Exploring Business Organizations: Ownership, Objectives, and Scale

This document provides a comprehensive overview of business organizations, exploring their classification based on ownership (private and public sectors), objectives (for-profit and not-for-profit), and scale (small, medium, and large). It delves into the characteristics of sole proprietorships and partnerships, highlighting their advantages and disadvantages, including liability, decision-making, and capital-raising challenges. The document also touches upon the registration process for sole proprietorships and partnerships, emphasizing the importance of understanding the legal and operational aspects of different business structures. This analysis equips readers with a solid understanding of the diverse landscape of business organizations and their operational dynamics.

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The following facts are discussed in this chapter.
3.1 Basic information on the types of business organizations
Classification of business organizations
Types of business organizations and their characteristics
3.2 Selecting an appropriate business organization
According to the objectives
According to the scale
According to the management procedures
3.3 Registration of a Sole Proprietorship
Steps to be followed for registration
Documents needed for registration
Advantages of registering the business name

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The figure 3.1 depicts different ways of classifying business organizations under
above two sectors based on ownership.
Businesses under the
Central Government,
Provincial Councils
and Local Government
Institutions.
Example :-
Departments
State Corporations
State Companies
Private Sector Public Sector
Partnerships
Sole Proprietorships
Incorporated Companies
Co-operative Societies
Other Associations
Business Organizations
Figure 3.1 Classification of business organizations based on the ownership
Private sector business organizations
Businesses owned by an individual or a group of individuals are known as private
sector businesses. Private sector businesses can be further classified as sole
proprietorship, partnerships, incorporated companies, cooperative societies and other
associations.
Public sector business organizations
Businesses funded and owned by the government are public sector business
organizations. State departments, state corporations, state companies, businesses
registered and owned under Provincial Councils and Local Government Institutions
are the different types of business organizations in the public sector.
3.1 Basic information on the types of business organizations
When the population of a country is increasing, the process of manufacturing and
distributing goods and services has expanded. Therefore, different types of business
organizations are established in order to fulfill the needs and wants of people. A
business organization consists of an individual or a group of individuals working
together to produce goods and services required to fulfill human needs and wants.
Different parties provide funds to businesses. The owners of a business are the
individuals or groups who provide funds and assume the risk by involving in
business. Based on the ownership, businesses are categorized into several categories.
In addition, businesses are conducted to achieve different objectives of the
businessmen. Accordingly, some businesses are carried out to earn profits whereas
others are carried out for the well-being of the society.
Further, a businessman can start either a small scale business or a large scale business
depending on the amount of resources that he has. Out of different types of business
organizations, businessmen should be clever enough to choose an appropriate type.
Classification of business organizations
Businesses are organized in different ways. These different types of business
organizations can be classified as follows depending on various criteria.
Y Based on the ownership
Y Based on the objective
Y Based on the scale
Classification of business organizations based on the ownership
The owners are the individuals who provide funds for the business and assume
risks by involving in it. The owners enjoy the profits earned by the business and
bear the losses of the business as well. Accordingly, business organizations can be
categorized as follows based on their ownership.
Y Private sector business organizations
Y Public sector business organizations

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Classification of business organizations based on the scale
The scale of a business organization depends on different criteria. Some of the
criteria used as follows.
Y Amount of capital invested in a business
Y Number of employees
Y Amount of the energy used
Y Market share of the business
Based on the scale, business organizations can be categorized into two parts.
Y Small and medium scale businesses
Y Large scale businesses
Business Organizations
Small and
medium scale
businesses
Large scale
businesses
Figure 3.3 Classification of business organizations based on scale
Small and medium scale businesses
Different institutions have identified
differen criteria in classifying small
and medium scale businesses.
Accordingly, businesses with a
small amount of capital invested,
with a small number of employees
and having a small market share
relative to large scale businesses are
known as small and medium scale
businesses.
Example :-
Businesses employing less than 25 employees according to the
Census and Statistics Department are considered as small scale
businesses.
Figure 3.4
Classification of business organizations based on the objectives
Different organizations are established to achieve different objectives. Businesses
are also conducted by its owners to achieve an objective. Businesses can be classified
as follows based on its objective.
Y For profit businesses
Y Not for profit businesses
The below Figure 3.2 depicts the classification of business organizations based on
the objective.
For profit businesses Not for profit businesses
Partnership
Sole Proprietorship
Incorporated companies
Co-operative Societies
Other Associations Departments
State Companies State Corporations
Business Organizations
Private PrivatePublic Public
Figure 3.2 Classification of business organizations based on the objective
For profit businesses
When the main objective of the business is to earn profits, they are known as profit
oriented businesses. This type of businesses are operated under both private sector
and public sector.
Not for profit businesses
The main objective of these businesses is to ensure welfare of members and the
society. Not for profit businesses are also conducted both under private sector and
public sector.

