Types of Business Ownerships (with examples)
- titatuchinda
- Jan 15, 2021
- 7 min read
Melanie aspires to start a business after graduating from college. She will either plunge herself into this journey alone or recruit another person. As her business develops, Melanie may choose to publicize or continue privatizing her company. Let’s imagine that she selects the former option with the desire to grow her organization even further. In order to achieve this goal, Melanie turns her company into multinational corporations and franchises. Despite her achievements, she remains unsatisfied. It turns out that prosperity is not her main goal after all. Melanie then decides to explore a career in the not-for-profit sector. She quickly falls in love with the work and never look back. Melanie’s story demonstrates the many definitions of business "success”, which depends on how you define the word in the quotation mark. In this blog post, I will introduce you to the many types of business ownership and provide some real-life examples of entrepreneurs as well as companies.
Let us address the initial challenge that Melanie encounters. In fact, many aspiring business owners face the same issue. They have trouble determining whether to act on their ideas by themselves or ask for the cooperation of others. If Melanie chooses the former option, then she will become a sole trader. Selecting the latter option will require teamwork. Most people who decide to travel down this route typically start their business with a close accomplice. This relationship is known as a partnership. Both choices contain advantages and drawbacks, which I will explore in the next paragraph.
Starting small can be beneficial for those who lack experience in finance and management. You do not need to invest a huge sum of money to get your enterprise running. Sole traders as well as business partners have easier times than big organizations in terms of registering their organizations. Moreover, individuals and small teams are efficient with their taxes as filing business accounts is not their concern. After the end of each quarter, these groups of people get to keep most of their money as they do not need to distribute their profits to as many employees as larger corporations do.
Unfortunately, there are also some drawbacks to being a sole trader and engaging in business partnerships. If you are the only owner of your business, then you encounter the risk of burn-out. Running the enterprise by yourself will take up a lot of your time and you might not produce huge quantities of your products at one time compared to working with others. If you do choose to work with a partner, then your business might crumble if he or she decides to quit. Regardless of whether you do everything by yourself or cooperate with another person, lack of prestige and unlimited liability may prevent you from advancing your business. Luckily, all hope is not lost as there is a good portion of successful sole traders and business partnerships.
Sir Richard Branson is an example of a prosperous sole trader. He earned a total of 4.8 billion dollars in October of 2020 as a founder of the Virgin Group. Branson, like many self-made billionaires, started small. At the age of 16, his part-time job was selling Student Magazines to passerby. During this period, he earned approximately $8000 from advertising popular albums on these issues. Branson then used this sum of money along with his savings to build his enterprise. Although he could easily register Virgin as a company with the amount of wealth he possessed at that moment, Branson had to sacrifice an immense amount of time and effort to consolidate his presence in the business world. In 1970, he launched Virgin Mail Order Records and assumed ownership of 14 record stores two years later. Branson greatly shaped the music industry by signing controversial artists such as The Rolling Stone and The Sex Pistol. As a result of this massive success, he went on to establish Virgin Books and Virgin Video in 1981. Three years later, Virgin Atlantic — the notable airline — was born. The sole trader then got involved in the technology market by creating Virgin Mobile in 2001. After twenty years, Branson remains an influential person who began his career as a sole trader before expanding his businesses globally and across many industries.
A famous example of a business partnership occurs between Steve Jobs and Steve Wozniak. The two Steves met each other during their teenage years, where they quickly became friends as a result of sharing the same interest. After a while, the two men drifted apart before Jobs reconnected with Wozniak in 1974. They reunited at Silicon Valley, a region in California that is known for its thriving technology industry. While they were catching up with each other, Wozniak talked about his current project. Jobs then became interested in his friend, who was designing the computer logic board, so he decided to form a partnership with Wozniak. In April of 1976, they produced Apple I and gained traction. It is amazing how the birth of a revolutionary company began in Jobs' garage. In a small-scale business relationship, both Jobs and Wozniak did not need to invest a huge sum of money to start their enterprise. In fact, they used the money that was obtained from selling Jobs' Volkswagen minibus and Wozniak's programmable calculator to establish their corporation. However, both entrepreneurs initially encountered difficulties in advertising their technological devices since they lacked prestige. Fortunately, they overcame these obstacles and came out with smartphones that we enjoy today.
