Organizations in the UK economy can be classified according to their choice of legal structure, the sector in which they operate, and their business objectives.
Two key concepts associated with private sector firms are profit and limited liability. The fact that an organization is in the private sector normally means it will seek to make at least an acceptable level of profits for its owner(s). The owners are entrepreneurs with a profit motive, profit being the reward for the risk of being in business. Other reasons that people set up private sector firms include:
· the desire for job satisfaction;
· personal goals and reasons;
· the wish for a satisfactory level of income;
· a desire to work.
Limited liability is associated with limited companies: business organizations which must include “limited” (Ltd) or “PLC” in their names. Limited liability brings benefits not only to the owners of the company but also to the economy: it encourages people to set up in business because they realize that there are limits to the amount they can lose if their business venture fails to succeed.
The main forms of private sector business ownership are sole traders, partnerships and limited liability companies. Their business objectives include survival, making a profit and increasing market share. Sole traders and partnerships are two forms of unincorporated business. Unlike limited companies they do not have a separate legal existence from their owners. A sole trader business is the easiest and least expensive to establish, and is found where large-scale production is not required. Local service firms such as hairdressing and plumbing are therefore often sole traders. Benefits include independence as well as the ease of setting up, but drawbacks include long working hours, limited specialist knowledge and unlimited liability. Partnerships are associated with professions such as dentists and accountants, and have similar advantages and disadvantages to sole traders. Compared with them, partnerships tend to be larger with access to more capital (there are at least two owners), although difficulties arise if one of the partners dies or decides to leave.
There are two categories of limited company, both receiving the benefits of incorporation and limited liability. The private limited company cannot advertise its shares for sale to the public or through the Stock Exchange: the owners can keep the affairs of the company more private, and are protected from hostile takeover bids. A public limited company (PLC) gains the financial benefit of approaching the public to invest, and its large size often leads to economies of scale. Setting up a PLC, however, is expensive and its large size works against it when diseconomies of scale are found.
Important recent developments in the UK economy include the growth in franchising as a form of business ownership.
The franchisor company allows the franchisee to sell its product or service, and supplies equipment and advice. The franchisor can therefore expand without the need for major capital investment.
In return for this, the franchisee invests the capital and pays royalties to the franchisor out of profits made, and receives a well-known or well-supported product or service.
The public sector provides goods and services typically through either public corporations or local authorities. The profit motive is not so important, although the organizations may have to meet certain financial targets. Privatization has been an important trend here: public corporations have been sold to the private sector in an attempt to bring about the benefits associated with greater competition. The government has received the revenue from privatization. In many cases, however, a privatized monopoly has been created from the public sector monopoly, and increased competition has not always resulted.