1.

2 Types of Business Entities

O1: Distinction between the private and the public sectors

AO2

Private Sector: the commercial sector of the economy, mainly owned and run by
private individuals and organizations and NOT by the government.

Public Sector: organizations controlled and run by regional and/or national

governments offering products deemed to be essential and of benefit to its
citizens (including transportation, healthcare services, national defense…)

O2: The main features of the following types of organizations

Sole traders (sole proprietorship)

 It’s a commercial business owned by a single person known as the sole
trader.
 The sole trader can employ as many people as needed but remains the
only owner of the business.
 It’s run as an unincorporated business.
 Unincorporated Business: it’s a business where no legal
separation/distinction exists between the owner and the business
money
 Accordingly, the sole trader has unlimited liability.
 Unlimited Liability/Responsibility: it’s when the owner is
responsible (liable) for any debt of the business which may be paid
from his own personal assets if necessary
 In other words, it means that the owner of a business is personally
liable for and all the business’s debts. This means that the owner
may need to pay for the debts by selling off their personal
belongings and assets.
  They take all the risks of running the business (risk of losses), but receive
all the profits too.
Advantages Disadvantages

 Sole trader is quick to create  Sole trader bears all the risks
 Owner has complete control and has unlimited liability
and is free to take decisions  Finance is limited (external
alone finance is difficult, but still
 Owner enjoys privacy as the possible) since the firm
business does not need to represents high risk so main
publish its financial accounts to source is provided by the owner
the public  Added workload and stress from
 Decision making is quick having to run the business and
take all the decisions alone
 Can be a lack of continuity if
something bad happens to the
owner
 Cannot benefit from economies
of scale, making it hard to gain
cost advantages, hence they
charge higher prices.

Partnerships
 It’s a commercial business owned by 2 or more people (depending on the
country’s laws on partnerships) called partners.
 As an unincorporated business partners have unlimited liability, in general.
 To prevent conflicts, most partnerships draw up a legal contract between
the partners known as a deed of partnership.
 Deed of Partnership: a document stating partners’ responsibilities,
voting rights, and how profits are to be shared between them.
 Partnerships are usually found in professional services (healthcare clinics,
law firms, dentistry etc…) and in family-run businesses
 There are 3 common types of partnerships:
  General partnership: all partners (2 or more) are general partners,
having unlimited liability, who share management responsibilities,
profits and losses.
 Limited partnership: at least 1 general partner (unlimited liability)
and other partners have limited liability who contribute capital but
have limited liability; profits and losses are shared according to the
deed of partnerships with limited partners receiving a share based
on their investment.
 Limited Liability partnership: all partners have limited liability,
which implies that each is only liabile for their actions and not the
ones of other partners, and profits and losses are shared according
to the deed of partnership. It’s not recognized in all states.
▪ But who will manage the business? Either all partners will
share management responsibilities with the added benefit of
limited liability, or more commonly, there will be designated
partners who take on the management role while still having
limited liability. They can be chosen based on experience,
expertise, or a pre-determined agreement and they are
responsible for the day-to-day operations and overseeing the
business operations.
▪ It’s similar to general partnership, except that all partners are
limited so have protection from the wrongful acts of the other
partners, such as misbehavior and other unprofessional
conduct or debt obligations.
 Partners can be either:
 General partners (active partners): they are actively involved in
the management of the business on a day-to-day level, make
decisions, and provide capital. They have unlimited liability.
 Limited partners (also called silent/dormant partners): they
provide capital to a business entity with an expectation of profit, but
they are not directly involved in the day-to-day management of the
business, and they have limited liability. Limited partners interests
 are typically illiquid (difficult to sell or there may not be a readily
available market for them), and they don’t have voting rights; so,
they are just passive investors who invest in the partnership.
Advantages Disadvantages

 Partners can raise more finance  There might be disagreements

than sole traders (still external and conflicts between them
sources of finance are difficult)  Profits must be shared
 Can have more ideas and between all partners
expertise, along with shared  The death or departure of a
workloads and responsibilities partner can cause the
 Business affairs are kept organization to cease until a
confidential new partnership agreement is
legally created
 In most cases, partners have
unlimited liability

Transition = after checking sole traders and partnerships, let’s check another
category of businesses called corporations.

