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Forms of Business

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Business Studies

There will be two types of businesses in the next five years, those that are on the internet and those that are out of business."

- Bill Gates

Beyond the two classifications of offline or online businesses, one of the main ways to distinguish businesses is based on their form and the sector they operate in. Most businesses operate to make a profit, meanwhile, others try to pursue social goals. Let's take a deeper look at what this means and learn how to distinguish between the most common forms of business.

Distinguishing between forms of business

In the private sector, businesses can be differentiated based on whether they are incorporated or not.

Unincorporated businesses are privately owned businesses and are owned by one or more people who hold unlimited liability.

Whereas, limited liability means that the owner or owners of the business are personally responsible for the losses of the business.

If the owners of the business were to take out a bank loan to boost the operations of the business but are unable to cover the costs of the loan from the money the business makes, the owner could risk losing their personal assets

(like their house or office).

Forms of Business, Sole Trader, Study Smartersole trader profits, pixabay.com

Sole traders or sole proprietors are businesses that are owned by one single person. The individual owner is fully liable for the costs of the business. An example of a sole trader would be a freelancer or an electrician. For a more detailed description of the sole trader business form, take a look at this article.

Partnerships or general partnerships are owned by one or more individuals. Both partners hold unlimited liability and are fully liable for the debts of the business. An example of a partnership could be a law firm.

It is also possible to set up a limited liability partnership, in which each partner has limited liability. In this case, the partnership (the business) is a separate legal entity to its owners and they are not liable for the debts of the business. To explore these topics in more detail check out our explanations on sole traders and limited liability.

Advantages and disadvantages of forms of business organisations

Incorporated businesses are also known as companies. Incorporation happens when the business is established as its own legal entity separate from its owners, meaning that a company is a separate legal entity to its owners. As a result, owners of companies have limited liability, meaning that they are not personally liable for the debts of the company. In case the company is experiencing financial difficulties, the owners do not risk losing their assets (like their house or other assets).

Private limited companies (Ltd) are owned by shareholders and each shareholder is only liable for their initial investment into the company. Owners of private limited companies can decide who they sell shares to - their shares are not publicly traded on the stock market. This is beneficial if the current owners want to retain control of the company in case the company is family-owned. It can also be beneficial for the long-term interest of the company.

shareholder meeting, pixabay.com

Public limited companies (PLC) are also owned by shareholders and each shareholder is only liable for their initial investment in the company. Owners of public companies cannot decide who they sell shares to - shares of these companies are publicly listed and available for anyone to buy. This is beneficial as the company can quickly raise investment and can generate publicity.

Check out Limited Liability and Shareholder to learn more!

Public sector organisations

Public sector organisations are usually owned by national governments. The three main types of public sector organisations are:

  • Public corporations are owned by the state but sell products and services to companies in both private and public sectors. Examples of public corporations include the BBC or Northern Trains.

  • Public services are organisations that provide services to the entire nation. Some examples of public services in the UK include the National Health Service (NHS), The Armed Forces, and Her Majesty's Revenues and Customs (HMRC).

  • Municipal services are services offered by local governments and councils. Examples of municipal services include libraries or municipal parks.

Non-profit organisations

Non-profit organisations are businesses that operate for reasons other than making a profit. These types of businesses focus on social objectives. Social objectives induce focusing on existing problems to advance humanity in some way. The three main types of non-profit organisations are:

  • Philanthropic organisations rely on donations to provide social services and create social capital. These organisations are usually foundations or charitable trusts. UK Community Foundations is an example of a philanthropic organisation.
  • Advocacy organisations exist to promote or lobby for a certain cause or political movement. They usually get donations from monthly membership programs. An example of an advocacy organization is Sisters Uncut, a British feminist group that advocates for survivors of domestic violence.
  • Mutual benefit organisations work for the benefit of their members. An example of a mutual benefit organisation would be a labour union, or a chamber of commerce.

You can find more information in Non-Profit.

Forms of Business - Key takeaways

  • One of the main ways to differentiate businesses in the private sector is based on whether they are incorporated or not.
  • Unincorporated businesses are privately owned businesses and are owned by one or more people who hold unlimited liability.
  • Sole traders and some forms of partnerships are businesses that have unlimited liability.
  • Incorporated businesses are also known as companies.
  • Incorporation happens when the business is established as its own legal entity separate from its owners, meaning that a company is a separate legal entity to its owners. As a result, owners of companies have limited liability, meaning that they are not personally liable for the debts of the company.
  • Private and public limited companies are examples of businesses that are separate legal entities to their owners.
  • Public sector organisations are usually owned by national governments.
  • Non-profit organisations are businesses that operate for reasons other than making a profit.