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Large scale businesses
Businesses that have invested a large
amount of capital, have employed
a large number of employees, have
a large market share and have the
ability to influence the respective
industry are known as large scale
businesses.
Example :-
A factory employing a large number of workers
Next, the above mentioned business organisations will be discussed in detail.
Sole proprietorship
Businesses owned by an individual
are known as sole proprietorship.
This is the most common type of
business organization in almost all
the countries in the world. This type
of business organization is common
because it is easy to commence,
requires only a small amount of capital
and can take independent decisions.
The success of this business depends
on the skills and dedication of its
owner.
Characteristics of sole proprietorship
The following characteristics can be seen in sole proprietorship.
Y Capital is provided by a single person who is the owner
The owner is required to find the necessary capital for the business
individually. Savings or borrowed funds by the owner can be invested as the
capital to the business.
Figure 3.5
Figure 3.6 - A small retail shop
Y Profits or losses to be born alone
All the profits earned by a sole proprietorship belong to the owner. Also,
if there is a loss, the owner should bear it alone.
Y Unlimited liability of the owner
In a sole proprietorship, the owners' liability is unlimited. Accordingly,
the liability is not limited only for the capital that had been invested.
In order to settle liabilities of the business, the owner might require to
use his properties external to the business and there is no limit for such
commitment.
Y No legal personality
A sole proprietorship cannot conduct any legal operations by its business name.
It can do so only by the personal name of the owner. For example, entering
in to contracts, purchase of vehicles, obtaining bank loan, filing cases
should be done in the personal name of the owner.
Y No continued existence
Due to such reasons as the death of the owner, being mentally unsound to
conduct the business etc. the business operations of a sole proprietorship
will be discontinued.
Y Not mandatory to register
In general, it is not mandatory to register a sole proprietorship.
In addition to the above mentioned characteristics, there are some other
characteristics of a sole proprietorship such as the ability to take decisions alone,
controlling is done by the owner and owner has the opportunity to discontinue the
business at any time he requires.
Advantages of sole proprietorship businesses
Sole proprietorship have following main advantages compared to other types of
business organizations.
Y Convenient to start
Since the legal requirements are minimal and the cost of establishing is low
compared to other business organizations, it is easy to commence a sole
proprietorship.

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Partnerships
The relationship among individuals conducting a business in common with an
objective to earn a profit is known as a partnership. The Partnership Ordinance of
1890 affects partnerships. Professions such as accountants, lawyers, tax officers
and doctors may also conduct their practice as a partnership.
Example:
A set of chartered accountants carrying out an audit firm.
Characteristics of partnerships
The following special characteristics can be seen in partnerships compared to other
business organisations.
Y Number of members in a partnership
There should be 2 members minimum and according to the Companies
Act No. 07 of 2007, a maximum of 20 members to commence a
partnership.
Y Partnership Agreement
A partnership commences with an agreement among its partners, which
is known as the partnership agreement.This agreement can be in written,
orally or implied. According to the Prevention of Fraud Ordinance if the
initial capital of the partnership is greater than Rs. 1000, a partnership
is required to be conducted under a written agreement. This written
agreement is known as partnership deed.
Figure 3.7
Y All the profits belong to the owner
All the profits earned by a sole proprietorship is enjoyed solely by the owner.
Y Privacy of the business information is secured
Since all the management and administrative activities of a sole proprietorship
are usually done by its owner, it is less likely that the business information
be transmitted to external parties.
Y Ability to use own skills at the best
Since all benefits accrue to himself, the owner renders his skills and
dedication at his best to achieve the growth of the business.
Y Independent decision making
The owner can take decisions quickly, since all the decisions regarding the
business are taken by its owner himself.
Disadvantages of sole proprietorship
Sole proprietorships have following main disadvantages compared to other business
organizations.
Y Unlimited liability of the owner
The owner is personally liable for all the debts of the business. If the level
of debt is higher than the value of all the assets of the business, the owner
must sacrifice even his private properties to pay off debts.
Y Difficulties in raising capital
The financial strength of an individual is limited. In addition, it is difficult to
raise capital from external parties such as banks, due to the higher level of risk
involved in sole proprietorships and due to the unlimited liability of its owner.
Y No continuous existence
The business operations of a sole proprietorship could be discontinued due
to the death of its owner or owner being mentally incapable.
Y No legal personality
A sole proprietorship does not have a legal personality. Therefore, all the
legal activities of the business have to be conducted under the personal
name of its owner.
Y Individual decisions of the owner can be unsuccessful
There is a possibility that the individual decisions taken based only on the
knowledge and experience of an individual can become unsuccessful
compared to collective decisions.