Corporations = Limited Liability Companies (NOT Partnerships)

 Corporations are commercial businesses with limited liability for their
owners who are called shareholders. Thus, any profits are either
reinvested back in the business and/or shared among the shareholders.
 They are incorporated businesses.
 Incorporated businesses: there is a legal separation between the
owners of a company and the business, making of the business an
independent entity. Accordingly, shareholders enjoy the benefit of
having limited liability, while having voting rights to participate in key
decisions (in general).
 Limited liability protects shareholders as in the event of the company going
bankrupt, they cannot lose more than the amount they invested; from there
came their name as limited liability companies.
  Typically, to set up a limited liability company, the owners must
submit 2 important documents:
 The Memorandum of Association: a relatively short document that
records the company’s name, its address, amount of share capital
and an outline of the company’s operations (what it does).
 The Articles of Association: a long document that includes:
▪ Details and duties of the directors of the company.
▪ Shareholders’ voting rights.
▪ The transferability of shares.
▪ Details and procedures of the Annual General Assembly
▪ How profits are to be distributed (dividend policy)
▪ Procedures for winding up (closing) the company
 Once the authorities are satisfied with the paperwork, a Certificate of
Incorporation is issued to begin trading as a legal entity.
 Corporate Governance: The shareholders elect a Board of Directors
(BOD), headed by a chairman, to take charge of the strategic direction of
the company on behalf of its owners, who then elect the President/CEO
and executive team comprised of the heads who will be actually running
the business under their supervision.

Transition = There are 2 types of limited liability companies or corporations:

privately held companies and publicly held companies.
Privately held companies (private limited companies)
 They are usually smaller than publicly held companies.
 Shares can only be transferred (bought or sold) privately, which implies
that all shareholders must agree on the sale/transfer (not via market).
 Shareholders in private limited companies often have more direct
involvement in the day-to-day operations of the business compared to
shareholders in public limited companies.
 Typically, shares are owned by family members, relatives, and close
friends.
 The shares cannot be advertised for sale nor be sold via a stock
exchange/market.
 Stock exchange/market: it’s a place for buying and selling shares
in publicly held companies. It is where IPO of new companies and
subsequent share issues of existing companies occur and are
oversaw. It is also the marketplace for buying and selling
secondhand shares.
 Examples include Mars, IKEA, and Men’s Club (Egyptian Clothing
company).
Advantages Disadvantages

 Control of the company cannot  Shares cannot be sold to the

be lost as shares cannot be public, limiting finance
bought without the agreement of compared to a publicly held
existing shareholders company
 More privacy than publicly held  Shareholders may find it difficult
companies to cash out their investment
 There is continuity in the event  Potential for founder
of the departure or death of one dependence: many are founded
of the shareholders and controlled by a single/small
 Owners have limited liability so group of people; if these leave
can only lose up to the sum of the company, it can create
their investment uncertainty and instability
Publicly held companies (public limited companies)
 Shares in a publicly held company can be bought by and sold to any
member of the public.
 Shareholders in publicly held companies typically exercise their influence
through voting rights on major decisions during annual assemblies, such
as electing board members, approving significant corporate actions... They
generally do not engage in day-to-day management decisions.
 IPO: The first-time shares of a publicly held company are sold via a stock
exchange is called the initial public offering (IPO)
 There is no legal maximum number of shareholders
 Share capital: it refers to the total amount of money a company receives
from the sale of shares (total amount raised from selling shares).
 Publicly held companies tend to be the largest type of business entities.
 They are strictly regulated and are required by law to publish their
complete financial accounts on a yearly basis to public.
 Members’ voting rights depend on the number of shares (representing
ownership) they hold in the company.
 Examples include Apple, Toyota, Samsung, P&G, Unilever, AstraZeneca,
Henkel and CIB.
Advantages Disadvantages

 It’s relatively easy to obtain  The financial information is

finance for growth and evolution required to be published to
by selling additional shares. public, which limits their privacy
 It is easier for large publicly held and gives competitors access to
companies to secure external their financial information
sources of finance from banks  They are the most
and other investors or lenders. administratively difficult, time
 Can enjoy economies of scale, consuming, and expensive type
market dominance, and market of commercial business to set
power up
 Owners (shareholders) enjoy  There is the potential threat of a
 limited liability hostile takeover by a rival
 There is continuity even if one company
of the principal shareholders  There is the possibility of the
leaves or passes away firm becoming too large to
manage efficiently, and thus
suffering from diseconomies of
scale (higher average costs of
production, i.e. per unit)

O3: The main features of the following types of for-profit

social enterprises.

Social Enterprise: a social enterprise typically refers to a business whose

primary goal is to create positive social change, prioritizing this over profit
maximization (not eliminating it because it’s the engine that keeps the business
running at the end).

