BUSINESS AND BUSINESS AND MANAGEMENTMANAGEMENT

MODULE 1MODULE 1

Unit 1.1Unit 1.1

INTRODUCTION TO INTRODUCTION TO ORGANISATIONSORGANISATIONS

ContentContentTypes of OrganisationsTypes of Organisations Profit non-profit and non-governmentalProfit non-profit and non-governmental Sole Trader/ProprietorsSole Trader/Proprietors PartnershipsPartnerships Companies/CorporationsCompanies/Corporations CharitiesCharities CooperativesCooperatives FranchisesFranchises

Private Sector and Public SectorPrivate Sector and Public Sector

Learning OutcomeLearning Outcome

Analyse local organisations of different types and identify Analyse local organisations of different types and identify their main features.their main features.

Explain the advantages and disadvantages of each type of Explain the advantages and disadvantages of each type of organisation identified.organisation identified.

Relate each type of ownership to the degree of control.Relate each type of ownership to the degree of control.

Distinguish between organisations in the Private and Public Distinguish between organisations in the Private and Public Sectors.Sectors.

READING FOCUSREADING FOCUS

Hall, Jones, Raffo, Business Studies 3Hall, Jones, Raffo, Business Studies 3rdrd Edition, Units 6 & 7. Edition, Units 6 & 7. Stimpson, AS and A Level Business Studies, Chapter 1.Stimpson, AS and A Level Business Studies, Chapter 1. Jewell, An Integrated Approach to Business Studies 4Jewell, An Integrated Approach to Business Studies 4thth

Edition, Chapter 1.Edition, Chapter 1. Barratt and Mottershead, AS and A Level Business Studies, Barratt and Mottershead, AS and A Level Business Studies,

Unit 3.Unit 3.

ContextContext

If you walk down any high street, you will notice that many of If you walk down any high street, you will notice that many of the shops display their names for all to see. It may be the shops display their names for all to see. It may be Robinson the butcher, Brown, Macy and Brown solicitors, as Robinson the butcher, Brown, Macy and Brown solicitors, as well as known chain stores such as Marks and Spencer plc well as known chain stores such as Marks and Spencer plc or Hodson's Limited. All are businesses, but each with a or Hodson's Limited. All are businesses, but each with a different status in terms of how is operated, who the owner different status in terms of how is operated, who the owner is and how any profit is shared.is and how any profit is shared.

The Private and Public Sectors of the EconomyThe Private and Public Sectors of the Economy

The Private Sector comprises businesses owned and controlled by The Private Sector comprises businesses owned and controlled by individuals or groups of individuals. In every country, most individuals or groups of individuals. In every country, most business activity is in the private sector.business activity is in the private sector.

The Public Sector comprises Organisations accountable to and The Public Sector comprises Organisations accountable to and controlled by central or local government. These usually include:controlled by central or local government. These usually include:

Health and education services Health and education services DefenseDefense Law and orderLaw and order Some strategic industries. Some strategic industries.

THE ECONOMY

Private Sector Public Sector

The Private Sector Legal StructureThe Private Sector Legal Structure

Private SectorBusinesses

SoleTrader Partnership

LimitedCompanies

Cooperatives

PrivateLTD

PublicLTD

The Sole Trader/ProprietorThe Sole Trader/Proprietor

This is the most common form of business organisation. One person This is the most common form of business organisation. One person provides the finances and in return, has full control of the business provides the finances and in return, has full control of the business and is able to keep all the profits.and is able to keep all the profits.

The Sole Trader/ProprietorThe Sole Trader/Proprietor

AdvantagesAdvantages

Easy to set up-no legal formalities.Easy to set up-no legal formalities.

Owner has complete control –not answerable Owner has complete control –not answerable to anybody else.to anybody else.

Owner keeps all profits.Owner keeps all profits.

Able to choose times and patterns of Able to choose times and patterns of working.working.

Able to establish close personal relationships Able to establish close personal relationships with staff (if any are employed) and with staff (if any are employed) and customers.customers.

The business can be based on the interest The business can be based on the interest and skills of the owner – rather than working and skills of the owner – rather than working as an employee for a larger business.as an employee for a larger business.

DisadvantagesDisadvantages

Unlimited liability – all of the owner’s a assets Unlimited liability – all of the owner’s a assets are potentially at risk.are potentially at risk.

Often faces intense competition from bigger Often faces intense competition from bigger firms, for example, food retailing.firms, for example, food retailing.

