The features, advantages and disadvantages of organisations in the private sector (sole trader, partnership, private and public limited company, franchise, multinational), the public sector and the third sector.

What this key area is asking

The SQA wants you to compare the main legal structures an organisation can take and judge which suits a given situation. The deciding factors are always the same set: ownership and control, sources of finance, liability (limited or unlimited), and objectives. Higher demands you evaluate, weighing the trade-offs rather than just listing features.

Private sector organisations

Sole trader

A sole trader is a business owned and run by one person, the simplest form. It is cheap to set up, the owner keeps all the profit and makes all the decisions, and its affairs are private. The drawbacks are serious: the owner has unlimited liability (personal assets are at risk if the business cannot pay its debts), it is hard to raise finance, and there is no continuity if the owner is ill or dies.

Partnership

A partnership has 2 to 20 partners who share the capital, workload, decisions and profit, usually under a partnership agreement (deed). More owners means more capital and a wider range of skills than a sole trader. But partners still have unlimited liability, profits are shared, decisions can be slowed by disagreement, and one partner's mistake binds the others.

Private limited company (Ltd)

A private limited company is owned by shareholders, often a family, who buy shares but cannot sell them to the public. Its great advantage is limited liability: shareholders can only lose what they invested, so personal assets are protected. It is a separate legal entity, giving continuity, and can raise more capital than a partnership. The costs are more paperwork, the expense of setting up, the need to publish accounts (less privacy), and shares that are hard to sell.

Public limited company (plc)

A public limited company sells its shares to the public on the stock exchange, which lets it raise very large amounts of capital. It has limited liability and a high public profile, and its size brings economies of scale. The downsides matter for Higher: it is expensive and heavily regulated to float, it must publish full audited accounts (no privacy), ownership is divorced from control (shareholders own it, directors run it), it can be the target of a takeover, and shareholder pressure for dividends can discourage long-term investment.

Franchise

A franchise is an arrangement where a franchisor (the brand owner, such as McDonald's) lets a franchisee use its name, products and business format for an initial fee and an ongoing royalty (a percentage of sales). The franchisee gains an established brand, a proven format, training and bulk-buying, all of which lower the risk of failure. In return it gives up some independence, pays fees and royalties that reduce profit, and must follow the franchisor's rules.

Multinational

A multinational (MNC) is a large company that operates in more than one country, such as Coca-Cola. It benefits from huge economies of scale, cheaper labour and materials, larger markets, and avoiding trade barriers by producing locally. Criticisms include exploiting low-wage workers, shifting profits to minimise tax, and weakening local competitors.

Public sector organisations

The public sector is owned by the state. Central government runs national services (the NHS, defence), local government (councils) runs local services (schools, refuse collection, leisure centres), and public corporations are state-owned bodies such as the BBC. They are funded mainly by taxation and exist to provide essential services to everyone, not to make a profit.

Third sector organisations

The third sector (voluntary sector) is run for a social aim rather than private profit. Charities (such as Oxfam) raise funds for a cause and benefit from tax advantages and volunteers. Social enterprises trade like a business but reinvest profits in a social or environmental purpose. Voluntary organisations and co-operatives (owned by their members, who share any surplus) also belong here, with any surplus reinvested in the cause.

Try this

Q1. Describe two disadvantages of operating as a sole trader. [2 marks]

• Cue. Unlimited liability puts personal assets at risk; it is hard to raise finance; there is no continuity if the owner is ill or dies; the owner carries the full workload (any two).

Q2. Compare the liability of the owners of a partnership with the liability of the shareholders of a private limited company. [4 marks]

• Cue. Partners have unlimited liability, so they are personally responsible for the firm's debts and their own assets can be seized. Shareholders of a private limited company have limited liability, so they can only lose what they invested and their personal assets are protected because the company is a separate legal entity.