Business Organization – Unincorporated versus Incorporated Business, Corporation, Franchise, and Joint Venture

  • A business that is not considered as a separate legal entity from its business owner(s) is called an unincorporated business.
  • An incorporated business is a legal trading entity whose identity is separate from its individual owners, and continues to exists if one of its owners dies or is incapacitated; and the business can legally enter into binding legal contracts and agreements. As expected, the business account is separate from the personal accounts of its owners.
  • There are 6 types of business organization in the private sector:
  1. Sole Proprietorship: This business is run and managed by the owner who is described as the sole proprietor. In the legal sense, it is the easiest business to set up, hence its popularity. It is also called a sole trader organization. A demerit of sole proprietorship is its unlimited liability. Unlimited liability means that the business entity and the owner are not two separate legal entities, and thus debts incurred by the business can be repaid by selling both the business stock and the private property of the owner.
  2. Partnership: This business is owned and managed by 2 or more entrepreneurs who have agreed to start and run it. Each entrepreneur is considered as a partner in this partnership. Normally, the partners raise the capital, make joint decisions, and share the profits. This partnership can be formed informally through a verbal agreement where the entrepreneurs agree to be partners in the business, or formally through a legally-bidding written deed of partnership, also called a partnership agreement. In some jurisdictions, entrepreneurs can form a limited liability partnership. The limited liability partnership (LLP) is a unique partnership that creates allows the liability of each partner to be limited by his/her share in the business, thus introducing limited liability while allowing the business to be recognized legally as a separate legal entity. Therefore, the LLP is an incorporated limited liability business that continues to exist after the demise of one of the partners. Even so, none of the partners is allowed to sell shares.
  3. Private Limited Company (PLC): This is an incorporated business that is jointly owned by 2 or more people who are given shares as proof of ownership. Because each owner has shares, (s)he is called a shareholder, and the shares are the amount of capital that (s)he has invested in the business. The shareholders appoint a board of directors to run and manage the business. Because this type of business is owned by shareholders and is run by appointed directors, it is described as a company. In most PLCs, the directors are usually the majority shareholders. The majority shareholder is the investor who owns the largest proportion of shares issued by the company. Unlike the LLP, the PLC allows its shareholders to sell their shares or buy the shares of other investors, but this must be done with consent of the other shareholders. As a legal incorporated business entity with limited liability, the trading name of a PLC is required to end with Limited (or its abbreviation Ltd) or proprietary limited [or (Pty) Ltd]. To form the PLC, the shareholders must send the following 2 documents to the registrar of companies:
  • The Articles of Association – This has the rules of management of the PLC, including how the directors are chosen/elected, when and how they will hold official meetings, and the duties and rights of each director; as well as procedures and rules governing issuance of shares.
  • The Memorandum of Association – This has the name, address, and objectives of the PLC, as well as its directors. It also states the number of shares owned by each director.

These 2 documents allow the registrar of companies to issue a certificate of incorporation to the PLC so that it can start trading.

  1. Public Limited Company: This is an incorporated limited company in the private sector that is allowed to sell its shares to the general public. In the United Kingdom (UK), the company name must end with plc. Unlike the PLC, a public limited company must be managed by professional managers who serve as the company directors, even if they do not own shares in the company. It is legally mandatory for this company to hold an annual general meeting (AGM), which allows shareholders to vote for the directors who are tasked with the management and ultimate decision-making responsibilities in the company. Therefore, unlike the PLC, majority shareholders do not necessarily have control over the running of operations or decision-making in the company. The elected directors make up the Board of Directors (BoD) which is tasked with employing managers to run daily operations in the company. The public limited company is said to exercise divorce between ownership and control as it is the shareholders who own the company, but it is the BoD and its managerial staff that control the company. Once per year, this company pays dividends to its shareholders. Dividends are the after-tax profit paid to shareholders as annual returns to investors.
  2. Joint Venture: This occurs when 2 or more existing businesses come together to pursue a for-profit project, and they share the risks, profits, and losses; as well as contributing capital for the project. This for-profit project is described as a venture.
  3. Franchising: This is a method of doing business where a business, called the franchisor, leases out rights to other businesses to use its patented business idea in its operations, or sell its proprietary products. This means that the franchisor does not sell its products directly to the end consumer, instead licensing another business called the franchisee to sell the products to end consumers. This business model whereby a franchisee is licensed to use the brand name, logo, and trading method of the franchisor is called a franchise. Normally, the franchisor supplies the products sold by the franchisee, and at times trains the staff of the franchisee, besides managing advertisements for all its franchises.
  • The main types of business organization in the public sector is the public corporation.
  • A public corporation is a government-owned company that is managed by a BoD appointed by governmental authorities, and the BoD is expected to conform to guidelines and objectives set by the government. This makes it analogous to the public limited company, but with a far limited divorce between ownership and control. Public corporations usually existing to prevent private-held monopolies from exploiting consumers or adversely impacting government planning, as well as ensure that government owns providers of critical public services such as electricity generation, water supply, and public transport.
  • A nationalized business is a business that once belonged to the private sector but was acquired by the government.
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