Cambridge IGCSE Business (0264) syllabus reference: 1.4.1
Success criteria - by the end of this topic you can:
- compare sole traders, partnerships, private and public limited companies
- recommend a suitable type of organisation for a given situation
- explain franchises, joint ventures and social enterprises
Key terms
Unlimited liability - owners are personally responsible for all the debts of the business.
Limited liability - owners can only lose the money they have invested in the business.
Incorporated business - a business with a separate legal identity from its owners (a company).
Comparing types of business organisation
| Sole trader | Partnership | Private limited (Ltd) | Public limited (plc) |
|---|
| Owners | One person | 2 to 20 partners | Shareholders (family, friends) | Shareholders (any member of the public) |
| Liability | Unlimited | Unlimited | Limited | Limited |
| Raising capital | Own savings, loans | Partners' capital | Sell shares privately | Sell shares on the stock exchange |
| Main advantages | Full control, keeps all profit, few formalities | More capital and skills, shared workload | Limited liability, continuity, more capital | Very large capital, high status |
| Main disadvantages | Unlimited liability, long hours, limited finance | Unlimited liability, disagreements, shared profit | Legal formalities, shares not freely sold | Expensive to set up, accounts public, risk of takeover, divorce of ownership and control |
Real-world example Infosys and Reliance Industries are public limited companies listed on Indian stock exchanges; many family businesses are private limited companies.
Exam tip
For 'recommend and justify' questions, consider: how much capital is needed, the risk involved (liability), how much control the owners want, and the size of the business.
Other forms of business organisation
Key terms
Franchise - a business that uses the name, logo and trading methods of an existing business (the franchisor) in return for a fee and royalties.
Joint venture - two or more businesses agree to work together on a project, sharing capital, risks and profits.
Social enterprise - a business with social objectives as well as financial ones, which reinvests profits to benefit society.
Franchise - for the franchisee
| Advantages | Disadvantages |
|---|
| Lower risk: proven brand and methods | Fee and royalties on sales |
| Training and support from the franchisor | Little freedom to make decisions |
| Advertising paid by the franchisor | Reputation depends on other franchisees |
Franchise - for the franchisor
| Advantages | Disadvantages |
|---|
| Fast expansion using franchisees' capital | Less control over quality |
| Income from fees and royalties | A poor franchisee can damage the brand |
| Franchisees are motivated owners | Shares profit with franchisees |
Real-world example Domino's Pizza operates in India through a franchise held by Jubilant FoodWorks. Starbucks entered India through a joint venture with Tata (Tata Starbucks).
Joint ventures
| Advantages | Disadvantages |
|---|
| Shared costs and risks | Profits are shared |
| Combines skills and local knowledge | Disagreements over decisions |
| Easier entry into new markets | Different cultures and objectives |
Analysis chains - use these to build 6 and 8-mark answers
- Limited liability [k] - owners only lose what they invested [an] - more willing to take risks and expand [an].
- Becoming a franchisee [k] - proven brand [an] - lower risk of failure [an] - but royalties reduce profit [an].
Check your understanding - exam-style practice
1. Define 'limited liability'. [2]
2. Explain one advantage and one disadvantage of a joint venture. [6]
3. A sole trader wants to open three more shops. Recommend a suitable type of business organisation.
Justify your answer. [8]
Write your answers, then check them against these notes and the Exam Technique Sheet.