Forms of Business

Private sector businesses are organisations that are owned by individuals. Private sector businesses can either be unincorporated (like a sole trader or a general partnership) or incorporated (like public and private limited companies). Organisations can also operate in the public sector or set up as non-profit organisations.


Final Forms of Business Quiz

Question

What is the definition of a sole trader?

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Answer

A sole trader is a business that is owned and managed by one person. People operating a sole trader business work for themselves and are responsible for all business activities and decisions involved in running the business.

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Question

What is another term for a sole trader? 


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Answer

A sole proprietor. The terms 'sole trader' and 'sole proprietor' are synonymous.

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Question

Define unlimited liability. 


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Answer

Unlimited liability is when an individual is personally responsible for all the actions of their business. For a sole trader there is no distinction between the individual and the business. This means that the individual is personally responsible for their business losses and problems. For instance, if a sole proprietor borrows money from a bank and cannot repay their debt, they may risk losing personal possessions.

Show question

Question

Which one of the following is not a common characteristic of a sole trader?

  1. Confident in making decisions 

  2. Has business and management skills. 

  3. Can manage their time effectively. 

  4. Reports directly to their manager. 

Show answer

Answer

D.

Show question

Question

One of the main disadvantages of a sole trader is:

  1. It is very complicated to set up and register. 

  2. It can get quite lonely working on your own. 

  3. You have direct contact with clients, making it hard to keep up with all the communication. 

  4. You rely on your employees for a lot of different business procedures. 

Show answer

Answer

B.

Show question

Question

Why would someone choose to operate as a sole trader rather than work for a company?


Show answer

Answer

  • Flexible working hours.

  • Ability to make all decisions without having to report to a manager. 

  • Being 'your own boss'. 

  • Direct relation to the market and clients. 

Show question

Question

Does operating as a sole trader mean that a business will always be able to make the right decision?


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Answer

No, this is not true. A sole trader has the freedom to make all decisions on their own without the involvement of a manager or other team members. However, this does not mean that a sole trader will always make the correct decision for their business. It is easy to get demotivated, lack appropriate time management skills and become disorganized when you are working without supervision and the guidance of others.

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Question

Does operating as a sole trader mean that you cannot hire anyone to help you with certain tasks?


Show answer

Answer

No, as a sole trader it is possible to hire employees. However, it is the sole trader's responsibility to make the right decisions when hiring help, as they are personally liable for all the operations and actions of their business.

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Question

Does operating as a sole trader mean that you are not allowed to take out a loan from the bank?


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Answer

As a sole trader, it is possible to borrow money from a bank or other financial institutions. However, it could be disadvantageous to do this since they often charge high interest rates. Banks do this because they are worried about the sole trader being able to repay their debts in case of failure.

Show question

Question

Which one of the following is not a benefit of operating as a sole trader?

  1. Easy to set up. 

  2. Quick and efficient decision-making process. 

  3. Unlimited liability. 

  4. Keeping all the profits the business makes. 

Show answer

Answer

B.

Show question

Question

Is it true that there are no downfalls to operating as a sole trader?


Show answer

Answer

No, this is not true. The disadvantages of a sole trader include: 

  • The risk of losing customers if you take time off

  • Pressure to deal with everything by yourself 

  • The sole responsibility for all business-related decisions 

  • The loneliness of working alone.

  • Unlimited liability. 

Show question

Question

Is it true that by hiring an employee, they are also responsible for the actions and decisions of the sole trader?


Show answer

Answer

No, the sole trader is individually and solely responsible for all the actions and decisions they make.

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Question

Name some of the disadvantages of the freedoms a sole trader experiences.


Show answer

Answer

One of the advantages of a sole trader is that they can set their schedule and work flexibly. However, this can result in the sole trader having to work long hours and not being able to take any holidays.

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Question

Name three examples of a sole trader. 


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Answer

Several different types of jobs are suitable for a sole trader:

  • Plumbers 

  • Electricians 

  • Gardeners

  • Copywriters

  • Artists

  • Taxi drivers

  • Nannies

Show question

Question

Name and outline an example of someone who would want to set up a sole trader.


