Policies and Resources

The Theory and Practice of Business and Finance

In business there are various types of organisations categorised by various types of ownership.

• Private sector.
• Public sector.
• Third sector.

Private Sector

Private sector organisations are owned by individuals. These businesses are powered by profit. The profit from private sector organisations benefits the owners, shareholders, and investors. The private sector has various types of business ownership. They can be incorporated or unincorporated. The most common are:

Unincorporated legal forms:

The distinguishing feature of unincorporated forms is that they have no separate legal personality. There are three main forms:

Sole Trader

A sole trader, or sole proprietorship refers to a business structure whereby one individual run and owns the entire business.

The sole trader model can be applied by a wide variety of businesses and is popular option for business owners providing solutions to individuals or other businesses. This includes freelance writers, consultants, graphic designers, plumbers, financial planners, landscapers, and fitness instructors.

As a sole trader, you are responsible for all aspects of your business, and are personally responsible for the finances of your business. Do note that the term refers to the structure of the business, rather than the number of personnel. While a sole trader is self-employed, they can choose to operate with other people by hiring personnel.

Unincorporated Association

Unincorporated associations are groups that agree, or ‘contract’, to come together for a specific purpose. They normally have a constitution containing the purpose for which the association has been set up, and the rules for the association and its members. They are typically governed by a management committee. All members of the management committee will again have infinite personal responsibility, except they are specifically indemnified in the constitution.

Partnerships

A partnership is a relatively simple way for two or more legal persons to set up and run a business together with a view to profit. A partnership can arise, with no formal agreement, when people carry on a business in common, but typically there is agreement to trade as a partnership. Partners will typically draw up a legally binding partnership agreement, containing such matters as the amount of capital contributed by each partner and the way in which they will share the profits (and non-profits) of the business.

A partnership has no legal existence distinct from the partners themselves. Partners share the risks, prices, and responsibilities. Because partners generally bear the consequences of each other’s decisions, partners typically manage the business themselves, though they can hire personnel.

Limited Partnerships

A limited partnership is made up of a mixture of ordinary partners and limited partners. Limited partnerships are normally registered. Changes to the partnership should also be registered. A limited partner’s responsibility is limited to the amount of money they have invested in the business and to any personal guarantees they have given to raise finance.

Trust

A trust is a business structure that has no owner or owners in the traditional sense. Trusts are unincorporated and have no legal identity of their own. The trust imposes an obligation on the trustee – a person or a firm – to hold and operate the business assets for the benefit of others, the beneficiaries.

A trust is complex and can be expensive to set up and operate, having higher ongoing compliance and accounting fees. The trustee should perform formal yearly administrative responsibilities.

The trustee is legal responsible for the operation of the trust; however, the trustee is typically a firm (a corporate trustee), which can lower responsibility.

Incorporated legal forms:

Limited Company

A limited company is an artificially created legal person. It is an entity that is legally separate from all other persons, including those who own and manage it. It is quite possible for a limited company to take legal action in opposition to any other legal persons, including those who own and manage it. Actions between limited companies and their owners or managers do occur from time to time.

Obviously, an artificial person can only function through the intervention of human beings. Those who ultimately regulate the company are the owners who each hold one or more shares in the ownership or equity of it.  

Limited Liability Partnership

A limited liability partnership is a corporate body with a separate legal personality like a company. Unlike in a normal partnership, the members of an LLP enjoy limited responsibility as the name suggests – responsibility is limited to the amount of money they have invested in the business and to any personal guarantees they have given to raise finance. Each member takes an equal share of the profits, except the members’ agreement specifies otherwise.

Public Sector

Public sector organisations are owned by the government. They provide goods and support for the benefit of the community. They are run by the government. They operate with money raised from tariffs.

Third Sector

Third sector organisations are owned and run voluntarily by trustees. These organisations are run by the need to support the community. They operate with money from donations and gifts. Any profits are reinvested in the organisation. Third sector organisations can be run as a social enterprise. The most common are:

Charity

A charity is an organisation set up for a specific cause. Charities receive grants from many fund-raising organisations. Money is also raised for them by promotions in charity shops and through public donation. All money goes to support the specific cause and to running of the charity.

Community groups

Community groups exist to provide support for people. They are non-profit making, and all the profit goes into the organisation to ensure it can keep running.

Social enterprise

A social enterprise is an organisation that exists with a clear goal to assist the community but runs the organisation like a business. All profits are reinvested into the organisation.

Businesses are, in effect, investment agencies or intermediaries. This is to say that their role is to raise money from members of the public, and from other investors, and to invest it. Businesses typically invest in real assets such as land, buildings, plant, and inventories, though they also invest in financial assets, including making offers to, and purchasing shares in, other businesses. People are employed to manage the investments, that is, to do all those things necessary to create and vend the products and facilities in the provision of which the business is engaged. Surpluses remaining after fulfilling the rates of operating the business -wages, raw material rates, and so forth – accrue to the investors.

Of vital importance to the business is the decisions regarding the types and quantity of finance to raise, and the choice of investments to be made. Business finance is the study of how these financing and investment decisions should be made in theory and how they are made in practice.

Business finance is a relatively new subject. Until the 1960s it consisted mostly of narrative accounts of decisions that had been made and how, if identifiable, those decisions had been reached. More recently, theories of business finance have emerged and been tested so that the subject now has a firmly based theoretical structure – a structure that stands up well to testing with real-life events. In other words, the accepted theories that attempt to explain and predict actual results in business finance broadly succeed in their aim.

Business finance draws from many disciplines. Financing and investment decision making relates firmly to certain aspects of economics, accounting, law, quantitative methods, and the behavioural sciences. Even though business finance draws what it finds most valuable from other disciplines, it is however a subject in its own right. Business finance is vital to the business.  

Decisions on financing and investment go right to the heart of the business and its success. This is because:

• Such decisions often involve financial amounts that are incredibly significant to the business concerned,
• Once made, such decisions are complicated to reverse, so the business is typically dedicated in the long term to a particular type of finance or to a particular investment.

Although modern business finance practice relies heavily on sound theory, we should be noticeably clear that business finance is an intensely practical subject, which is concerned with real-world decision making.