The features, advantages and disadvantages of the main types of business organisation: sole traders, partnerships, private limited companies (Ltd), public limited companies (plc), franchises, charities, social enterprises and public sector organisations, including the meaning of limited and unlimited liability.

What this dot point is asking

The SQA wants you to know the features, advantages and disadvantages of each main type of business organisation, and to recommend or justify a type for a given firm. The single most important idea threaded through the topic is liability: whether the owners can lose their personal possessions if the business fails.

Liability: the key idea

Liability means responsibility for the debts of the business. It splits the organisation types into two groups.

Limited liability protects owners, which makes people more willing to invest, but it requires the business to register as a company and publish accounts.

Private sector organisations

Sole trader

One owner who provides all the capital, makes all the decisions and keeps all the profit. Quick and cheap to set up with few legal formalities, and the owner has full control and privacy. The drawbacks are unlimited liability, difficulty raising finance, long hours, and no one to share decisions or cover illness.

Partnership

Between 2 and 20 partners share the capital, the workload, the decisions and the profits, usually under a partnership agreement (a Deed of Partnership). More capital and a wider range of skills are available than for a sole trader, and the burden is shared. The drawbacks are unlimited liability, shared profit, and the risk of disagreements between partners.

Private limited company (Ltd)

A separate legal body owned by shareholders, often a family or small group, who have limited liability. Shares cannot be sold to the public, which keeps control within the group, and the company can raise more capital than a sole trader or partnership. The drawbacks are the cost and paperwork of registering with Companies House, the duty to publish annual accounts (so less privacy), and profits shared as dividends.

Public limited company (plc)

A larger separate legal body that can sell shares to the public on the stock exchange, raising very large amounts of capital. Shareholders have limited liability. The drawbacks are high set-up and legal costs, full public disclosure of accounts, the risk of a takeover if someone buys enough shares, and a possible loss of control as ownership is spread widely.

Franchise

A franchisee pays a franchisor a fee (and usually a share of sales) to trade under an established brand and business format, such as a well-known fast-food chain. The franchisee gains a trusted name, training, support and lower-risk start-up; the drawback is the ongoing fees and the loss of independence, because the franchisor sets the rules.

Third sector and public sector organisations

Charity

A third sector organisation run to support a cause, funded by donations, fundraising and trading. Surpluses are reinvested in the cause, and registered charities receive tax advantages, but they rely on volunteers and uncertain income.

Social enterprise

A business that trades to make a profit but reinvests that profit to achieve a social or environmental aim, rather than paying it to owners. It blends commercial trading with a social mission.

Public sector organisation

Owned and run by central or local government to provide public services, funded mainly by taxation. Examples include the NHS, state schools and local councils, and public corporations such as the BBC. The aim is to provide a service to the whole community rather than to maximise profit.

Choosing and justifying a type

Exam questions often give a scenario and ask you to recommend a type or to justify the one chosen. Match the choice to the firm's needs: a one-person start-up with little money suits a sole trader; a growing family firm wanting to protect personal assets suits an Ltd; a large business needing millions in capital suits a plc; an owner wanting a tested brand suits a franchise; a venture with a social mission suits a social enterprise.

Try this

Q1. Identify one disadvantage of unlimited liability for a sole trader. [1 mark]

• Cue. The owner can lose personal possessions to pay business debts.

Q2. Describe two advantages of forming a partnership rather than trading as a sole trader. [2 marks]

• Cue. More capital available; shared workload and a wider range of skills.

Q3. Outline two reasons a business might become a plc. [2 marks]

• Cue. To raise large amounts of capital by selling shares to the public; to fund expansion and increase its public profile.