Types of Business Ogranizations

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
  • Partnership
  • Private Limited Companies
  • Public Limited companies
  • Co-operatives
  • 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.

Sole Proprietorship

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. Business secrecy is kept at maxium.

Sole proprietors have certain disadvantages too:

  1. A sole trader’s skills and abilities are limited to he himself. Specialization and economies of scale is difficult.
  2. 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.
  3. 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.

Partnerships

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:

  1. A partnership can raise a bigger capital compared to a sole trader. Therefore expansion is possible.
  2. It is possible to have more skill in the business through pooling of ideas and expertise.
  3. Partnerships can get loans easily compared to sole traders, even though it may not be as good as a limited company.
  4. 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.
  5. Business secrecy is kept since partnerships do not need to disclose financial reports. Disclosing is required by the limited companies.

Disadvantages of partnerships are:

  1. Just like sole traders, the liability of partnerships is unlimited. In case of financial difficulty, the partners too could lose their personal property.
  2. There is a limit on the number of partners the business can have and thus expansion has a limit too.
  3. The more partners the business has, the more likely it is to have disputes, and therefore the business may have to be dissolved.
  4. 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

  1. 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.
  2. 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.
  3. 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.
  4. Bank are more willing to give loans to private limited companies compared to partnerships and sole traders

Disadvantages of private limited companies

  1. 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.
  2. AGM: The Annual General Meeting is held with shareholders for the purpose of electing board of directors. This sometimes is a big expense.
  3. 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.

Co-operatives

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

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.

Multinational Businesses

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

Economic Systems

As Economics deals in managing the available scarce resources, there are three basic questions that a country has to answer:

  • What to produce?
  • How to produce?
  • For whom to produce?

The answers to the above questions determine what type of an economic system that particular country has. Whatever the system a country may have, the ultimate purpose is to manage the available scare resources.
The following links will give u more details:

  1. Types of Economic Systems
  2. Advantages and Disadvantages of the market system

Stages of Production

Production means producing goods and services so that we can satisfy our wants. Any type of production is an economic activity. It is useful to classify the economic activities according to the nature of production they do.

Primary Economic Activities

Also known as the extractive industry, primary economic activities involve in extraction of natural resources. Firms which produce natural resources are called primary firms. Fishing and agriculture are good examples of primary economic activities in Maldives. Other examples in this sector include, mining, extraction of crude oil and logging. The output of the primary industries are usually input for the secondary industries.

Secondary Economic Activities

Secondary sector involves in the use of raw materials to make other goods. Secondary production is also known as ‘manufacturing’. While the normal fishermen catching fish from the sea is a primary economic activity, the fish cannery in Felivaru is in secondary sector of the economy. Any firm which manufactures by using primary goods or secondary goods from another firm as raw materials is doing secondary production. Other world examples include, manufacturing cars, ship building and refining oil etc.

Tertiary Economic Activities

Once primary and secondary industries complete their production of goods, there are activities necessary to bring them to the consumers. These activities are also called services. For example, travel boats from the agricultural islands bring farm products to the local market.
There are also support services which support the primary and secondary sector. For example, banking and insurance.
Tertiary sector involves in giving services. This is also called service sector. Tourism, which is the major economic activity in Maldives is a tertiary economic activity. Other tertiary economic activities in Maldives include, shipping, teaching, wholesaling and retailing.

Next Topic: Economic Systems

Factors of Production

Factors of Production are the resources used for the production of goods and services.

Production is known as any type of activity that has an economic value. Any activity that generates money or income.

Land

In Economics, land has a wider meaning compared to the English meaning of the word ‘land’. In economics, land consists of all the natural resources. For example, the atmosphere, the seas, soil, everything on the seabed etc.

The price given for the land is usually called ‘rent’

Labour

Labour is the all human efforts in the production. Labour does not only mean the labourers in an industrial site. If we take an example of a tourist resort, labour includes the receptionists, bell boys, bartenders, waiters, admin assistants, telephone operators etc.

The price given for the labour is usually called salaries and wages

Capital

Capital is the investment given to the business by the owner. It includes money input by the owner plus the fixed assets such as machinery and tools used for the production.

The price of the capital usually is interest payments.

Entrepreneur

An entrepreneur is a person or a group of people who bring together all the other factors of production. For example, the manager in a company gives direction to the plumbers, supervisors, admin assistants. He also manages the finance in the business and thinks of ways of increasing profit. The manager here is the entrepreneur.

Next Topic: Production Possibilities Frontier

The Nature of Economic Problem

Keeping in mind the meaning/definition of economics, let us see why we study economics. It is because of the basic economic problems facing every individual, society and country as well.

Scarcity

It is a known fact that human beings have unlimited wants. Wants are desires of oneself to do or have something. When one want it satisfied, another comes up and there is no end to it. To satisfy those wants we use ‘resources’. The problem, however, is that the resources we use to satisfy those wants are limited. Scarcity means limitation of supply of resources in relation to their wants

However scarcity does not mean that something is available in small quantities. It actually means that the available quantity is not enough to satisfy their appropriate wants. Because of this scarcity, we are all forced to make ‘choices’.

Choice

When we do not have enough resources to satisfy all our wants, we are forced to make choices. We choose which want we will satisfy with the available resource. For example, Habeeb had MRF25. He wanted to eat a fried noodles and would like to buy a small office notebook too. However, the money he had was not enough to buy both. He could buy either a fried noodles or the notebook, but not both. What would he choose to buy? He was hungry, therefore chose to eat the fried noodles and forget about the notebook. His choice was fried noodles.

Opportunity Cost

If we decide and choose which want to satisfy with the available resource, then there are other wants we have to leave unsatisfied. We have to forgo something in order to satisfy a want. The want that is forgone is called the ‘opportunity cost’. It is also known as ‘the next best alternative’.

Economic goods are scarce goods

If the resources were unlimited in supply, there would be no need to study economics. An economic good is anything that has a money value. Money value exists because it is scarce. Therefore anything that is not scarce has no economic value.

Next Topic: Factors of production

Economics: Meaning & Introduction

What is Economics?

Different scholars have given different definitions of Economics. Some of those definitions are easy to understand, while others could be a little difficult for a beginner to understand. Let us look at a few definitions:

Alfred Marshall, in his book Principles of Economics, described Economics as “a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing. Thus it is on one side a study of wealth; and on the other, and more important side, a part of the study of man.”

Lionell Robbins in 1935: “Economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses.”

Now let us make a clearer definition from the above. Economics is the social science that examines how people choose to use limited or scarce resources in attempting to satisfy their unlimited wants.

Economics is a social science because it studies about human behaviour. In fact, Economics is regarded as ‘the darling queen of social sciences’ today.

Always remember the meaning/definition of Economics if you are studying any topic in the subject; it will make it easy for you to understand the topic well.

If the meaning/definition of economics is still not clear to you, or if you need a Dhivehi explanation, please use the Contact Me page to contact me.

If you have understood the definition of economics, Go to the Next Topic:<< The Basic Economic Problems >>