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Y Can take collective decisions
More accurate decisions can be taken in a partnership by considering the
views of all the partners collectively.
Disadvantages of partnership businesses
Y Unlimited liability
Partners in a partnership are also unlimitedly liable regarding the debts of the
business. Therefore, when the debts of the business are more than the
capital partners have provided, they are liable to sacrifice their personal
properties to pay off that debt.
Y Profit shared among partners
Even though the owner of a sole proprietorship enjoys all the profits earned,
in a partnership, the profits earned are shared among the partners.
Y Conflicts among partners
Conflicts could arise among the partners of a partnership due to certain
decisions taken when conducting the business. These conflicts will cause a
business to become a failure.
Y No continued existence
A partnership may be dissolved due to the death of a partner or a partner
being mentally instable.
Y No legal personality
Since a partnership is not accepted as a legal person in front of law, the
partners are required to use their own personal names in all legal activities
of the partnership.
Incorporated companies
A firm which is required to be registered under the Companies Act No. 07 of
2007, with a legal personality, can raise capital by issuing shares and the liability
of the shareholders being limited, is an incorporated company. The owners of
these companies are the shareholders. Their liability is limited to the amount they
have paid or liable to pay for the shares they have purchased.
Characteristics of incorporated companies
The following are some major characteristics that are common in incorporated
companies.
Y Unlimited liability of partners
Partners are unlimitedly liable for the debts of a partnership. If the assets of
the business are not sufficient to pay off its debts, partners are liable to
sacrifice their private properties even to pay off debts.
Y Not mandatory to register a partnership
If a partnership is conducted under the full names of all the partners, it is not
required to register. However, if a partnership is conducted under a different
name, the business name should be registered. Registrar of the respective
Provincial Council is the authorized officer to register business names.
Y No separate legal identity
A partnership is not considered as a legal person in front of law. Therefore,
a partnership is unable to perform any legal activities in its business name.
Partners are required to use their personal names in legal matters.
Y No continued existence
The existence of a partnership will be ceased due to the death of a partner or
a partner being mentally unstable.
Advantages of partnership businesses
The partnership have following advantages compared to other business organizations.
Y Convenient to commence
Partnership businesses are also easy to commence like sole proprietorships.
The legal regulations pertaining to the commencement and conduct of
partnerships are comparatively low.
Y Can raise more capital
Since a partnership consists of two or more members, they can raise more
capital compared to a sole proprietorship.
Y Can utilize different skills of partners
As various individuals involve in a partnership, special skills of them can
be utilized.
Y Shared liability among partners
The liabilities arising from operations of a partnership will be shared
among all the partners in the business.

