Types of Business Entities
Public vs private sector, for-profit organisations, social enterprises, and NGOs.
- Distinguish between the private sector and public sector
- Explain the main features of sole traders, partnerships, and limited companies
- Compare for-profit social enterprises (private, public, cooperative) with non-profit NGOs
- Evaluate the most appropriate legal structure for a given business situation
Private Sector vs Public Sector
| Private Sector | Public Sector | |
|---|---|---|
| Ownership | Owned by private individuals or shareholders | Owned and controlled by the government |
| Primary aim | Profit for owners/shareholders | Provide services for the public good |
| Funding | Investors, loans, retained profit | Taxes and government budget |
| Examples | Apple, local café, family farm | NZ Police, public schools, NHS (UK) |
Sole Traders
A sole trader is a business owned and operated by one person. It is the simplest and most common form of business.
| Advantages | Disadvantages |
|---|---|
| Simple and cheap to set up | Unlimited liability — personal assets at risk |
| Full control over decisions | Limited ability to raise capital |
| Owner keeps all profits | Business depends on one person — illness or death ends it |
| Flexible and easy to manage | No specialist skills across all areas |
Unlimited liability means the owner is personally responsible for all debts of the business. If the business fails, creditors can claim the owner's personal assets (house, car, savings).
Partnerships
A partnership is a business owned by two or more people who share responsibilities, profits, and liabilities. Governed by a deed of partnership.
| Advantages | Disadvantages |
|---|---|
| More capital than a sole trader | Unlimited liability (in a standard partnership) |
| Shared workload and specialisation | Profits shared — less per partner |
| Relatively easy to set up | Disagreements between partners can paralyse decisions |
| Shared risk | Each partner is liable for debts incurred by the others |
A legal document that sets out profit-sharing ratios, roles and responsibilities, and what happens if a partner leaves. Without one, partnerships are governed by default rules (e.g. equal profit shares regardless of contribution).
Privately Held Companies (Ltd)
A private limited company has limited liability for shareholders. Shares can only be sold to known individuals (family, employees) — not on a public stock exchange.
| Advantages | Disadvantages |
|---|---|
| Limited liability — shareholders only lose what they invested | More complex and expensive to set up |
| Can raise more capital by issuing shares | Annual accounts must be filed (some disclosure required) |
| Business continues if an owner leaves (separate legal entity) | Shares cannot be freely sold to the public |
| More credible to banks and suppliers | Profits shared with all shareholders |
Limited liability means shareholders can only lose the amount they invested in shares. Their personal assets are protected even if the company goes into debt.
Publicly Held Companies (PLC / Incorporated)
A publicly held company sells its shares on a public stock exchange. Anyone can buy and sell shares.
| Advantages | Disadvantages |
|---|---|
| Massive capital raising potential via IPO and share sales | Significant regulatory requirements and disclosure obligations |
| High public profile and credibility | Risk of hostile takeover |
| Limited liability for all shareholders | Short-term shareholder pressure can conflict with long-term strategy |
| Shares are liquid (easily bought and sold) | Loss of control for original owners |
An Initial Public Offering (IPO) is when a private company first sells shares to the public on a stock exchange. This raises large amounts of capital but comes with significant regulatory obligations and loss of privacy.
Social Enterprises (For-Profit)
Social enterprises have a double (or triple) bottom line — they aim to make a profit AND create social or environmental value.
Private Sector Social Enterprise
A for-profit company that trades commercially but reinvests profits into a social mission. Example: Patagonia (outdoor clothing) donates profits to environmental causes.
Public Sector Social Enterprise
Government-owned enterprises that operate commercially but serve a public interest. Example: NZ Post, government-owned banks in some countries.
Cooperatives
Owned and democratically controlled by their members (workers or customers). Profits are shared among members, not external shareholders.
- Worker cooperatives — employees own the business (e.g. some law firms)
- Consumer cooperatives — customers own the business (e.g. Fonterra in NZ — farmer owned)
| Advantages of Cooperatives | Disadvantages |
|---|---|
| Democratic — every member has a vote | Slower decision-making |
| Profits distributed to members, not outside shareholders | Harder to raise large amounts of capital |
| Strong worker/member motivation | Potential conflicts between member interests |
Non-Governmental Organisations (NGOs)
An NGO is a non-profit organisation that operates independently from government, typically focused on humanitarian, social, or environmental goals. Any surplus is reinvested into the mission, not distributed to owners.
- Examples: Red Cross, Oxfam, Greenpeace, Doctors Without Borders
- Funding: donations, grants, government contracts
- Aim: social or environmental impact, not profit
Both care about social impact, but a social enterprise generates profit through trading and may distribute some to shareholders. An NGO does not distribute surplus — all funds go back into the mission.
Key Terms
- Private sector = privately owned, profit-driven; public sector = government-owned, public service
- Sole traders and partnerships have unlimited liability; companies have limited liability
- As businesses grow, they typically shift from sole trader → partnership → private company → public company
- Social enterprises pursue profit AND social goals; NGOs are non-profit with a social mission only
- Cooperatives are owned and controlled by their members with democratic voting rights
Show answer
Unlimited liability means the owner is personally responsible for all business debts. If the business cannot pay its creditors, the owner's personal assets (home, car, savings) can be seized. This applies to sole traders and standard partnerships.
Limited liability means shareholders can only lose what they invested in the company. Their personal assets are protected even if the business becomes insolvent. This applies to private and publicly held companies.
This distinction matters because a business with high levels of debt or operating in a risky industry exposes unlimited liability owners to catastrophic personal loss. Incorporation (becoming a company) protects personal wealth but requires more administrative compliance.
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Without a deed of partnership, default rules apply — including equal profit sharing regardless of contribution.
- Unfair profit distribution: If Priya produces significantly more billable work, she still receives only 50% of profits. Over time this may cause resentment and reduce her motivation, harming the quality of the business's output.
- No agreed exit process: If either partner wants to leave, there is no mechanism for valuing or buying out their share. This could force the business to close even if the remaining partner wants to continue.
- Unlimited liability with no agreed limits: Each partner is liable for debts incurred by the other. If Sam takes on a costly contract that fails, Priya's personal assets are at risk even though she had no say in the decision.
Award 1 mark for identifying the problem + 1 mark for a logical consequence.
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Ownership: A cooperative is owned by its members (workers or customers), each holding a membership stake. A publicly held company is owned by shareholders who buy shares on the stock exchange — ownership is open to anyone.
Control: In a cooperative, each member has one vote regardless of their financial stake — genuinely democratic. In a public company, voting power is proportional to shares held, giving large institutional shareholders significant influence.
Profit distribution: A cooperative distributes surplus to members, often in proportion to their use of or contribution to the cooperative. A public company distributes profits as dividends to shareholders in proportion to shares held. Large shareholders receive a disproportionate share.
Award 2 marks per point (1 for cooperative, 1 for public company) across the three dimensions.
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- Profit distribution: A private limited company distributes profits to its shareholders as dividends. An NGO does not distribute any surplus to owners — all funds are reinvested into advancing the organisation's social or environmental mission.
- Primary objective: A private limited company's primary objective is typically profit or shareholder value. An NGO's primary objective is social, humanitarian, or environmental impact. Success is measured by mission outcomes (e.g. lives improved, hectares protected) rather than financial return.
- Funding sources: A private limited company raises finance through share capital, loans, and retained profit. NGOs typically rely on donations, grants, and government contracts rather than commercial revenue or equity investment.
Award 1 mark per feature + 1 mark for explaining the contrast clearly.