as environment and social
Private limited company
Private limited companies do not sell their shares to the public. Thus, the right to transfer shares is restricted. In addition, the company has no obligation to publish financial reports to the public. Also known as a closed company or privately-held company.
Other advantages and advantages of private limited liability companies (besides those discussed above) are:
- Does not have to issue financial reports to the public
- Easy to convert into a public limited company
- Not bound by stock market regulations
- Owners have more control over the business than a public limited company
- Quite tricky to transfer ownership (selling shares)
- Low transparency to the public
Public limited company (Plc)
A public limited company sells its shares through the stock exchange. Thus, company shares are available to be traded by the public. Therefore, ownership is easier to transfer. Also known as a public company or listed company.
A public limited company starts from a private limited company. They develop from startups, and once they are mature and viable, they list shares on the stock exchange to increase their equity capital. Turning a private company into a public company is known as flotation. Meanwhile, offering shares for the first time is an initial public offering.
Public limited companies have the same characteristics as private limited companies. Their difference lies in whether the company’s shares are listed on the stock exchange. Likewise, the advantages and disadvantages are also relatively the same, except for the following points:
- Easier to transfer ownership
- Easier to raise capital from the capital market (having a network with investors)
- Potential to become a shareholder by employees
- Encouragement for good governance
- Higher public trust because it is tied to transparency and disclosure
- Must follow strict stock market regulations
- Complexity and high regulatory compliance costs
- Susceptible to speculative attacks on shares to tarnish the company’s image or make it a target for a takeover
- Must publish financial reports and critical information
A social enterprise is a for-profit social organization. They generate profits not to maximize the owner’s wealth. Instead, they use it for their social purposes. So, profit is not their main motive.
Social enterprises invest the money they earn to support operations and programs. For example, some are used to buy resources and hire staff. Or they use it to scale up operations to have a broader positive impact on society.
Social enterprises have several characteristics:
- They operate for good causes and public welfare
- The social motive while making a profit underlies the operation
- Maximizing profits is not the primary goal
- Profits are reinvested to provide more services
- Businesses generate their income mainly from trading
The following examples are social enterprises in several countries:
- Baron Fig
- Better World Books
- Bio Lite
- Books to Prisoners
- Fair Phone
- Faire Collection
The triple bottom line in social enterprise
The triple bottom line (3Ps) is a philosophy in business to balance three goals:
Profit represents the economic motive. The business generates profits to finance operations, such as hiring employees and buying resources for expansion.
People refer to an orientation towards social goals. Meanwhile, the planet underlines environmental goals.
The serious concern about how business activities impact the environment and society makes the above three objectives a framework for measuring company performance. This forces businesses to pursue profits and pay more attention to society and the environment.
Social enterprises operate based on the three motives above. And they are growing in popularity and where it is estimated to reach 11 million globally.
A cooperative is an organization where people unite voluntarily to fulfill needs and aspirations, which may be related to economic, social, or cultural.
Members jointly own and run cooperatives to meet common needs and goals. They join voluntarily and manage the cooperative under common ownership. Each has one vote in electing officers.
Several features characterize cooperatives:
- Cooperatives are established voluntarily based on similarity in purpose;
- Its members run and own the organization;
- Some members act as administrators;
- Creating value for members is the main goal;
- All members are entitled to voting rights;
- Risks and rewards are shared equally among members.
- Easy to set up and has no legal formalities
- Fulfill common interests
- Participation in decision-making by all members
- Social benefits rather than self-interest
- Open to everyone to become a member
- Provide goods and services at a fair price to members
- Fair distribution of surplus, divided according to participation
- Limited resources because it relies on contributions from members
- Managed by members who may lack the necessary management skills
- The disincentive effect in which top-performing members are not more valuable than the common interest
- Longer decision-making process
- Conflict among members
Microfinance providers exist to provide financial services to community members. For example, they may provide concessional loans. Or they provide micro-insurance and micro-savings.
Their targets are poor and economically disadvantaged households. In addition, some organizations may target micro-enterprises, minority groups, or women.
Microfinance providers are for-profit social organizations. They exist for social purposes. But they also make profits.
Microfinance providers make a profit not to maximize the owner’s wealth. Instead, they invest it back into the organization to finance operations and provide more services.