Transition = Some social enterprises are run for profit, while others are run as
non-profit organizations.

For-profit Social Enterprises: they are businesses that aim to achieve a social
or environmental mission while generating profit. They seek to address societal
challenges by providing goods or services that tackle these
environmental/societal challenges.
 The profit generated is reinvested into the business to further achieve its
social objectives, distributed to shareholders as dividends, or both.

For-profit Social Enterprises Features:

 Revenue Generation: Primarily relies on sales of products or services for
revenue.
 Profit Distribution: Profits can be distributed to owners or shareholders,
in addition to being reinvested into the business.
  Mission-Driven: The core mission is to address social, environmental, or
community issues, but financial sustainability and profitability are also
critical to achieve their core mission.
 Scalability: Often aims for growth and scalability to increase their social
impact and profitability.
 Ownership Structure: Typically has private ownership or shareholders
who may influence business decisions based on financial returns.

Transition = We will now study 3 types of for-profit social enterprises.

Private sector companies

 They consist of social enterprises operating in the private sector such as
sole traders, partnerships, and limited liability companies (privately held
ones = not state-owned).
 While they still have in mind to achieve profitability and success
commercially, their main driver and purpose of existence remains centered
around their social cause.
 They can operate in the form of any commercial activity, including cafés,
cleaning services, health care providers, recycling projects, restaurants,
waste-management companies and many others…
 One example is: Change Please.
 The company sells coffee in multiple countries and strives for a
world without homelessness by recruiting and training homeless
people to become baristas at its coffee outlets, offering them full-
time employment, accommodation, and support with mental health.
 Another example is: Tesla, Inc.
 Tesla designs, manufactures, and sells electric vehicles (Evs) and
renewable energy products (including energy storage solutions and
solar products).
 Their mission statement is: “To accelerate the world’s transition to
sustainable energy.”
Public sector companies
 Public sector companies are owned and run by the government. If in a
corporation context, then all shares would be owned by the government
(government-owned corporation or limited liability company).
 Being in the public sector, these organizations are more likely to have
social objectives, providing essential goods and services to the country.
 Some companies may be jointly owned by the private and public sector,
such as with public-private partnerships.
 Public Private Partnerships (PPP): it’s an organization jointly
established/owned by the government and at least 1 private sector
company.
 It can be organized in the form of a partnership, a limited liability
company, or a special purpose vehicle (separate legal entity
established specifically to undertake the project).
 The government usually owns the bigger stake.
 For example, the Honk Kong government owns 51% of the stake in
Honk Kong Disneyland, while The Walt Disney Company owns the
other 49% stake.
 A PPP is run as a public sector company, since the government is
the major shareholder
 In the PPP, the government (public sector) benefits from the private
sector expertise and investment, which is often needed to provide
the necessary resources and expertise to get the joint project
completed, such as constructing an airport or highway (Orascom in
Egypt). On the other hand, the private sector company benefit from
the revenues generated from the project, such as toll stations and
highways, fees from the government, and/or charges for
maintenance. Still, based on the contract, the government may be
subject to a % of these revenues.
 PPPs have been used for a wide range of projects that benefit local
communities and societies, such as schools, hospitals and health
 care services, public transportation, parks, and convention centers
(for meetings/expositions).
 Once a PPP project is built or completed, it is usually maintained by
the private sector company on a medium to long-term basis (typically
up to 30 years), after which time there is the option to renew the
partnership, or the asset returns to public ownership.
 According to the World Bank, more than half the countries around
the world now operate public-private companies

Tip – Ownership in Corporations compared to Partnerships:

 In a corporation, the ownership is expressed in terms of shares; yet, the
stakes aren’t just limited to shares (or ownership), but also includes voting
rights and influence which all together fall under “membership interest”.
 In a partnership, the owner does not own shares but have a “partnership
interest” which represents their stakes in the company including their
ownership percentage of the company and responsibilities.
 HENCE: Stakes includes ownership and other interests in the company,
while shares only refers to ownerships in corporations.

Tip – Corporation doesn’t necessarily mean a large organization: although

many of the limited liability companies are considered huge organizations
(corporates), it’s not a rule that any LLC must be a large company in size. Hence,
shareholders can exist in large and even small and medium enterprises,
depending on the legal structure of the company.
Tip – Difference between Publicly Held Company and Public Sector
Company:
 The Publicly Held Company is owned by shareholders and operates in the
Private Sector
 The Public Sector Company is wholly (100%) or owned in majority (51%+)
by the Government (State).
 TAKE CARE: If an entity owns less than 51%, then it is considered a
minority shareholder but if it controls 51% or more, then it has majority
stake.

