1.

2 Types of
organizations

IB Business and management

1.2 Types of organizations
By the end of this chapter, you should be able to:
Distinguish between the private and public

sectors
Outline the main features of the following types

of for-profit (commercial) organizations: sole

traders, partnerships, companies or corporations
Outline the main features of the following types

of for-profit social enterprises: cooperatives,

microfinance providers, public-private
partnerships (PPP)
Outline the main features of the following types

of non-profit social enterprises: non-governmental

organizations (NGOs), charities
Business sectors
Public sector
Covers activities that are within the control

or direction of governments.
Organizations do not have outside
shareholders.
They are solely accountable to the
government for their performance.
In many countries, they cover activities

such as the state health, education, police,

and prison services.
Business sectors
Private sector
Organizations owned and managed by
individuals.
Generally operate with the main objective

of making profit.
Includes public and private limited
companies.
Public means that the shares are traded

on a stock market and available to any

members of the public to buy and sell.
Profit = total revenues total costs
Revenues: the income received by the
business in a specific period of time.

Costs: costs incurred by the business in the

same period of time.
For-profit organizations
Sole traders or sole proprietors
Partnerships
Companies or corporations
For-profit social enterprises
Cooperatives
Micro-financers
Public-private partnerships (PPP)
Sole traders or sole proprietors
Set up by an individual and where that
person is the owner. The person is the
business and the two are the same.
Ownership and control of the business is
with the sole proprietor.
The assets and liabilities of the two are not

separated, leading to unlimited liability.

Include plumbers and carpenters, some

shopkeepers, individual accountants and

lawyers and many consultants.
The key to success is to exploit the
advantages of being a sole trader and yet
to take seriously the disadvantages.
Business Bureau-uk
Sole trader

Easy to set up the Unlimited liability

business Limited finance
Complete control
Pressure of
Keep all the profit
responsibility
Personal service Lack of expertise
Privacy Lack of continuity

Advantages Disadvantages
Partnerships
Organizations where two or more individuals
choose to work together as co-workers.
The risks are shared.
The owners all have unlimited liability. The
partners are liable for each others debts.
They can be specialized in certain tasks.
No distinction between the owners and the
managers of the business.
Look more substantial to potential customers
than sole traders.
Partnerships

Extra financial Unlimited liability

capital Shared profit
Additional skills Disagreements
Shared workload Shortage of capital

Advantages Disadvantages
Limited Companies or
corporations
Have shareholders and directors, and they
are not always the same people.
Separation in ownership and control.
The shareholders are limited in their
liability to the amount of their investment.
Have to file annual financial information to

public registrars.
Presents a more solid and trusting image.
Private limited companies (Ltd)
The smaller of the two types of limited
company.
Suitable for a new business start-up or for an
existing sole trader or partnership seeking the
benefits of limited liability.
The shares they issue cannot be advertised for
sale or traded on the stock market.
Any transfer of shares must be done privately
and with the agreement of all shareholders.
Many Ltds are family businesses, with the
family members being directors and
shareholders.
Private limited companies

Limited liability Legal requirements

Sources of finance Loss of privacy
Continuity Limited growth

Advantages Disadvantages
Public limited companies (Plc)
Much larger type of company.
Have their shares traded on the stock market.
When a company decides to become a plc it
must be floated on the stock exchange.
This involves publishing a prospectus to
advertise the company to potential
shareholders and can be an expensive process.
Once a plc has a listing on the stock market,
any member of the general public can buy and
sell shares in the company.
Public limited companies

Sources of finance Costs

Expansion Loss of control
Credibility Business size

Advantages Disadvantages
Workpoint
When establishing a business, which type of
organization would best suit these two scenarios?
Expand your answers.

1. Two brothers were employed in a local building company that had

been struggling with a downturn in demand for new houses and had
decided to make staff redundant to cut costs, including the brothers.
They each receive compensation of $50,000 for loss of job. They
decide to set up in business together as a specialist building firm
converting old houses into small flats around the site for the 2012
London Olympics. They will employ three staff to start with and will
need to borrow $200,000 from a bank. They have very different private
wealth but are close brothers and have always wanted to work
together.
Workpoint
When establishing a business, which type of
organization would best suit these two scenarios?
Expand your answers.

