Private and Public Sectors
Businesses can be classified into 2 main sectors:
Private sector: businesses controlled by an individual/group of people
Public sector: state-controlled businesses
Economies can be classified into 3 based on their business activity:
Mixed Economy: comprises of both private and public sector businesses
Free market economy: largely composed of private sector businesses
Command economy: economic resources largely owned and controlled by the government.
Reasons to keep certain businesses (like strategic industries) under government control:
- maintain environmental standards
- to ensure the supply of ESSENTIAL goods/services (education, healthcare, defence, law & order etc.)
- to prevent private monopoly from controlling supply
- maintain employment
Strategic industry: industry that's considered very important to a country's economy or safety (energy, public transport)
Monopoly: occurs when a company is the only seller in a particular market, hence faces no competitions, therefore able to control pricing.
Privatization: transfer of public sector businesses to the private.
Public corporations: companies owned & controlled by the PUBLIC sector. Also known as, nationalized sector, public sector enterprise. (not to be confused with public LIMITED companies)
| Advantages | Disadvantages |
| managed with social objectives rather than profit objectives, even if its proving to be a loss | government subsidies and lack of profit objectives can cause inefficiency |
| finance provided by the government hence not subjected to limitations from banks/shareholders | interference of the government in business decisions solely to gain popularity |
For-profit Organizations
Profit based private sector organizations:
Unincorporated business: businesses which doesn't hold a separate identity from its owners; owners are fully liable should the business fail Eg: sole traders, partnerships
- Sole trader: self-employed person who runs their own business, provides finance, has complete control over it and keeps all the profits
Unlimited liability: when one is legally responsible for a business to an extent that one's personal possessions can be used to pay off debts should the business fail.
Continuity: when the death of the owner doesn't lead to the dissolution of a company
| Advantages | Disadvantages |
| keeps all the profits | risks of unlimited liability |
owner retains complete control; not answerable to anyone | faces competitions from large companies as businesses operated by sole traders are usually small |
| flexible working schedule | difficulties raising capital for expansion |
| able to establish close relationships with customers, employees | no continuity in case of death of the owner since the business doesn't have a separate legal status |
| a business can be based on personal interest/hobby of the sole trader rather than working for a company | cannot specialize since the owner is responsible for all aspects of management |
| no legal formalities | long hours necessary in order to be profitable |
- Partnerships: business formed and controlled by 2 or more people, with shared responsibilities such as decision making and capital investment.
Deed of partnership: a formal agreement between the partners who are about to start a venture together about issues such as voting rights, management roles, distribution of profits etc.
| Advantages | Disadvantages |
| capital invested and decision-making is shared | unlimited liability |
| partners can specialize in a certain aspect of management | no continuity in case of death of a partner, unless the partnership is reformed |
| losses are shared between partners | loss of independence in decision-making (in case of a sole trader) |
| more privacy and less legal formalities (compared to limited companies) | shared profits |
| | impossible to raise capital from selling shares |
- Limited companies: a general form of incorporation that has a separate identity from its owner, limits the amount of liability imposed on its shareholders/owners and is able to continue even after the death of the owner(s). This is further classified into: private and public limited companies.
Limited liability: one is legally responsible for the business only to the extent of the amount they've invested, not their total wealth.
Share: unit of a company's ownership entitling the shareholder to dividends and to certain shareholder rights.
Shareholder: individuals that own shares in a limited company
Private limited companies: 'Ltd' or 'Pte', small-medium sized businesses
| Advantages | Disadvantages |
| limited liability | too many legal formalities |
| separate legal personality | not able to sell shares to the general public to raise capital |
| continuity | |
| original owner is able to retain control | |
| able to sell shares to family, friends, relatives | difficult for existing shareholders to sell their shares |
| greater status than unincorporated businesses | less secrecy over financial affairs (compared to unincorporated businesses) |
Public limited companies: 'plc' or 'Inc', large businesses
Stock market flotation: conversion of a company from a private to public limited one where shares can be bought/sold on the free market.
Divorce between ownership and control: when owners of the business don't exercise management control over the business.
| Advantages | Disadvantages |
| limited liability | legal formalities |
| separate legal personality | conflicts over objectives, due to divorce between ownership and control (shareholders will focus on maximizing profits (short-term goals) whereas directors aim for long term growth. |
| continuity | risk of takeover due to huge volume of shares sold |
| able to raise capital with the sale of shares to the public | less secrecy over information (required to disclose to shareholders/public) |
| ease of buying/selling shares encourages investment into the business | share price subjected to fluctuations that's beyond the business's control |
For-profit Social Enterprises
Social enterprise: business that prioritizes social over profit objectives and uses ethical ways of achieving them; invests most of its revenue into benefitting the society rather than maximizing returns to owners.
- Triple bottom line: the 3 objectives of social enterprises. Economic, Social, Environmental.
Cooperative: a group of people united voluntarily to meet their common needs and aspirations through a jointly-owned and democratically controlled enterprise; prioritizes social over financial objectives.
- Retail cooperative: consumers' cooperative. Owned by users rather than producers of a good/service. Main aim is to provide quality goods at the lowest prices to consumers/owners.
- Agricultural cooperative: farmers pool their money to buy a fertilizer or market key products.
- Worker cooperative: mostly, in manufacturing industry. It is owned and self-managed by its workers.
Microfinance Institution: provision of very small loans by specialist finance businesses, not by a traditional bank.
Public–private partnership
Public-private partnership: involvement of the private sector in the form of financial or management expertise in public sector projects aimed at the benefitting the public.
- Government funded - Financed by the government but managed by private sector business since private sector techniques of management is believed to be more efficient.
- Private finance initiative (PFI) - investment of a private sector business in public sector project. Relieves the government from having to find taxpayers to finance the project.
- Government directed but with private sector finance & management
| Costs | Benefits |
| Workers wouldn't have the security of being employed by the public sector since private sector businesses usually try to increase profits by cutting staff wages and benefits. | It's argued that many roads, prisons and hospitals couldn't have been built unless the private sector had been involved.
|
| high rents and leasing charges involved in PFI schemes these must be paid for by taxpayers. | Costs to the public sector would be lower if the projects were operated by private sector businesses as they aim to make profits; hence, they operate services as efficiently as possible. |
Private sector businesses may lack the experience
needed to operate public sector projects. E.g.
social housing schemes – failure of the scheme could
leave vulnerable groups in society at risk. | Using private sector business finance could mean, public services being improved, without an increase in taxes (since at least, in the short run, costs aren't covered by the government). |
Non-profit Social Enterprises
Non-profit organization: governed by a voluntary board who have other aim other than profits.
Non-governmental organization (NGO): a non-profit group that functions independently of any government, which serves a social/political goal. E.g. supporting disadvantaged groups in developing countries.
Charity: organization set up to raise money to help people in need or to support causes that require funding.
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