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Y Incorporation under the Companies Act
In order to commence an incorporated company, it is required to be incorporated
under the Companies Act No. 07 of 2007. As per the provisions in the Act,
the duly completed relevant documents should be submitted to the Registrar
of Companies.
Y Continued existence
Since a company is considered as a separate legal entity from its owners,
the death of shareholders or shareholders being bankrupt shall not affect to
the continued existence of its business activities.
Y Ability to register with limited liability
Shareholders have a limited liability with regard to the debt and other liabilities
of a company. The liability of shareholders is limited to the value of the shares
they have purchased. Hence, they are not required to sacrifice their private
properties unlike in sole proprietorships and partnerships.
Y Can raise capital by issuing shares
An incorporated company can raise capital by issuing shares.
Advantages of incorporated companies
The following advantages can be seen in incorporated companies compared to
other business organizations.
Y Can raise more capital
A higher level of capital can be raised by issuing shares. Due to the higher
recognition of the incorporated companies, it is easy to raise funds by
obtaining loans from external parties as well.
Y Receiving legal personality
A company is considered as a legal person in the presence of law. Therefore,
a company can enter into contracts, can appoint agents, can acquire assets
and can pay taxes etc. in its name.
Y Continued existence
The continued existence of a company will not be disrupted by the death of
its shareholders or due to bankruptcy. Therefore, a company can conduct
their operations continuously.
Y Limited liability
The liability of shareholders of an incorporated company are limited to the
amount of capital they have invested in the company.
Y Managed by a Board of Directors
The business activities of a company are managed by a Board of Directors
selected and appointed by the shareholders of a company.
Disadvantages of incorporated companies
The following are some of the disadvantages that can be seen in limited
companies compared to other business organizations.
Y Greater level of legal provisions
Since the legal provisions relevant for starting a company, conducting operations
and winding up of a company are comparatively higher, conducting a
limited company is more complex compared to other forms of business
organizations.
Y Profits and ownership are shared
In the case of an incorporated company that has a large number of
shareholders, the ownership and profits are shared among them.
Cooperative Societies
A cooperative society is a democratically controlled independent organization.
Further, it aims to achieve common needs of a group of individuals voluntarily
gathered and enjoy a collective ownership. A cooperative society can be started
with at least ten members and the capital is mainly provided by the membership
subscriptions. In addition, cooperative societies are required to be registered under
the Cooperative Societies Act No. 05 of 1972.
Examples :-
Sri Lanka Multi Purpose Cooperative Societies
Sri Lanka Coconut Producers' Cooperative Society
Thrift and Credit Cooperative Societies (SANASA)

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Disadvantages of cooperative societies
Y Limited capital
Since the capital is raised only by the membership subscriptions of members,
the amount of capital that can be collected is limited.
Y Should adhere only to the stipulated cooperative policies
This type of business organizations are based on cooperative policies. It is
not possible to change the business operations in order to face competitive
business environment, since it is required to adhere to these policies.
Associations
Associations are organizations with the objective of social well-being. These
associations are established especially in order to achieve well-being of the
members, to accomplish a community service or a charitable activity.
Examples :-
Sports Clubs
Farmer's Associations
State corporations
Businesses fully owned or the majority is owned by the government are known as
state corporations. A state corporation is controlled by a Board of Directors appointed
by the government. These businesses will be commenced under a general or special
act of the Parliament. These are also known as state corporations, commissions,
authorities, boards and bureaus.
Examples :-
1. Sri Lanka Rupavahini Corporation
2. Sri Lanka Ports Authority
3. Coconut Development Authority
4. State Pharmaceuticals Corporation of Sri Lanka
5. Sri Lanka Bureau of Foreign Employment
6. Export Insurance Board
Characteristics of cooperative societies
The following are some unique characteristics of cooperative societies.
Y Democratic control
The democratic control is that the cooperative society will be controlled
by a Board of Directors elected by its members and the decisions are taken
based on the consent of the majority.
Y Voluntary and open membership
Any individual can obtain membership and any member can withdraw
from the membership voluntarily.
Y Collective ownership of members
A cooperative society is owned by its members and all its assets are also
owned by all the members.
Y Common expectations and needs
The main objective of a cooperative society is to achieve the well being
of its members and facilitate development of society.
Advantages of cooperative societies
The following advantages can be seen in cooperative societies compared to other
business organizations.
Y Democratic control
Board of Directors can be elected and decisions will be taken based on the
consent of the majority of members.
Y Acting for the well being of members
Since cooperative societies are established with common goals, it will
carry out its operations emphasizing the social responsibility and equity to all.
Y Government provides various incentives for conducting cooperative
societies
Y Shared economic benefits
Excess profit earned through the business activities of a cooperative society
will be distributed among the members in different forms.