Show answer

Answer

An example of someone who would want to set up as a sole trader would be a freelance copywriter. They would enjoy the benefits of managing their own schedule, making their own business decisions and the freedoms that come with being their 'own boss'. Their business can respond directly to the needs of her clients, engage with her clients on a personal level, and make decisions freely on the number of clients they take on.


Show question

Question

What is incorporation?

Show answer

Answer

Incorporation is a process through which a business establishes itself as a company. Through incorporation, the business establishes that it is its own legal entity, separate from its owners and shareholders. It allows the company to benefit from limited liability. 


Show question

Question

What is limited liability?

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Answer

Limited liability ensures that the personal assets of the owners and shareholders of a company are safe. If the company were to experience financial troubles, shareholders would only lose up to the amount they originally invested in the company when they bought shares. Limited liability ensures that their personal belongings are kept safe, even if the company is struggling financially.

Show question

Question

What is the difference between limited liability and unlimited liability?


Show answer

Answer

In limited liability companies, the company is a separate legal entity to its owners. This means that they are not personally responsible for the debts of the company. In an unlimited liability business, the owner is personally responsible for the debts of the business. This means that if the business were experiencing financial difficulties, the personal assets of the owner are at risk.

Show question

Question

Is it possible to set up a limited liability sole proprietorship?


Show answer

Answer

No, it is not possible to set up a limited liability sole proprietorship. The owner of a sole proprietorship has unlimited liability, meaning that their personal belongings and assets are at risk if the business is experiencing financial difficulties. 


Show question

Question

What is a dividend?


Show answer

Answer

A dividend is a part of the firm's profits that is paid to its shareholders. The more shares an owner has in the company, the more dividend payments they receive.

Show question

Question

Are dividend payments equal to the original investment shareholders made into the firm?


Show answer

Answer

No. Dividends are paid based on the profits the company has made. This does not mean that shareholders receive the value of their original investment each time a dividend is paid to them.

Show question

Question

Why do companies have limited liability?

  1. Because owners do not want to be taxed. 

  2. Because they do not want to pay dividends. 

  3. Because they do not want to be incorporated. 

  4. Because owners do not want to be personally liable for losses. 

Show answer

Answer

D.

Show question

Question

A difference between a limited liability company and a sole proprietorship is that: 


Show answer

Answer

A limited liability company can own property and a sole proprietorship cannot

Show question

Question

The difference between a private limited company and a public limited company is that:


Show answer

Answer

Private limited companies can decide who they sell shares to but public limited companies cannot

Show question

Question

What type of company would be at risk of a takeover?

  1. Private limited company 

  2. Public limited company

  3. Sole proprietorship 

  4. Partnership

Show answer

Answer

B.

Show question

Question

Imagine you are running a family business. The business is doing really well, so you decide you are going to incorporate your business. What type of company would you set up if you did not want to risk the family business getting into the hands of non-family owners?


Show answer

Answer

You would set up a private limited company. This type of company would ensure that the owner (you) has control over who the company sells its shares to. 


Show question

Question

What are some of the advantages of a limited liability company?


Show answer

Answer


  • Owners are not personally responsible for the losses and debts of the company - they have limited liability.

  • The company is a separate legal entity.

  • No restriction on the number of owners.

  • Easier access to capital and resources (compared to a sole proprietorship).

  • The business can raise finances through share capital. 

  • Flexibility when it comes to company management.

  • The potential to benefit from economies of scale. 

Show question

Question

What are some of the disadvantages of a limited liability company?

Show answer

Answer

  • It is expensive to set up if the company is just starting up. 

  • You must pay your shareholders dividends. You cannot keep all the profits your company makes.

  • Takeovers are also a possibility for public limited companies, which could lead to a loss of control for the current owners. 

Show question

Question

One of the disadvantages of a limited liability company is that: 

  1. There are restrictions on the number of owners.

  2. There are restrictions on the number of shares you can sell. 

  3. The owners are personally liable for the debts of the company. 

  4. The company is potentially at risk of takeovers.

Show answer

Answer

D.

Show question

Question

Other than limited liability, what are some of the advantages of operating as a limited liability company?


Show answer

Answer

  • Easier access to capital and resources (compared to a sole proprietorship).

  • The business can raise finances through share capital. 

  • Flexibility when it comes to company management.

  • The potential to benefit from economies of scale. 

Show question

Question

What is the definition of a non-profit business?

