When the population of a country increases, the process of manufacturing and
distributing goods and services expands. Therefore, different types of business
organizations are established in order to fulfill the needs and wants of people. A business
organization generally consists of an individual or a group of individuals working
together to produce goods and services required to fulfill human needs and wants.

Different parties provide funds to businesses. Owners of a business are the individuals
or groups who provide funds and assume the risk by involving in business. Based
on the ownership, businesses are categorized into several categories.
In addition, businesses are conducted to achieve different objectives of the
businessmen. Accordingly, some businesses are carried out to earn profits whereas
others are carried out for the well-being of the society.Further, a businessman can start either a small scale business or a large scale business
depending on the amount of resources that he has. Out of different types of business
organizations, businessmen should be clever enough to choose an appropriate type.

Classification of business organizations

Businesses are organized in different ways. These different types of business
organizations can be classified as follows depending on various criteria.

  • Based on the ownership
  • Based on the objective
  • Based on the scale

    Classification of business organizations based on the ownership
    Classification of business organizations based on the ownership

The figure  depicts different ways of classifying business organizations under
above two sectors based on ownership.

 

Private sector business organizations

Businesses owned by an individual or a group of individuals are known as private
sector businesses. Private sector businesses can be further classified as sole
proprietorship, partnerships, incorporated companies, cooperative societies and
other associations.

Public sector business organizations

Businesses funded and owned by the government are public sector business
organizations. State departments, state corporations, state companies, businesses
registered and owned under Provincial Councils and Local Government Institutions
are the different types of business organizations in the public sector.

Classification of business organizations based on the objectives

The scale of a business organization depends on different criteria. Some of the
criteria used are as follows

  • Amount of capital invested in a business
  • Number of employees
  • Amount of the energy used
  • Market share of the business

Based on the scale, business organizations can be categorized into two parts.

  • Small and medium scale businesses
  • Large scale businesses

Small and medium scale businesses

Small and medium scale businesses
Small and medium scale businesses

Different institutions have identified
different criteria in classifying small
and medium scale businesses.
Accordingly, businesses with a
small amount of capital invested,
with a small number of employees
and having a small market share
relative to large scale businesses are
known as small and medium scale
businesses.

Large scale businesses
Large scale businesses

Businesses that have invested a large
amount of capital, have employed
a large number of employees, have
a large market share and have the
ability to influence the respective
industry are known as large scale
businesses.

 

 

Sole proprietorship

Businesses owned by an individual are known as sole proprietorship. This is the most common type of business organization in almost all the countries in the world. This type of business organization is common because it is easy to commence, requires only a small amount of capital and can take independent decisions. The success of this business depends on the skills and dedication of its
owner.

Characteristics of sole proprietorship

  • Capital is provided by a single person who is the owner
    • The owner is required to find the necessary capital for the business
      individually. Savings or borrowed funds by the owner can be invested as the
      capital to the business.
  • Profits or losses to be born alone
    • All the profits earned by a sole proprietorship belong to the owner. Also,
      if there is a loss, the owner should bear it alone.
  • Unlimited liability of the owner
    • In a sole proprietorship, the owners’ liability is unlimited. Accordingly,
      the liability is not limited only for the capital that had been invested.
      In order to settle liabilities of the business, the owner might require to
      use his properties external to the business and there is no limit for such
      commitment.
  • No legal personality
    • A sole proprietorship cannot conduct any legal operations by its business name.
      It can do so only by the personal name of the owner. For example, entering
      in to contracts, purchase of vehicles, obtaining bank loan, filing cases
      should be done in the personal name of the owner.
  • No continued existence
    • Due to such reasons as the death of the owner, being mentally unsound to
      conduct the business etc. the business operations of a sole proprietorship
      will be discontinued.
  • Not mandatory to register
    • In general, it is not mandatory to register a sole proprietorship

In addition to the above mentioned characteristics, there are some other
characteristics of a sole proprietorship such as the ability to take decisions alone,
controlling is done by the owner and owner has the opportunity to discontinue the
business at any time he requires.

Advantages of sole proprietorship businesses

Sole proprietorships have the following main advantages compared to other types
of business organizations.

  • Convenient to start
  • All the profits belong to the owner
  • Privacy of the business information is secured
  • Ability to use own skills at the best
  • Independent decision making

Disadvantages of sole proprietorship

  • Unlimited liability of the owner
  • Difficulties in raising capital
  • No continuous existence
  • No legal personality
  • Individual decisions of the owner can be unsuccessful

Partnerships

The relationship among persons conducting a business in common with an objective
to earn profit is known as a partnership. The Partnership Ordinance of 1890 affects
partnerships. Professionals such as accountants, lawyers, tax officers and doctors
may also conduct their practice as a partnership.

Incorporated companies

A firm which is registered under the Companies Act No. 07 of 2007, with a legal
personality, can raise capital by issuing shares, and the liability of the shareholders
being limited, is an incorporated company. The owners of these limited companies
are the shareholders. Their liability is limited to the amount they have paid or liable
to pay for the shares they have purchased.

Characteristics of incorporated companies
The following are some major characteristics that are common in incorporated
companies

  • Incorporation under the Companies Act
  • Continued existence
  • Ability to register with limited liability
  • Can raise capital by issuing shares

Read out more articles about business development