- Create more jobs by financing microenterprises
- Expanding access to financial services
- Promote social welfare
- Limited financial resources
- Greed, taking advantage of the poor
- Not everyone is eligible for financing
Public-private partnerships are partnerships between the government and the private sector to provide specific goods or services. Such partnerships are usually for large projects where the fiscal budget is insufficient. Or it is for areas where the private sector can operate more efficiently.
There are several models for public-private partnerships, including:
- Operation and maintenance contract (O&M);
- Build-transfer (BT);
- Build-operate-transfer (BOT);
- Build-own-operate (BOO);
- Build-lease-transfer (BLT);
- Design-build-operate-transfer (DBOT).
- More capital involved
- Knowledge and expertise transferred
- Achieve high efficiency
- The project finished on time
- Risk sharing
- Job security and salary cuts for efficiency
- Limited private sector capacity
- Burden to taxpayers
- Reluctance by the private sector due to high-risk projects
- Not possible for all projects
Non-Governmental Organizations (NGOs)
Non-governmental organizations (NGOs) are non-profit social organizations. They operate independently without the participation or representation of any government.
NGOs operate for public or social welfare purposes. They often participate in social activities and speak on sustainable development, emergency relief, poverty alleviation, and child protection.
NGOs work in various areas. For example, they may focus on human rights, health, poverty, or the environment.
Funds come from membership dues or private donations. Grants from international agencies or governments are other sources. Some also sell goods and services to finance operations.
Examples of NGOs:
Community groups work for the public interest. They are non-profit oriented. And all revenue goes back to the organization to finance operations, ensuring the organization keeps going.
Community groups can be found in various areas, such as health, education, and social welfare. The establishment is usually based on similarities in interests, needs, and concerns.
Communities usually rely on donations from members, which can be in kind or money. In addition, other sources come from sponsors from the government and businesses.
Charities provide assistance for good causes. They raise money from several sources, including donors, promotions, and grants. Some also raise money by selling items at charity shops.
Charities’ goals vary widely, depending on where they operate. And in general, they use the money to help specific causes and operate charities. For example, a charity provides support to the poor or to children.
Examples of large charities in the United States are:
- Feeding America
- United Way Worldwide
- St. Jude Children’s Research Hospital
- Salvation Army
- Direct Relief
- Provide social benefits
- Public trust
- Tax exemption
- Tax incentives for donors
- Limited liability
- Limited finances
- Charity scam
- Operation inefficiency
Multinational companies have operations and production facilities in other countries but are headquartered in one country. Coca-Cola, Toyota Motor Corporation, Nike, and BP are all good examples.
Several reasons underpin businesses for seeking to become a multinational corporation, including:
- Increase sales by accessing broader overseas markets
- Secure supply by operating near sources of raw materials
- Lower costs through high economies of scale and access to cheaper labor and inputs
- Avoiding tax or trade barriers
- Achieved more sales in the overseas market
- Get cheaper inputs in other countries
- Diversity in expertise, encouraging innovation
- Benefits of higher economies of scale
- Benefit in tax differences between across countries
- More complex operations
- Difficulties in cross-border coordination
- Labor or environmental exploitation
- Keeps no profit in the host country
Multinational company vs. transnational company
Multinational companies have similarities with transnational companies. Both spread their business in many countries. They have subsidiaries in two or more countries. For this reason, the two terms are often used interchangeably.
However, both have slight differences. While multinational corporations have a centralized management system, transnational corporations are decentralized. Multinational companies usually have their headquarters in their country of origin. Meanwhile, transnational companies do not consider a particular country as their home.
Doing business doesn’t always have to be by starting from scratch. However, entrepreneurs can also begin through franchising. They buy franchise rights and operate them in the target market.
Franchising involves cooperation between two parties, including:
- Franchise owner (franchisor). They sell the rights to use their business ideas and concepts to other parties.
- Franchisees. They buy the rights from the franchisor to copy the business format and operate it in the target region.
Advantages and disadvantages for the franchisor
- Quick to grow business and increase revenue
- More resources to grow the business
- Efficient growth when expanding in other regions
- No need to bother with operations and business management in other regions
- Obtain royalties from franchisees
- Spreading the business risk across different franchisees
- Inconsistent quality issues by franchisees
- Damage to brand reputation due to mismanagement by franchisees
- Low control over the franchised business
- Conflict, increasing potential for legal disputes
- Low direct contact with customers
Advantages and disadvantages for franchisees
- Leverage well-known franchise network to gain profit
- Easier than setting up and growing a business from scratch
- Benefit from pre-opening support, e.g., site selection, design, financing
- Save on promotions by cooperating with well-known franchise networks
- Higher consumer acceptance, business opportunities to succeed
- Established contacts with stakeholders, such as suppliers
- High royalty fees and payments
- Strict operating rules by the franchisor
- Perhaps inadequate support by the franchisor
- The risk when the franchisor stops operating
- Penalty costs due to breach of contract
A joint venture is an entity created by two or more parties with complementary strengths. An example is Sony Ericsson, a collaboration between Sony and Ericson.
