Types of Business Organizations

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.

Sole proprietorship

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.

Partnership

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.

Partnership deed

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.

Partnership feature

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.

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:

• Private limited company
• Public limited company

The two differ based on whether their shares are offered to the public by being listed on a stock exchange.

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:

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:

Social enterprise

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
• Belu 
• Better World Books 
• Bio Lite 
• Books to Prisoners
• Cafédirect 
• Crowde 
• Evoware
• 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
• People
• Planets

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.

Cooperative

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.

Microfinance provider

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.

Public-private partnership

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).

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:

• Human Rights Watch 
• Amnesty International
• Greenpeace

Community groups

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.

Charity

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

Multinational company

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

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.

Franchise

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

Advantages and disadvantages for franchisees

Joint ventures

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.

Strategic alliance

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.

Holding company

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.

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