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).
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.
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.
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