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7/13/22

Types of business organization structures: advantages and disadvantages

 After this study the reader should be able to understand the forms and structure of business organisation, their characteristics, advantage and disadvantages. 

In an economy,  in which free enterprise is allowed and encourage by the government ,Business organization take different forms in this situation , we will discuss four different types of business organization.

Business organization Structure


  1. sole proprietorship 
  2. Partnership  
  3. Limited liability company 
  4. Public enterprise 

forms of business organization structure 

Sole proprietorship 

It is  a business owned by an individual.  He bears the responsibility for running the business and he alone takes the profit or loss. The sole proprietorship is not regulated by special rule or law. 

advantages of sole proprietorship 

1.The individual provides the capital and employs a handful of people, if and when necessary .
2. He takes decisions quickly without consulting anybody. 
3. He is highly committed because the profit is entirely his own in case of success and he depends on the business for his livelihood.
4. There is privacy. 
It is not regulated by special rule of law. 

disadvantages of sole proprietorship 

1. The finance available for expansion is limited to that which the sole trader can raise.
2. The owner has unlimited liability because all his asset might be seized if the business goes bankrupt.
3. It lacks continuity because of death of the owner automatically leads to the collapse of the business. 

Sole proprietorship is common in retailing, farming, personal services such as hairdressers, fashion designers etc. 

partnership 

Partnership is the relationship which exit between two or more persons , commonly referred to as partners, carrying on a business in common with a view to making profit .

The business may also result in a loss although the purpose is that of profit.  Coming together is voluntary and exit of a member may also be voluntary. 

The partnership act 1890 and the limited partnership act 1907 contains the provision which govern the relationship between persons carrying on a business with the intention of making profit. The maximum number of partners in a firm is twenty.  There is no maximum limit for professional firms such as accountants and solicitors who have received the approval of the law for this purpose. A firm with more than twenty members would normally be incorporated as a limited liability company. 

Most partnership are formed under a formal agreement.  In the absence of an agreement ,the partnerships act 1890 provide among other things , that:
  • all profits and losses are to be shared equally between the partners 
  • No interest is allowed an capital and current account 
  • No remuneration will be paid to a partner 
  • Any advance loan made by a partner in excess of his agreed share of capital will attract interest at 5% per annul. 
An agreement is most important ,if it is intended that partners should be rewarded according to their differing contribution made to the firm in form of capital, expertise, experience or effort. Resulting from this,  an agreement would necessary contain provisions regarding the following, to ensure as far as possible , that there is an equitable distribution of profits or losses. 
  • The amount of capital to be provided and maintained by each partner. 
  • The rate of interest to be paid on capital
  • The extent to which drawing are allowed and the rate of interest to be charge on drawings. 
  • The remuneration to be paid to partners for their services 
  • The interest to be paid on any advance or loan made to the firm by a partner over and above his agreed capital. 
  • The proportions in which profits and losses are to be shared after taking account of any adjustments.

The main advantages of partnership 

  • More finance is available 
  • Higher performance may be achieved since two heads are better than one. 
  • Decisions making is also swift since partners are friends and the others are not many 

The disadvantages of partnership 

  • The major disadvantages is that the liability of members of the partnership is unlimited 
  • The amount of capital the partners can raise is too small to enable them carry out large investments
  • The deaths and bankruptcy of a member may lead to the dissolution of the firm. 
  • Disagreement may occur between the partners.  This may find out that they are not compatible which may lead to the dissolution of the partnership.

Limited liability company 

A limited liability company is a type of business organization structure that has a personality distint from those of its owners.  The attractionof this type of business organization it's access capital larger than what it's promoters can provide. Because of its distinct legal personality ,it can sue and be sued in its name and enter into contract for which it solely liable. 

The following are the different types of companies 

  • Private limited liability company 
  • Public limited liability company 
  • Company limited by guarantee 
  • Unlimited liability company 

Advantages of Limited liability company 

  • The liability of the shareholders is limited to the amount they have subscribed to the firms capital if the company goes bankrupt 
  • It can raise substantial amount of capital from the numerous shareholders or from financial institutions .
  • The chance of survival is high because the company is controlled and managed by highly skilled proffesional management team appointed by the board of directors who are elected by and answerable to the shareholders. 
  • The limited company is a separate legal entity distinct from its members. It can sue and be sued in its name
  • Unless it is wound up,  a limited company has perpetual secession so that it is not affected by the death, bankruptcy, mental disorder or retirement of its members .
  • Floating charges can be created by a limited company 
  • Share in a public company scan be transferred without the consent of other members 

Disadvantages of limited liability company 

  • Formation of limited liability company requires costly legal expenses 
  • Decisions making may be delayed due to bureaucratic bottlenecks. 
  • The members of the company have no power to manage it's affairs .
  • much legal and publicity formalities are observed for example filling of annual returns annual general meeting. 

public enterprise 

The public corporation is an enterprise owned by and controlled by the government. The government provided the capital for the company . The commissioner acting on behalf of the state and federal government appoints the members of the board of directors who in turn formulate policies within the enabling act establishing the corporation and the framework. 

Advantages of public enterprise 

  • Some activities such as the generation of electricity, provision of port facilities and rail transportation service involve huge financial considerations which the private entrepreneurs cannot provide.  These facilities must be provided to quicken the pace of of econimic development and industrisl growth 
  • It enable some natural resources ,especially minerals to be effienctly exploited and effectively managed
  • Some essential goods or services if left in the hands of private business may not sufficiently provided or may be provided at exorbitant prices. Thus , the common people will not be able to afford them as a result of which their conditions of living will worsen. 
  • The public company can borrow money externally by issuing bonds or debentures. This is not possible for private company. 
The major disadvantage of public enterprise is that members of the board of directors are political appointment to control and manage the corporation.  At times, they may not posses the relevant skills to manage such organisation efficiently. Some members of staff are appointed on political grounds and quota basis, resulting in low quality of labour. 

The performance of public enterprise is poor when compared with the private sector. Most of the public enterprise are being run at loss as the motive for establishing them is not for profit. They receive subventions from government. 

in conclusion with the above types of business organization structure will at the end give the reader a sufficient familiarization of the four major types of business organization structure 

There are several types of business organizations, including sole proprietorships, partnerships, corporations, and limited liability companies. Each type has its own advantages and disadvantages.

Sole proprietorships are the most common type of business organization. They are easy to form and have relatively few government regulations. However, sole proprietorships are also subject to unlimited liability, meaning that the owner is personally responsible for all debts and liabilities of the business.

Partnerships are similar to sole proprietorships, but there are two or more owners. Partnerships are also subject to unlimited liability.

Corporations are more complex than sole proprietorships and partnerships. They are subject to more government regulation, and the owners have limited liability. However, corporations can raise capital more easily than other business organizations.

Limited liability companies are a hybrid of sole proprietorships, partnerships, and corporations. They have the simplicity of a sole proprietorship, the liability protection of a corporation.

Related article : what is partnership

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