Types of Businesses- Joint Stock Companies

What are joint stock companies?

Joint stock companies are owned by shareholders, there is usually a separation between ownership and management.

The company is divided up into many shares which are held by people or groups. They elect a board of directors who oversee the day to day running of the business, these people have a duty to protect the interests of the shareholders. The board of directors can also appoint others to look after the day to day running of the business as well as other employees.

Joint stock companies benefit from limited liability, this means that should the business fail the shareholders liability is only limited to the price they paid for the shares or has left to pay. e.g. if the shareholder bought 1 share at $10, and paid $8 for it, should the business fail the shareholder will only have to pay $2 for it (the remainder of his share).

In most countries there are two types of companies that issue stock.

1. Private limited company- which is owned by private individuals and the shares are not sold on the market
2. Public limited company- owned by individuals in the public, the shares can be bought and sold on the stock-exchange.
   

So what the benefits of joint stock companies?

1. limited liablity - see above
2. easier to raise finance as they can sell shares to raise capital, and they are usually larger so have more credibility (not always true), and they can also raise finance through debenture or bond issues
3. can take advantage of specialised knowledge of managers

Sounds perfect right? Again there are downfalls

1. they have to publish accounts yearly
2. they are more expensive to set up and have more requirements under the law
3. original owners can lose control of the business
4. ownership and management are separate and often conflict of interests may occur.

Pretty straight forward stuff, next time co-operatives!

Types of Businesses- Partnerships

Partnerships are much like sole traders, the only exception is that there is more than 1 owner. This usually occurs in the professional industries e.g. lawyers, accountants, doctors. When you hear about a law firm or an accounting firm that word 'firm' refers to a partnership.

Often businesses may start out as sole traders, and then move on the partnerships. What may be the reasons for this?

1. need extra funding without wanting to borrow money (interest costs)
2. extra skills
3. share in the workload

However as with anything, disadvantages do exist.

1. unlimited liability exists just like a sole trader business
2. profits must be shared
3. one partner's actions can ruin the entire business
4. if a partner leaves, the partnership is dissolved and a new partnership agreement must be formed
5. a partnership agreement is usually required, however if one does not exist there are some default terms that are available.
   

Next up, joint stock companies!

Types of Businesses - Sole Trader

Welcome to part 1 of the Types of Businesses. This post talks about sole traders we also have partnerships, joint stock companies, and co-operatives later on.

Sole trader businesses, like the name suggests, is a business which is owned by one person. This person usually works inside the business and is involved in the day-to-day operations. However, this does not mean that they cannot employ staff.

Sole Trader businesses have unlimited liability, this means that should the business fails the owner's personal assets may be affected by the business' debts. This may mean that if the business fails, the owner may have to sell off his car in order to pay for its debts.

Money for a sole trader business usually comes from his own savings or loans on the trader's house (known as a mortgage).

Advantages:

1. owner has complete control over business and its runnings
2. easy to set up - there is usually much less legal documents to submit
   
3. owner keeps all the profits (less taxes)
4. there is no need to publish a set of annual accounts (you do with registered businesses)
   

Disadvantages:

1. have to compete with larger firms - these firms may have lower costs (called economies of scale- more on that later)
   
2. banks may be reluctant to loan money
3. difficult to take a holiday - as the business often can't function without the owner
   
4. unlimited liability - read above
   

Let's take a look at some examples:

1. convenience store
   
2. hairdresser
3. tourism
4. electrician
5. plumber

All these are usually in the form of sole trader businesses, however they can be other types of businesses as well.