TYPES OF BUSINESS ORGANISATIONS

A business is an organization that uses economic resources or inputs to provide goods or services to customers in exchange for money or other goods and services.

In order to carry on a trade or business, a type of business entity must be chosen. For all practical purposes, the four major business entities for the current 2000 year are: sole trader, partnership, corporation, and Limited Liability Company. The most efficient way of selecting a business entity revolves around trying to match the needs (present and future) of the business and its owners in legal, financial, and tax-related areas. In other words, this selection process becomes a form of a needs analysis study. In some cases, it is relatively easy; in fact the choice may be practically automatic. In other cases, it can be quite complex to coordinate the current and future needs of both the business and its owners.

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Business organizations come in different types and forms. There are 4 Types of Business;

  1. Service Business

A service type of business provides intangible products (products with no physical form). Service type firms offer professional skills, expertise, advice, and other similar products. Examples of service businesses are: schools, repair shops, hair salons, banks, accounting firms, and law firms.

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  1. Merchandising Business

This type of business buys products at wholesale price and sells the same at retail price. They are known as “buy and sell” businesses. They make profit by selling the products at prices higher than their purchase costs. A merchandising business sells a product without changing its form.

Examples are: grocery stores, convenience stores,

Distributors, and other resellers.

  1. Manufacturing Business

Unlike a merchandising business, a manufacturing business buys products with the intention of using them as materials in making a new product. Thus, there is a transformation of the products purchased. A manufacturing business combines raw materials, labor, and factory overhead in its

production process. The manufactured goods will then be sold to customers.

  1. Hybrid Business

Hybrid businesses are companies that may be classified in more than one type of business. A restaurant, for example, combines ingredients in making a fine meal (manufacturing), sells a cold bottle of wine (merchandising), and fills customer orders (service). Nonetheless, these companies may be classified according to their major business interests. In that case, restaurants are more of the service type, they provide dining services.

These are the basic forms of business ownership:

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  1. Sole Trader
    1. A type of business unit where one person is solely responsible for providing the capital and bearing the risk of the enterprise, and for the management of the business.
    2. Sole trader is a business owned by only one person. It is easy to set-up and is the least costly among all forms of ownership.
    3. The owner faces unlimited liability; meaning, the creditors of the business may go after the personal assets of the owner if the business cannot pay them.
    4. The sole trader form is usually adopted by small Business entities

Characteristics of sole proprietorship form of

business organization

  • Single Ownership: The sole proprietorship form of business organization has a single owner who himself/herself starts the business by bringing together all the resources.
  • No Separation of Ownership and Management: The owner himself/herself manages the business as per his/her own skill and intelligence. There is no separation of ownership and management as is the case with company form of business organization. A sole proprietor contributes and organizes the resources in a systematic way and controls the activities with the objective of earning profit.
  • Less Legal Formalities: The formation and operation of a sole proprietorship form of business organization does not involve any legal formalities. Thus, its formation is quite easy and simple.
  • No Separate Entity: The business unit does not have an entity separate from the owner. The businessman and the business enterprise are one and the same, and the businessman is responsible for everything that happens in his business unit.
  • No Sharing of Profit and Loss: The sole proprietor enjoys the profits alone. At the same time, the entire loss is also borne by him. No other person is there to share the profits and losses of the business. He alone bears the risks and reaps the profits.
  • Unlimited Liability: The liability of the sole proprietor is unlimited. In case of loss, if his business assets are not enough to pay the business liabilities, his personal property can also be utilized to pay off the liabilities of the business.
  • One-man Control: The controlling power of the sole proprietorship business always remains with the owner.

He/she runs the business as per his/her own will.

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Merits of Sole proprietorship

  • Easy to Form and Wind Up.
    • Quick Decision and Prompt Action.
    • Direct Motivation.
    • Flexibility in Operation.
    • Maintenance of Business Secrets.
    • Personal Touch.

Limitations of sole proprietorship

  • Limited Resources.
    • Lack of Continuity.
    • Unlimited Liability.
    • Not Suitable for Large Scale Operations.
    • Limited Managerial Expertise.
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