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Disadvantages of state corporations
Y Absence of independence in decision making
Y Need to adhere to financial regulations of the government
Departments
The state departments are institutions that will be directly and fully governed by the
government under a ministry. Departments are operated in order to provide various
services to the general public.
Examples :-
Sri Lanka Railway Department
Sri Lanka Postal Department
Characteristics of state departments
The following characteristics can be seen in state departments compared to other
business organizations.
Y Ownership and control vested with the government
Departments are fully owned by the government and directly governed by the
Parliament and the respective ministry. The management and administration
is done through the Heads of departments.
Y In legal activities, the head of the department should represent the
department using his designation.
Y Continued existence
The existence of a department depends on the discretion of the government.
Y Funded by the government
The required funds will be allocated by the annual budget of the government.
Advantages of state departments
Y The departments provide essential services to the public that will not be
otherwise provided by the private sector.
Characteristics of state corporations
The following characteristics can be seen in state corporations compared to other
business organizations.
Y Government ownership and control
The full or majority of ownership and control is vested with the government.
In some instances, the private sector also hold a minority of shares.
Y Objective of providing services in common
Most of the state corporations are aimed at providing services in common to
the general public.
Y Legal personality
In legal activities, a state corporation has a separate legal identity.
Y Can commence either under a special act or a general existing act
Y Continued existence
Since state corporations are established under an act of Parliament, they have
a continued existence.
Advantages of state corporations
Y Appropriate for the provision of essential services
State corporations are suitable to provide essential services, which may not
be provided by the private sector to the general public.
Y To reduce the monopoly effects of private sector
State corporations can be used to create a competitive environment to reduce
unfavorable influences arising through private sector monopolies.
Example :-
Sri Lanka Transport Board
Y Profits owned by the public
A portion of the profits earned by a state corporation will be credited to the
Consolidated Fund of the government.

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Social welfare objective
There are business organizations that operate to fulfil human needs and wants while
concerning the well-being of the society. These oraganizations have objectives
such as facilitating well-being of the members and providing relief services for the
people facing disasters and unrest. These businesses operate both in the private and
public sectors.
Examples :-
Farmers' Associations, Sports Clubs etc
Cooperative Societies
State departments
Selecting a business organization based on the scale
It is required to consider the scale of a business when selecting a type of business
organization. Determining the scale of a business depends on several factors. The
financial strength, skills and experiences and various relationships of the owner are
some of the major factors. In addition, the quantity of goods and services produced
by the business, market share of the respective product will also be considered
when deciding the scale of the business. Accordingly, there are two major types of
businesses that can be identified based on the scale.
Y Small scale businesses
Y Large scale businesses
Small scale businesses
Businesses are generally started as small scale businesses. Most of the small scale
businesses are sole proprietorships. The ease of starting with less capital, with less
legal influences are some reasons for selecting sole proprietorships.
Large scale businesses
A large scale business can be commenced with a large pool of resources owned
by the businessman, experiences obtained by working in other businesses,
network of relationships that stimulate businesses and with the infrastructure
facilities and other incentives provided by the government.
Y The departments will handle long term development activities which require
a larger amount of funds.
Y A large number of employees are working in departments providing more
employment opportunities.
Y The departments provide services for the well being of the general public
without a profit motive.
Disadvantages of departments
Y The decision making will be delayed due to the approval required from the
Parliament and the respective ministry.
Y The departments have to conduct activities in accordance with the provisions
in government Financial Regulations, Establishment Code and different
circulars.
3.2 Selecting an appropriate business organization
The different types of business organizations that can be organised to fulfill the
needs and wants of humans are discussed previously in this chapter. The following
are some factors that should be considered by businessmen when selecting an
appropriate type of business organization.
Y Based on the objective
Y Based on the scale
Y Based on who will perform management activities
Selecting a business organisation based on the objective
There are two main objectives affecting the choice of a business organisation.
Y Profit objective
Y Social welfare objective
Profit objective
Most of the businessmen expect to earn a profit in doing business activities. The
maximization of profits is the objective of these businessmen. The previously
mentioned sole proprietorships, partnerships, incorporated companies and state
companies are generally established with a motive to earn profits.