Owner is unable to specialise in areas of the Owner is unable to specialise in areas of the business that are most interesting – it is business that are most interesting – it is responsible for all aspects of management.responsible for all aspects of management.

Difficult to raise additional capital.Difficult to raise additional capital.

Long hours often necessary to make business Long hours often necessary to make business pay.pay.

Lack of continuity- as the business does not Lack of continuity- as the business does not have separate legal status, when the owner have separate legal status, when the owner dies, the business ends too.dies, the business ends too.

PartnershipPartnership

Partnerships are agreements between two or more people carry on a Partnerships are agreements between two or more people carry on a business together, usually with a view of making a profit.business together, usually with a view of making a profit.

The Deed Of partnership establishes the rights and privileges of the The Deed Of partnership establishes the rights and privileges of the partners. This document includes issues such as voting rights, partners. This document includes issues such as voting rights, distribution of profits, The management role of each partner and distribution of profits, The management role of each partner and who has the authority to sign contracts.who has the authority to sign contracts.

PartnershipPartnership

AdvantagesAdvantages

Partners may specialise in Partners may specialise in different areas of business different areas of business management.management.

Shared decision making.Shared decision making.

Additional capital injected by each Additional capital injected by each partner.partner.

Business losses shared between Business losses shared between the partners.the partners.

Greater privacy and fewer legal Greater privacy and fewer legal formalities that corporate formalities that corporate Organisations (companies) Organisations (companies)

DisadvantagesDisadvantages

Unlimited Liability for all partners.Unlimited Liability for all partners. Profits are shared.Profits are shared.

There is, as with sole traders, no There is, as with sole traders, no continuity and the partnership will continuity and the partnership will have to be reformed in the event have to be reformed in the event of the death of one partner.of the death of one partner.

Al partners are bound by the Al partners are bound by the decision of any one of them.decision of any one of them.

Not possible to raise capital from Not possible to raise capital from selling shares.selling shares.

A sole trader, taking on partners A sole trader, taking on partners will loose independence of will loose independence of decision making.decision making.

Limited CompaniesLimited Companies

Characteristics of Limited CompaniesCharacteristics of Limited Companies

Limited LiabilityLimited Liability Legal personalityLegal personality ContinuityContinuity Capital is divided into sharesCapital is divided into shares Companies are run by directorsCompanies are run by directors

Question:Question: Discuss the characteristics of a limited company and how Discuss the characteristics of a limited company and how these differ from the Sole Trader and Partnership forms of these differ from the Sole Trader and Partnership forms of businesses.businesses.

Distinguish between the ownership and control of a Limited Distinguish between the ownership and control of a Limited Company.Company.

How Limited Companies are FormedHow Limited Companies are Formed

Memorandum of Association + Article of Association

Registrar of Companies

Certificate of Incorporation

Trading Begins

The Memorandum of AssociationThe Memorandum of Association

Name of the companyName of the company Name and address of the company’s registered officeName and address of the company’s registered office The objectives of the company and scope of its activitiesThe objectives of the company and scope of its activities The liability of membersThe liability of members The amount of capital to be raised and the number of shares to be The amount of capital to be raised and the number of shares to be

issuedissued

Note:Note: A limited company must have a minimum of two members. A limited company must have a minimum of two members.

Article of AssociationArticle of Association

The rights of shareholdersThe rights of shareholders The procedure for appointing directors and scope of their powersThe procedure for appointing directors and scope of their powers The length of time directors should serve before reelectionThe length of time directors should serve before reelection The timing and frequency of company meetingsThe timing and frequency of company meetings The arrangement for auditing company accountsThe arrangement for auditing company accounts

The Private Limited CompaniesThe Private Limited Companies Characteristics Characteristics

Tend to be relatively small companies.Tend to be relatively small companies. Their business name ends in Limited or Ltd.Their business name ends in Limited or Ltd. Shares can only be transferred privately and all shareholders must Shares can only be transferred privately and all shareholders must

agree to the transfer.agree to the transfer. Private Limited Companies are often family businesses owned by Private Limited Companies are often family businesses owned by

members of the family or close friends.members of the family or close friends. The directors of these companies tend to be shareholders and are The directors of these companies tend to be shareholders and are

involved in the running of the business.involved in the running of the business. Many manufacturing firms are Private Limited Companies rather Many manufacturing firms are Private Limited Companies rather

than Sole Traders or Partnershipsthan Sole Traders or Partnerships

List the names of five (5) Private Limited Companies in your List the names of five (5) Private Limited Companies in your community?community?