Cooperatives
 They are for-profit social enterprises owned and run by and for their
members, such as employees, managers, and customers.
 Owners have limited liability, so are typically only liable for the debts of the
company up to the amount of their investment (their share of ownership).
This means that if the company incurs debts or liabilities that exceed its
assets, creditors generally cannot go after the personal assets of members
to settle those debts.
 Profits are shared among the members.
 All members (shareholders) are expected to help run the business, which
promotes a democratic style of management.
 Each shareholder has the same voting rights (1 vote), regardless of the
number of shares they own in the cooperative.
 They operate in the private sector.
 Cooperatives generate profit through their business activities, which can
include selling goods or services to members or external customers.
 For example, a consumer cooperative might sell groceries to its
members or the public.
 How is profit distributed among Members?
 Any net margins generated after covering expenses like operating
costs, salaries, and reserves is considered profit.
 Profit distribution in cooperatives follows the principle of
patronage: profits are distributed among members based on their
transactions with the cooperative (e.g., purchases). This ensures
that the benefits of the cooperative’s success are shared among
those who support it economically.
Advantages Disadvantages

 Straightforward and inexpensive  Employees and managers may

 All members are equally not be highly motivated due to
important and have equal voting the absence of financial rewards
rights and benefits (there are salaries
 Members have limited liability but not as high as in commercial
 Members own and control the business)
business rather than being  As cooperatives are managed
 governed by external investors by their members (employees,
 Governments often provide managers…), some may not
financial assistance to help have any managerial skills so
cooperatives inefficiencies can hinder the
success of the business
 Although some members have
some more responsibilities, they
still only get the same voting
right, which may be deemed as
unfair
 There are limited resources as
the financial strength of co-
operatives depends on the
capital contributed by their
members

Tip – About the Distribution of Profits among members of a Cooperative:

 Profit is only distributed among its members, even if according to the
patronage principle, external members contribute more economically to the
cooperative.
 Thus, profit is only shared among shareholders and not the public, even if
they purchased a lot more from the cooperative

Transition = after covering the for-profit social enterprises, let’s cover the other
category of social enterprises which is the non-profit social enterprises.

O4: The main features of the following type of non-profit

social enterprise.

Non-profit Social Enterprise: they are organizations that operate with the
primary goal of achieving a social or environmental mission.
 In that context, profit is called surplus since their goal is to conduct
commercial activities that would just allow them to cover their expenses;
 beyond their expenses, the leftover (surplus, and not profit) is reinvested
back into the entity and/or used in activities that would allow them to
pursue their social/environmental objectives.
 Hence, they are the only businesses who do not operate with profit in
mind, but they mainly focus on covering their expenses to keep serving
their cause.

Transition = the type of non-profit social enterprise we’ll study is NGOs.

Non-governmental organizations (NGOs)

 An NGO is a type of non-profit social enterprise that is neither part of a
government nor a for-profit business but is instead run by paid staff and
many volunteers.
 They are generally funded by governments, international organizations,
charities, commercial businesses, or private individuals and may even earn
income from conducting simple (in general) economic activities such as the
sale of handmade goods.
 NGOs can operate at a local, regional, national or international level, but
are not affiliated with any government.
 Most NGOs are run to promote and support a social cause, such as
human rights, animal rights, environmental protection etc.
 They exert pressure and influence on governments to support their cause.
 Examples include the UNICEF, WWF, the UN’s World Food Program
(WFP), and Doctors Without Borders (Médecins Sans Frontières) which
provides medical humanitarian aid in conflict zones and areas affected by
epidemics, natural disasters and other crises.

Advantages of Non-Profit Social Disadvantages of Non-Profit Social

Enterprises (including NGOs) Enterprises (including NGOs)

 They are exempted from paying  Earning of workers are often

 taxes lower, as it would be regarded
 They qualify for government as unethical if they were paid
grants and subsidies like those in for-profit
companies
 They are highly dependent on
donations and external support
to survive, which is not
sustainable compared to other
sources

Tip – the UN is not an NGO!

 The UN is an international organization established by governments
through a treaty (the UN Charter) and operates as an intergovernmental
organization, rather than a non-governmental one, serving as a platform
for countries to collaboratively make decisions on global issues.