Business | Types of organisations

Welcome to Types of Organisations!

Hello future Business guru! This chapter is super important because it helps us understand the fundamental building blocks of the economy. When you look around, you see businesses like massive supermarkets, local hairdressers, and even the NHS—but they are all structured differently!

In these notes, we will learn about the different ways organisations are owned, financed, and run. Don't worry if some of the legal terms seem tricky; we will break them down into simple, bite-sized pieces.

Section 1: The Three Main Economic Sectors

Organisations are generally grouped into three main sectors based on their primary aims and ownership.

1. The Private Sector

• Goal: To make a profit for their owners/shareholders.
• Ownership: Owned and controlled by individuals or groups of private citizens.
• Examples: Apple, your local café, Tesco.

2. The Public Sector

• Goal: To provide essential services to the public, focusing on social welfare, not profit.
• Ownership: Owned and controlled by the government (local or national).
• Funding: Primarily funded by taxes.
• Examples: State schools, the Police, the National Health Service (NHS).

3. The Third Sector (Non-Profit Organisations)

• Goal: To achieve a social or environmental aim (a "good cause"). They do not distribute profits to owners.
• Ownership: Independent of the government and run by trustees or voluntary members.
• Examples: Charities (Oxfam, WWF), voluntary clubs, social enterprises.

Section 2: Private Sector Organisations – Forms of Ownership

The Private Sector has several legal structures. The choice of structure drastically affects how much risk the owners face.

1. Sole Trader

A Sole Trader is a business owned and controlled by one person. This is the simplest form of business structure.

Example: A self-employed electrician, a freelance graphic designer, or a small corner shop.

Key Concept: Unlimited Liability

This is the most critical concept for sole traders and partnerships!

• Unlimited Liability means there is no legal distinction between the owner and the business.
• If the business runs into debt, the owner is personally responsible for repaying those debts.
• The owner’s personal assets (like their house or car) can be seized and sold to pay off business debts.

Advantages of a Sole Trader

• Easy and quick to set up (minimal legal paperwork).
• The owner keeps all the profits.
• The owner has complete control over decisions.

Disadvantages of a Sole Trader

• Unlimited Liability (major risk).
• It can be difficult to raise finance, as banks view them as riskier.
• The workload can be very heavy; holidays are often difficult.

2. Partnerships

A Partnership is a business owned by 2 or more people (usually up to 20), who share the risks, costs, and profits.

Example: Many law firms, accounting firms, or medical practices operate as partnerships.

Key Features of Partnerships

• Partners usually draw up a legal document called a Deed of Partnership, outlining who invested what, how profits will be shared, and who manages what.
• Unless it’s a specific 'Limited Liability Partnership' (which is more complex), most standard partnerships have Unlimited Liability.

Advantages of a Partnership

• More owners mean more capital (money) can be invested initially.
• The workload and decision-making are shared, spreading the risk.
• Partners can bring different skills and expertise to the business.

Disadvantages of a Partnership

• Unlimited Liability (shared between partners).
• Disagreements between partners can lead to difficult decisions.
• If one partner makes a terrible decision, all partners are legally responsible for the consequences.

3. Companies (Incorporated Businesses)

When a business grows large, the owners often want to protect their personal wealth. They do this by "incorporating" the business, turning it into a Company.

Key Concept: Limited Liability

This is the legal shield that sole traders and partnerships desperately wish they had!

• Limited Liability means the business is legally separate from its owners (shareholders).
• If the company fails, the owners (shareholders) only lose the money they initially invested in shares.
• Their personal assets (house, savings, car) are safe.

Private Limited Company (LTD)

A Private Limited Company (LTD) is usually owned by a few people who know each other, such as family members or close business associates.

• Shares cannot be sold to the general public (hence "Private").
• Shares can only be transferred privately, with the agreement of other shareholders.
• They must legally include ‘Ltd’ after their name (e.g., Smith & Sons Ltd).

Public Limited Company (PLC)

A Public Limited Company (PLC) is generally a much larger business that wants to raise substantial amounts of capital from the global market.

• Shares can be sold to the general public on the Stock Exchange (hence "Public").
• This allows them to raise vast amounts of finance quickly.
• They must legally include ‘PLC’ after their name (e.g., Amazon PLC).

Comparing LTD and PLC

Key Takeaway for Private Sector:

The biggest difference between Sole Traders/Partnerships and Companies (LTD/PLC) is the level of personal risk due to liability. Companies offer crucial financial protection to their owners.

Section 3: Public Sector Organisations

As mentioned earlier, the public sector is run by the state and focuses on delivering goods and services that benefit society as a whole.

Aims of Public Sector Organisations

• Providing Essential Services: Such as healthcare, education, defence, and infrastructure (roads, etc.).
• Efficiency: Delivering quality service in the most cost-effective way (since they are using taxpayers' money).
• Accessibility: Ensuring services are available to all citizens, regardless of their income.

Example: When the government builds a new road, its aim isn't profit, but improving transport links for commuters and businesses.

Funding the Public Sector

Public organisations rarely charge prices high enough to cover their costs. They are primarily financed through:

• Taxes (Income Tax, Sales Tax, Corporation Tax).
• National Insurance contributions.

Key Takeaway for Public Sector:

Their driving force is service and welfare, not profit. They exist to fill gaps that profit-seeking private companies wouldn't touch.

Section 4: The Third Sector (Non-Profit Organisations)

The Third Sector is made up of organisations that are neither government-owned nor profit-driven in the traditional sense.

1. Charities

Charities aim to raise money and awareness for a specific cause (e.g., medical research, poverty relief, animal welfare).

• They rely heavily on donations, fundraising events, and sometimes government grants.
• All money raised must be spent on the charitable cause; no money goes to private shareholders.

2. Social Enterprises

Social enterprises are businesses that trade (sell goods or services) but exist primarily to fulfil a social or environmental mission.

• They look like regular businesses, but any profit made is reinvested back into the business or used to fund their social mission.
• Example: A café that hires homeless people and uses its profits to provide housing support.

Aims of Third Sector Organisations

• Maximising Social Impact: Achieving their core mission (e.g., building schools, protecting wildlife).
• Financial Sustainability: While they don't aim for profit distribution, they must cover their running costs to survive.

Key Takeaway for Third Sector:

They use business methods (like selling goods) or fundraising to achieve a social mission. Profit is a means to an end, not the main goal.

Chapter Review & Success Checklist

What You Should Know Now:

You can identify the three main sectors and the different legal forms within the Private Sector.

• Can you define Unlimited Liability and explain why it is risky for a sole trader?
• Can you explain the protective nature of Limited Liability for shareholders in a company?
• Do you know the key difference between an LTD (private shares) and a PLC (public shares)?
• Can you state the primary aims of the Public Sector and the Third Sector?

Keep revising these key terms, especially the difference between the two types of liability. You've got this!