2. A scientist at a Swedish university has recently discovered a drug

that will stop some men losing their hair. He has patented the drug and
predicts it would have worldwide sales of up to $300 million. He is
considering selling the manufacturing rights to a large Swedish drug
company and taking annual royalties from them. An alternative is that
a private equity company has found a team of managers and is
prepared to set up a new technology company with an investment of
some $25 million to get the business up and running. The investors
believe that if the company is successful, then it can go on to the stock
market in five years time or be sold at a greater value to a competitor.
For-profit social enterprises
Form of business that has a social purpose.
Aims to improve human, social, or
environmental well-being.
The social aim takes priorities over any

other aim such as growth, maximizing sales,

or making profits.
Can take the form of a sole-trader,
partnership, or company.
Cooperatives
Form of partnership whereby the business is
owned and run by all the members.
Each member participates actively in the

running of the business.

Generally aims to make some profit, but

maximizing profit is not the most important

priority.
Types of cooperatives
A financial cooperative: a financial institution
that lends money at lower rates of interest or
provides non-lending services at lower cost than
banks or other financial institutions.
A housing cooperative: is run to provide
housing for its members as opposed to providing
rent for private landlords.
A workers cooperative: is owned and
operated by the workers themselves, which does
not pay significant higher wages or salary to
managers, and has providing employment to
workers as a priority.
Types of cooperatives
A producer cooperative: is where groups of
producers collaborate in certain stages of
production. Often the aim is to maximize the
utilization of an expensive piece of equipment
that individual members, by themselves, could
not afford.
A consumer cooperative: provides a service to
its consumers who are also part owners of the
business.
Micro-financiers
They provide small amounts of finance to those
who traditionally would not have access to it, for
example low-income individuals, families in rural
communities, and women.
The money is lent with specified conditions of use
and scheduled repayments.
They expect to receive repayment of principal
and to make a profit on the loans (interest).
The loan amounts are small and the interest rates
are low.
Public-private partnerships
Business created between a private sector
business and the public sector.
Involves the construction of a facility with a social
aim (healthcare or education).
Could also be a specific project such as the
development of a site for alternative energy or a
nature reserve.
Public-private partnerships
The business is expected to make a return on the
money invested into it, but the priority is not
profits.
The public sector usually provides the finance
and the private business the expertise.
Often, the government offers tax incentives to
the private sector to take part in the partnership.
Common features of a PPP
Profit is important but not the priority.
There is collaboration between the business and
the local community.
There is greater democracy in the business than
in other organizations.
The business operates the same functions as any
other business.
A favourable legal status is achieved.
There is a strong communal identity.
There are benefits to the stakeholder community.
Common features of a PPP
Decision making is complex and time consuming.
There may be insufficient capital for growth.
There may be insufficient capital for financial
strength.
Non-profit social enterprises
Do not aim to make profits at all. The main aim is
for social purpose.
They generate as a surplus (profit), used to
advance the social purpose.
Organizations such as churches, hospitals, schools,
foundations, charities and pressure groups.
Charities include well-known international
organizations and also local fundraising groups.
Pressure groups include political parties, trade
unionists, commercial lobby groups; and local
protest action groups.
Non-government organizations
Involved in economic development and
humanitarian issues.
Plan and implement specific projects in

developing countries.
Influence governments policies on areas

such as poverty and human rights.

Work in the field where a disaster happens

and often in places that official government

aid does not reach.
Charities
Need to be established carefully and comply with legal
requirements.
They aim to minimize costs in order to maximize net
revenue and therefore charitable donations.
They also seek to educate or inform the public about their
area of expertise or concern.
Focus their objectives on money raising, education, and
lobbying.
Sources
Lomin, L., Muchena, M., and Pierce, R.
(2014) Business Management. Oxford
Clark, P. and Golden, P. (2009) Business

and management Course Companion

Gutteridge, L. (2009) Business and
management for the IB Diploma
Thompson, R. and Machin, D. (2003) AS

Business Studies