A business is an organization that buys and sells goods or services with a view to make profit.
The structure of the business varies, depending on the number of people involved in a business and the nature of their operations.
The type of business organizations could be as follows:
- Sole Trader or Sole Proprietorship
- Private Limited Companies
- Public Limited companies
- Public Corporations
- Multinational Businesses
Sole Proprietorships, Partnerships, Private and Public Limited Companies are all in Private Sector of the Economy.
Where as Public Corporations are in Public Sector.
A sole trader or a Sole Proprietorship is a small business owned and usually managed by a single person. It is the oldest and still the most popular form of businesses worldwide.
The popularity of sole proprietorships due to the advantages of this types of businesses compared to other forms of businesses.
The advantages include:
- Easy to set up – It is easy to start a sole trader business since the capital required to start this type of business is relatively small.
- Easy to manage – Small businesses are easy to manage. Sole trader has full control, therefore he finds it easy to take decisions and enforce them.
- Sole Trader is his own boss – Sole trader does not have to consult anybody to take any decisions and he is the only owner of the business. Therefore he keeps the profit to himself too, without having to share it with anybody.
- Personalized services – A sole trader usually can keep closer relationships with workers and customers. It usually happens in a friendly enviroment rather than a formal office environment.
- Flexibility – It is easy for a sole trader to switch and adjust his business by taking consideration of the market factors since decision making is easy and swift.
- Business secrecy is kept at maxium.
Sole proprietors have certain disadvantages too:
- A sole trader’s skills and abilities are limited to he himself. Specialization and economies of scale is difficult.
- Limited Capital – Capital for the sole trader business comes from the owner’s own savings. Therefore it is limited.The banks may not be so willing to give loans to a single person.
- A major disadvantage is that the liability of a sole trader is unlimited. He may lose his own properties to pay the creditors in case of financial distress.
A partnership is a business owned by two or more people. The maximum number of owners in a partnership can be twenty.
A partnership has certain advantages:
- A partnership can raise a bigger capital compared to a sole trader. Therefore expansion is possible.
- It is possible to have more skill in the business through pooling of ideas and expertise.
- Partnerships can get loans easily compared to sole traders, even though it may not be as good as a limited company.
- There is a greater possibility of division of labour, larger scale business and therefore economies of scale.
Risk is greatly reduced since any loss will be shared by the partners.
- Business secrecy is kept since partnerships do not need to disclose financial reports. Disclosing is required by the limited companies.
Disadvantages of partnerships are:
- Just like sole traders, the liability of partnerships is unlimited. In case of financial difficulty, the partners too could lose their personal property.
- There is a limit on the number of partners the business can have and thus expansion has a limit too.
- The more partners the business has, the more likely it is to have disputes, and therefore the business may have to be dissolved.
- Partners have to share the profit, unlike the sole trader who keeps it all to himself
Joint Stock Companies: Private Limited Companies
A joint stock company sells shares to investors to raise money. These types of business organizations are known as limited companies.
The name of a limited company is always followed by the word ‘limited’ or letters ‘ltd’. The limited companies are called so because liability of the owners are limited to the amount of shares they hold in that particular company.
A limited company is an artificial entity created by law. Which means the company can sue and be sued.
A private limited company is smaller than public limited companies. The main difference between them is that private limited companies can not sell shares at the stock exchage, while public limited companies do.
The documents required to register a company in Maldives can be obtained from the website Ministry of Economic Development.
Advantages of private limited companies
- Share holders have limited liability. While sole traders and partnerships are at disadvantage because of unlimited liability, private and public limited companies are at an advantage due to their liability being limited.
- Share holders have no management worries. The owners and the management of the company is usually different. Share holders can elect a board of Management at the Annual General Meeting. Each share has one voting power.
- One of the reasons why companies are preferred is because they are separate legal entities. The owners have no worries over the debts and if there is any problem, it is the company which is taken to the court, not the owners.
- Bank are more willing to give loans to private limited companies compared to partnerships and sole traders
Disadvantages of private limited companies
- The companies have to disclose their business information:The companies are required to submit annual reports to the Ministry of Economic Development and all the details of profits and losses need to be disclosed to all the stake holders as well. Therefore business secrecy is lost.
- AGM: The Annual General Meeting is held with shareholders for the purpose of electing board of directors. This sometimes is a big expense.
- Private limited companies have advantages over sole traders in terms of size and capital. However it is still not as good as a public limited company. Private limited companies cannot sell shares on the stock exchange.
Wataniya and Villa Shipping are some of the famous private limited companies in Maldives.
Joint Stock companies: Public Limited Companies
The main difference between private and public limited companies are that public limited companies can sell shares to the general public, while private limited companies cannot. Therefore public limited companies are larger in size.
Shares are offered for sale on the Stock Exchange. Any member of the general public can buy and sell shares.
A public limited company usually must include the words “public limited company” or its abbreviation “plc” at the end and as part of its legal company name.
Public Limited companies are able to attract money from investors all over the world.
MTCC, Bank of Maldives, and STO are public limited companies from Maldives.
A co-operative is where a number of individuals or businesses work together to achieve a common purpose. They are normally formed so individuals and small businesses can benefit from being part of a larger group, meaning they have more power to buy or bargain.
We already know that small businesses have certain disadvantages compared to larger join stock companies. Therefore, co-operatives could be a means to overcome those challenges faced by small businesses.
Types of co-operatives include housing co-operatives, building co-operatives, retailers’ co-operatives, worker co-operatives, consumers’ co-operatives and agricultural co-operatives.
Public corporations are owned by government. These companies are formed by government to run the industries owned by the government. Maldives Post Limited and Maldives National Broadcasting Corporation are good examples.
Public Corporations too have separate legal entity just like other companies. That means the corporations can sue and be sued.
A Multinational company(MNC) is a firm which has operations in more than one country. It maybe a private limited company or a public limited company. Ford and Sony are well known examples of Multinational companies.
Advantages of MNCs
1. Capital is often more mobile than labour and other factors of production. An can start operations in a country where there is availability of resources.
2. MNCs enjoy economies of scale by operating in a large scale.
3. MNCs can locate their operations near the potential market which results in lower transportation cost.
Advantage of MNCs to the host county
1. MNCs bring in capital and new technology to the country.
2. MNCs make it possible to start mega projects which otherwise may not be possible.
3. MNCs create jobs and thus employment increases.
4. MNCs bring revenue to the government through taxes.
Disadvantages of MNCs and to the host country
1. Expanding operations sometimes tend to increase costs if not managed properly.
2. Even though MNCs bring capital into the country, they will later remit funds out of the country in the form of profits.
3. The companies may pullout and relocate to another country where it can make more profit.
Next topic: Changes in the structure of business organisations