As time goes on, both the sole traders and business partners might consider the option of scaling up their operations. If they choose to privatizetheir corporations, then they are more likely to keep all the important details to themselves. Truett Cathy, the private company's founder and longtime CEO, would prefer to only let his employees know the financial information of Chick-Fil-A rather than putting it on the internet. As a result, shareholders could not influence management decisions. The value of Chick-Fil-A will definitely fluctuate over time, which might cause private investors to withdraw their capital. Due to this inevitable occurrence, Cathy may feel obligated to return losses to shareholders. Therefore, he needs to work hard to generate as much profit for Chick-Fil-A as possible to ensure the continuous flow of money from private investors.
Another option is publicizing your business. In contrast to private companies, executives can make the statistics of their companies available to everyone. While conducting my research, I stumbled across the online data that Chevron Corporation provides for the public. The website displays various links to the public company's annual and quarterly reports. In addition, the interactive analyst center contains useful financial information — ranging from balance sheets to income statements — for investors who are interested in Chevron. Shareholders can also participate in the stock markets. They could calculate their profits by checking out the stock data during the periods of 5 days, 1 month, 3 months, 6 months, and 1 year on the Chevron website. Most of the time, the values of public companies are stable. So if the corporation usually thrives, then stockholders feel confident in their decision and purchase shares for their own benefits, which generates cash for the respective company. Top investors would utilize this public information to their advantage and make well-informed decisions on whether to devote their money to the company or not.
Some corporations might wish to expand their influence even further by turning multinational. Nike, a famous company that manufactures sport equipments and accessories, assumes this model. The main goal of multinational corporations is to maximize profits and minimize expenses. To achieve this objective, they outsource and offshore their products. In Nike's case, the company searches for cheap labor by contacting external suppliers in developing countries such as Philippines and China to outsource a good portion of their jobs. Additionally, Nike offshores its shoe industries to those respective countries. Offshoring and outsourcing parts of their production process not only benefit the financial aspect of multinational corporations, but these procedures also expose the products to potential customers who are unaware of them. In fact, Nike uses these methods to stay competitive against other companies that sell similar products such as Reebok and Adidas.
Other corporations choose to adapt their products to fit the tastes of the wider audience to gain recognition and customer’s loyalty. More exposures internationally will lead to better sales and higher revenues after all. McDonald — a renowned fast food chain — allows third parties to pay for the right to establish their brands across many locations. As of 2019, there are approximately 38,000 McDonalds and 93% of them exist as franchises. This global expansion greatly benefit McDonald. In terms of sales, franchising create predictable as well as stable revenue streams as it ensures customer loyalty due to the consistency of products and services. The corporation also profit off franchisees. After gaining the right to use the brand in their desired locations, franchisees encounter long-term leases as McDonald has control over the establishments. They are also responsible for distributing salaries to their employees, ordering supplies to cook, and paying rents to the landlords. In addition to lowering the operating costs for the company, McDonald gets to keep 82% of the revenues that franchisees generate. Although this business relationship favors the corporation significantly, franchisees still earn substantial amount of money from customers who love the brand. In the end, both parties benefit.
The final option becomes available when companies abandon the goal of making as much money as possible. A non-profit such as the Bill & Melinda Gates Foundation does not focus on pleasing shareholders through financial rewards.The Gates couple builds this organization so they could work for the common goods and guide those who are truly desperate for their help. With its status as a private foundation, Bill and Melinda devote a portion of their wealth to make grants to other charitable bodies. There are other positions in the organization such as the chairmen, boards of directors, and volunteers. These people understand that monetary compensations is not the foundation's priority; regardless, they accept this condition and work hard to fulfil the needs of their customers. In fact, the Development Policy and Finance Team collaborates with the government of developing countries to eradicate poverty through providing funds to bring ideas and innovations to fruition. Bill & Melinda Gates Foundation also support other non-governmental organizations by granting them with multilateral financing instruments.
I hope that this article has provided some helpful introduction to the main features of each business format that you could consider starting. Lastly, I would like to give credits to the following sources that I used to write this article. Please refer to them if you need more information on sole traders, partnerships, private companies, public companies, multinational corporations, franchises, or non-profits:
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