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Selecting a business organization depending on who will perform
management activities
Management is a process of planning, organising, leading and controlling the
resources of a business in order to achieve the objectives of a business.
A sole proprietorship will be managed by its owner. He can take all the decisions
of the business independently. In addition, he will be the owner, leader as well as
the manager of the business. As the owner, he has the freedom to take decisions
regarding the sources of a business.
If a business is expected to be managed by a group of individuals, a partnership or
an incorporated company type of business organization would be the appropriate
type. Here, decisions can be taken with the consent of all partners or the directors
of the board.
3.3 Registration of a sole proprietorship
If a sole proprietorship is conducting in a different name other than the full name of
its owner, it is mandatory to register the name of the business.
Example : -
If Gayal Perera conducts his business under the name of
‘Gayal Stores’, the business name is required to be registered.
This is only a registration of the business name and hence will not provide a legal
personality for the business.
Legal procedure of registering a sole proprietorship
If a sole proprietorship is conducted in a name other than the full name of its
owner, it is required to register. Registrar of the respective Provincial Council is
the authorized officer to register business names. The application form required for
the registration can be collected from the office of the Divisional Secretariat. The
registration fee will be determined by the respective Provincial Council within the
authority given to them. Further, it is required to submit an application to register
the business name within 14 days of commencing a sole proprietorship.
The following procedure will be followed when registering a sole proprietorship.
01. Obtain the relevant application form from the respective Divisional Secretariat
office.
The following two documents are required to submit for this purpose.
i An application form to register the business name of a sole
proprietorship.
ii An application form to obtain the required report from Grama
Niladharee regarding the registration of the business name.
02. Handing over the certified report of the Grama Niladharee and the duly
completed application form along with the registration fee to the Divisional
Secretary.
03. After considering above documents, the Divisional Secretary will issue the
Certificate of Registration of Business Name. It is required to display this
certificate at the business place.
Advantages of registering the business name
The following advantages can be achieved by registering the business name of a
sole proprietorship.
Y Provides an identity and recognition
A business can be separately identified from other businesses by using the
business name.
Y Provides an ownership of the business name
Since the business name is registered under the name of the owner, this
ensures the ownership of the business name.
Y Provides a qualification to obtain incentives given by the government
The government provides various incentives for the businesses. The
registered businesses will be given the priority when giving such facilities.

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Activity 02
Prepare a table by listing similarities and differences among business organizations
under the below mentioned dimensions.
Dimension Sole
proprietorship
Partner
ship
Limited
companies
State
corporations
State
department
Ownership
Financing
Liability
Management
Legal Personality
Continually
Activity 03
The following are the names of businesses.
j Nandu Company Limited
j Janahitha Stores
j Silva and Sons
j Cooperative Society of Fisheries
j Young Buddhists Association
j Sri Lanka Railway Department
j Sri Lanka Broadcasting Corporation
01. Name type of business organization of each business mentioned above.
02. Classify the above business based on the ownership.
03. Classify the business based on the objective.
04. From the above businesses, which businesses have a legal personality?
05. State how each business raise the required capital
Y Easy to obtain loans
Since there is a higher trust on businesses that have registered their
business names, lenders prefer to supply loans to such businesses.
Activity 01
Consider a sole proprietorship that can be commenced utilising the resources
available in your area.
01. Suggest a suitable name for the business.
02. Explain the advantages of commencing a sole proprietorship.
03. Can there be disadvantages of commencing such a business as a sole
proprietorship? Justify your answer.
04. Is the business name of that sole proprietorship required to be
registered? Justify your answer.
05. If the name of the business needs to be registered, explain the procedure
that needs to be followed.

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Activity 04
Pahan prefers to take collective decisions by listening to all and prefers to share
the risk. He believes in group work and has the ability to act with others with a
mutual understanding and even would accept a responsibility of a friend.However,
Pahan has a limited amount of savings.
Dinuka prefers to take individual decisions and could face any risk alone. He is
always dedicated to be succesful in every thing he does. Pahan owns a large
amount of savings.
Pahan and Dinuka both expects to start a business
01. Suggest the appropriate types of business organization for Pahan and
Dinuka. Give reasons.
02. If Pahan and Dinuka Start those businesses, what are the advantages
and disadvantages that they will receive?