Different Business Types: Pros, Cons, and Conversions
Different Business Types and Their Pros and Cons
A) Sole Trader
A business where one person provides permanent capital and has full control of the business.
Pros:
- Easy to set up
- Owner has full control
- Close relationship with consumers
- Flexible working hours
- Secrecy in finance
Cons:
- Unlimited Liability
- Lack of Capital
- Cannot Specialize
- Lack of continuity
- Long working hours
- Lack of economies of scale
B) Partnership
A business formed by 2 or more people to carry out business with shared responsibility and capital.
Pros:
- More skills
- More opportunity for specialization
- More sources of capital
- Fewer legal formalities
- Secrecy in finance
- Partners can share decision-making, giving one another moral support
- Shared workload
- Shared risks
- Easier to raise external funds than sole traders
Cons:
- Unlimited Liability
- Less Capital than Limited Company
- Profits and control are shared
- Lack of continuity
C) Private Limited Company
Small to medium-sized business often owned by members of the same family that cannot sell shares to the general public.
Pros:
- Limited Liability
- Separate legal identity
- Original owners can retain control
- More capital
- Greater status
- Separate legal personality
- Continuity
Cons:
- More legal formalities
- Loss of secrecy
- Less capital than PLC – cannot trade in the stock market
- Shares cannot be sold without agreement
- Loss of complete control
D) Public Limited Company
Large business with legal rights to sell shares to the general public.
Pros:
- Limited Liability
- Access to substantial capital
- No restrictions on the sale of shares
- Opportunities to grow
- Benefit from economies of scale
- Recruit more experienced staff
Cons:
- Has the most legal formalities
- Risk of being taken over
- Conflicts in business management
- Business is owned by shareholders but managed by the Board of Directors
- Loss of privacy
Conversion of Private to PLC and its Effect on Stakeholders
Shareholders:
- May gain wealth with an increase in market value
- May risk dilution of control as the company goes public
Managers:
- Will benefit from working in a firm of greater status
- Work-life might become more stressful
Employees:
- Benefit from job security, promotion prospects, and higher wages
- PLC might be more ruthless with employee relationships
Suppliers:
- Benefit from large orders, security of orders, and it is safer to trade
- PLC might be ruthless in negotiations
Customers:
- Better quality products and lower prices due to economies of scale
- PLC might become a monopoly
Community:
- Gains from job creation and development of the area
Other Types of Businesses
A) Joint Venture
Two or more businesses agree to start a new project together.
Pros:
- Costs are shared
- Risks are shared
- Greater range of expertise
- Local Knowledge
Cons:
- Profits have to be shared
- Disagreements over important decisions
- Two different businesses might have different business cultures
B) Holding Company
A business that owns and controls several separate businesses but does not unite them into one unified company.
C) Co-operatives
Joint ownership organizations that are member-owned – they meet common economic, social, and cultural needs of members.
Key Features:
- All members can contribute to the running of the business
- All members have one vote
- Profits are shared equally
Pros:
- Strength in unity
- Greater motivation
- Democratic control
- Buy in bulk
- Easy to set up
- Limited Liability
- Idealistic values
Cons:
- Members lack management skills
- Lack of capital
- Slow decision-making
D) Franchise
A business that uses the name, logo, and trading system of a successful established business.
D.1) Effect on Franchisor (the one giving out the franchise)
Pros:
- Earn franchise fees
- Earn income from the supply of products
- Expand quickly
Cons:
- Franchisee keeps most or all profits
- Poor management can lead to a bad reputation
D.2) Effect on Franchisee
Pros:
- Less chance of failure
- Advice and training
- Advertising is paid for
- Quality of supplies assured
- Easier to obtain finance
- Benefit from economies of scale of the franchisor
- Benefit from expert management
Cons:
- License fee is expensive
- Profit sharing
- No choice of suppliers
- Less independence
- Strict rules over pricing
- Clash of ideas
- Have to follow criteria set by the franchisor
- Limited freedom
Public Sector Businesses
Businesses owned by the state or government.
Features:
- Owned by the government
- Social objective is a priority over economic objectives
- May be loss-making or subsidized
- Finance comes from the government
- Produces merit goods
Pros and Cons of Public Sector Businesses (Continued)
Pros:
- Has social objectives to keep prices low for basic services to maintain affordability
- Keeps people in jobs and unemployment doesn’t rise
- Managed with social objectives
- Businesses continue even with losses if the social benefit is greater
- Finance raised by the government
Cons:
- Lack of profit motivation
- Dependence on government subsidies can lead to inefficiency
- Business objectives may be political
- Decision-making is slow and bureaucratic