Show answer

Answer

A non-profit organization is a social enterprise that has social aims and operates to benefit a community or society as a whole. The mission of non-profit organizations can range from community service projects, childcare, recycling companies, apprenticeship programs, etc.

Show question

Question

What is one of the key differences between a non-profit and a for-profit organization?


Show answer

Answer

A non-profit is an organization that is not set up to make profits. For non-profit organizations, the goal is not to maximize profits. Rather, their objectives are to operate for the benefit of a community or society as a whole.

Show question

Question

What are the three different types of non-profit organizations?

Show answer

Answer

  • Philanthropic organizations

  • Advocacy organizations

  • Mutual benefit organizations

Show question

Question

What are the three different types of public sector businesses?


Show answer

Answer

  • Public corporations

  • Public services

  • Municipal services 

Show question

Question

What is the general mission and purpose of non-profit organizations?


Show answer

Answer

The mission and purpose of non-profit organizations are to create social benefits, also known as social capital. By creating social capital, non-profit organizations aim to solve an existing problem or issue in order to advance humanity in a certain way.

Show question

Question

What is the definition of privatization?


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Answer

A process in which the state transfers their businesses or services from public to private ownership.  


Show question

Question

Give an example of a potential downfall of privatization.

Show answer

Answer

A potential problem that could arise as a result of privatization is short-term unemployment.

Show question

Question


Which of the following statements about non-profit organizations is true?

  1. They do not make any profits. 

  2. Stakeholders are not involved in the business. 

  3. They do not distribute profits. 

  4. They can only be established as hobbies. 

Show answer

Answer

C.

Show question

Question

Which of the following statements about co-operatives is false?

  1. They are run for the benefit of the government.

  2. Co-operative are a common type of mutual business. 

  3. Co-operatives must represent social responsibility. 

  4. Co-operatives are run by members who each have a say in the management of the business.

Show answer

Answer

A.

Show question

Question

Which one of the following does not make up one of the ethical values ​​of a co-operative?

  1. Honesty 

  2. Social responsibility 

  3. Adaptability

  4. Openness

Show answer

Answer

C.

Show question

Question

What are the different types of co-operatives?


Show answer

Answer


  • Consumer co-operatives

  • Worker co-operatives

  • Producer co-operatives 

Show question

Question

What is the difference between a public corporation and a public service?


Show answer

Answer

A public corporation is an enterprise owned by the state but offers products and services to both private and public sectors. A public service includes organizations that provide services to the entire nation. Public corporations include the BBC or Channel 4 television. Public services include the NHS or the HMRC.

Show question

Question

Which one of the following statements is correct?

  1. Non-profit organizations are all charities. 

  2. Non-profit organizations only benefit their members and donors. 

  3. Non-profit organizations do not make any profits.

  4. Non-profit organizations aim to benefit the community. 

Show answer

Answer

D.

Show question

Question

What is a municipal service?


Show answer

Answer

These are services offered by local governments and councils. Examples include libraries, street lighting, and municipal parks and recreation.

Show question

Question

Which one of the following statements holds true for public services?

  1. Public services only serve local governments.

  2. Public services only serve national governments.

  3. Public services serve the whole nation. 

  4. Public services only serve local communities.

Show answer

Answer

C.

Show question

Question

What is a franchise?

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Answer

A franchise is a business, which has an established owner, that sells the rights of operating the business to a franchisee. Franchising is a two-party contract. The franchisor provides a set of information to the franchisee on how to run the business. The franchisee essentially receives the whole 'business package' from the franchisor.

Show question

Question

What is a franchisor?


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Answer

A franchisor is an established business that sells the rights to its name. The franchisor also provides training and input to the franchisee on how to run the daily operations and manage the franchise. The franchisor receives royalty payments from the franchisee.

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Question

What is a franchisee?


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Answer

The franchisee is the party that purchases the rights to the franchise. Upon purchase, they receive the right to the business name and are allowed to operate their business with the same business model as the franchisor. The franchisee is also granted the right to use the name, branding and marketing as the franchisor.

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Question

What is a royalty payment?


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Answer

A royalty payment or royalty fee is a fee the franchisee must pay to the franchisor. This fee is usually calculated based on a percentage of the franchisee's yearly sales and profit. They must pay this fee in order to continue operating as a franchise.

Show question

Question

What is a franchising system?


Show answer

Answer

In a franchising system, individual business owners are a tightly knit group, whose operations are directed and controlled by the franchisor.

Show question

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