Each party agrees to cooperate closely on a particular project. They created separate business divisions to do it, which are jointly owned. In addition to sharing ownership, they generally share contributions to resources, returns and risks, and governance.
Joint ventures are not based on long-term relationships but on short-term single business projects. Therefore, it can dissolve or cease to exist once the joint venture has served its purpose.
- Access to greater resources
- Allowing companies to have access to new technologies
- Enabling companies to acquire new capacities and expertise
- Share the risk with partners
- Disagreements and conflicts resulting from different management styles and cultures
- Unclear business goals
- Poor communication between partners
- Low support and commitment in the early stages
- Inequalities for contributed capital and resources
- Risk on the project due to partner business failure
A strategic alliance is an agreement between two companies to share resources to carry out specific projects for mutual benefit. Each maintains its independence.
Unlike joint ventures, such partnerships are less involved and less permanent. In addition, cooperation is also less binding than a joint venture because it does not create a new separate entity.
An example is the collaboration between Starbucks and Barnes & Noble. Starbucks delivered coffee, and Barnes & Noble brought books.
- Access to complementary resources and knowledge
- Low investment
- Leverage partner assets to generate profits
- Lower risk than joint ventures
- Less permanent and, therefore, shorter life cycle
- Communication barriers
- Risks to reputation and goodwill due to partners’ mistakes
- Delays in solutions due to communication and coordination problems
- Can be challenging to manage, especially when there are changes
A holding company is a business organization having a controlling interest in many other companies. They do not unite their ownership interests into a single corporate entity but keep them operating separately.
In general, holding companies only hold controlling shares in other companies without producing their own goods or services. They focus on dealing with business assets, investments, and management.
The alphabet is an example. The company owns Google, YouTube, Nest, and other companies. Warren Buffett’s Berkshire Hathaway is another example, with ownership in GEICO, Dairy Queen, and Fruit of the Loom.
- Diversified business with several subsidiary companies
- Easy to raise capital through subsidiaries
- Tax benefits by reinvesting profits from a subsidiary into another
- Asset protection because each subsidiary is a separate entity
- Challenging to manage because it involves different management
- Reduced economies of scale than if the subsidiaries were put together in one entity
- Double taxation for each entity
- Complex structures with many different management and business models
- High costs as each has to pay operating and compliance costs
- Reduced transparency makes it difficult for creditors to assess the company’s health
Family owned business
A family-owned business is a business in which the ownership or management is passed down through the family generations. Walmart is an example. Ford Motor Company, Schwarz Group, and Koch Industries are other examples.
Family-owned businesses have some strengths and weaknesses. Stability is among their strengths. Leadership is passed on between generations. Thus, determining who leads the company can be traced from the family tree.
Greater commitment and responsibility are other strengths. Each generation feels it is crucial to uphold the family’s good name. Thus, they are interested in maintaining the business, growing it, and making it more successful.
However, family conflicts can put the business at risk. A split can result in a business ending prematurely.
Another weakness is unstructured governance which can lead to inefficiencies. For example, hierarchy and governance may place internal family rules over compliance with company laws.
In addition, it can be difficult for external parties to reach higher positions. This is because the top-level management is only filled with the family generations.
- Organization and Business Ownership
- Public-Private Partnership: Meaning, Types, Benefits, Costs
- Non-Governmental Organization: Definition, Examples, Funding
- List of Examples of Social Enterprises You May Be Familiar
- Unlimited Liability: Examples, Pros and Cons
- Limited Liability: Examples, Advantages, and Disadvantages
- Private Limited Company: Definition, Features, Advantages, Disadvantages
- Public Limited Company: Examples, Characteristics, Advantages, Disadvantages
- Partnership: Types, Features, Advantages, and Disadvantages
- Sole Proprietorship: Meaning, Characteristics, Advantages, and Disadvantages