Syllabus Content

By the end of the chapter, you should be able to understand:

Distinction between the private & public sectors

Private Sectors

Owned and controlled by private individuals
Profit can be earned by owners
Largely privately funded
Little or no government intervention

Nationalisation occurs when a government takes ownership of a business from the private sector into the public sector.

Public sectors

Owned and controlled by the government
Provide essential goods and services to citizens
Financed by the government through taxes and other public funds
Answerable to the public or any decisions taken

Privatisation occurs when a government transfers ownership of a business from the public sector to the private sector.

Types of organisations

Sole traders

Sole trader (aka sole proprietor) is a commercial for-profit private sector business owned by a single person. An important legal point about sole traders is that the business is unincorporated. This means the owner is the same legal entity as the business itself.

Advantages	Disadvantages
Few legal formalities: easy to set up and start-up costs are quite low.	Unlimited liability: No limit to the amount of debts that a sole trader is legally responsible for if the business fails.
Profit taking: owner is the only owner, thus, receives all profit.	Limited sources of finance: Funds are mostly secured through personal savings, rather than acquired from financial institutions.
Own boss: owner takes charge and has flexibility in decision making	High risks: Larger and more established firms creates huge threats to smaller businesses.
Personalised service: Owner gets to know their customer on a more personal level.	Workload and stress: Owners [mostly] manage all 4 functions in a business on their own.
Privacy: Financial records is not available to the public.	Limited economies of scale: Prices are less competitive to larger rivals.
Quicker decision-making: There is only a single owner, thus, owner can decide independently based on their own preferences.	Lack of continuity: Running of the business is jeopardised if owner is not present.

Partnerships

Partnership is a for-profit private sector business owned by 2 or more people.

Ordinary partnerships: maximum owners is 20 (although, varies to countries).

Silent partners: owners who do not actively take part in the running of the partnership but have a financial stake in it.

Deed of partnership (aka partnership deed) is a legal contract that usually includes the following:

Amount of finance contributed by each partner
Roles and responsibilities of each partner
How profit and losses are shared between partners
Conditions for introducing new partners
Procedures for ending the partnership

Advantages	Disadvantages
Financial strength: Can secure external sources of finance due to the lower risks.	Unlimited liability: Debt has to be paid by either one (wholly) or shared amongst partners (severally)
Specialisation and division of labour: Workload is shared between partners.	Lack of continuity: partnership becomes invalid if a partner leaves or passes away and causes problem to the partnership deed.
Financial privacy: Financial reports are not publicised.	Prolonged decision-making: Decisions take longer in comparison to sole trader, conflicts might occur
Cost-effectiveness: Each partner specialises in different aspects of the business, thus, increasing labour productivity and operational efficiency.	Lack of harmony: Conflict and the lack of mutual trust. A mistake made by one partner reduces the profit for every partner.

Privately held companies

Privately held company (aka corporations) ****is a limited liability company that can not raise share capital from the general public via stock exchange.

Advantages	Disadvantages
Control and ownership: Control is only shared between a small group of people, i.e. friends and family.	Profits: Profits are shared between several shareholders.
Greater access to finances: Better excess to external sources of finances as there are multiple people investing in the business.	Lengthier decision-making: All shareholders need to discuss and agree on decisions.
Limited liability: The personal assets of shareholders are not at risk if the business fails.	Shares cannot be traded publicly to raise finances.
Financial records: It is kept private and not accessible for the public.	Privacy: The business may not be examined by external experts due to privacy reasons.
	High costs: It can be costly and time-consuming to set up a privately held company.

Publicly held companies

Publicly held company is a limited liability company owned by shareholders with the shares in the business that are being bought and/or sold on the stock market.

Advantages	Disadvantages
Finances: Money (capital) can be raised through selling of shares to the public.	Shared profits: Profits are shared between many shareholders.
Risks: The risks are shared among a large number of shareholders.	High costs: It is expensive and a time-consuming process to set up a publicly held company.
Continuity: If one shareholder dies, the business continues to operate.	Loss of control: Outsiders can get control of the business by becoming the largest shareholder.
Limited liability: If the business fails or suffers losses, the personal assets of shareholders are not at risk.	Accounts are publicly available to be viewed.
	Diseconomies of scale: Being too large cause inefficiency to the company.