Private Limited CompaniesPrivate Limited Companies

AdvantagesAdvantages

Shareholders have limited liability.Shareholders have limited liability.

More capital can be raised as there More capital can be raised as there are no limits on the number of are no limits on the number of shareholders.shareholders.

Control of companies cannot be lost Control of companies cannot be lost to outsiders.to outsiders.

The business will continue even if The business will continue even if

one of the owners diesone of the owners dies..

DisadvantagesDisadvantages

Profits have to be shared out Profits have to be shared out amongst a much larger number of amongst a much larger number of members. members.

There is a legal procedure to set up There is a legal procedure to set up the business. This takes time and the business. This takes time and costs money.costs money.

Firms are not allowed to sell shares Firms are not allowed to sell shares to the public This restricts the to the public This restricts the amount of capital that can be raised.amount of capital that can be raised.

Financial information filed with the Financial information filed with the Registrar can be inspected by any Registrar can be inspected by any member of the public. Competitors member of the public. Competitors could use this to their advantage.could use this to their advantage.

Formation of Public Limited CompaniesFormation of Public Limited Companies

Memorandum of Association + Article of Association + Statutory Declaration

Registrar of Companies

Certificate of Incorporation

Publish of Prospectus

FLOTATION

Public Limited CompaniesPublic Limited Companies

A plc cannot begin trading until it has completed these tasks and A plc cannot begin trading until it has completed these tasks and has received at least 25% payment for the value of shares.has received at least 25% payment for the value of shares.

It will then receive a Trading Certificate and can begin operating.It will then receive a Trading Certificate and can begin operating.

The shares will be quoted on the The shares will be quoted on the Stock Exchange or the Stock Exchange or the AlternativeAlternative Investment Market (AIM).Investment Market (AIM).

The Stock Exchange is a market where second hand shares The Stock Exchange is a market where second hand shares are bought and sold. A full Stock Exchange listing means are bought and sold. A full Stock Exchange listing means that the company must comply with the rules and that the company must comply with the rules and regulations laid down by the Stock Exchange.regulations laid down by the Stock Exchange.

The Alternative Investment Market (AIM) is designed for The Alternative Investment Market (AIM) is designed for companies which want to avoid some of the high costs of a companies which want to avoid some of the high costs of a full listing. full listing.

Going Public is ExpensiveGoing Public is Expensive

The company needs lawyers to ensure that the prospectus is The company needs lawyers to ensure that the prospectus is ‘legally’ correct. ‘legally’ correct.

A large number of publications have to be made available.A large number of publications have to be made available.

The company must use financial institutions to process share The company must use financial institutions to process share application.application.

The share has to be The share has to be underwritten. underwritten. A fee is paid to an underwriter A fee is paid to an underwriter who must buy any unsold shares.who must buy any unsold shares.

The company will have advertising and administrative expenses.The company will have advertising and administrative expenses.

The company must have a minimum of $50,000 share capital.The company must have a minimum of $50,000 share capital.

Exiting the Stock MarketExiting the Stock Market

Sometimes a business operating as a Public Limited Company Sometimes a business operating as a Public Limited Company is taken back into private ownership. Why does this is taken back into private ownership. Why does this happen?happen?

Exiting the Stock MarketExiting the Stock Market

Sometimes the business lose favour with the stock market.Sometimes the business lose favour with the stock market.

The business may be bought outright by a private individual.The business may be bought outright by a private individual.

The people running the business might no longer be willing to The people running the business might no longer be willing to tolerate interference from the external shareholders.tolerate interference from the external shareholders.

Question: Suggest why Richard Branson decided he wanted to buy back all the shares of his company after going public.

Public Limited CompaniesPublic Limited Companies

AdvantagesAdvantages

Huge amounts of money can be raised from Huge amounts of money can be raised from the sale of shares to the public.the sale of shares to the public.

Production costs may be lower as firms gain Production costs may be lower as firms gain economies scale.economies scale.

Because of their size, plc can often dominate Because of their size, plc can often dominate the market.the market.

It becomes easier to raise finance as financial It becomes easier to raise finance as financial institutions are more willing l to lend to plcs.institutions are more willing l to lend to plcs.

DisadvantagesDisadvantages

Setting up costs can be very expensive.Setting up costs can be very expensive.

Since anyone can buy shares, its possible for Since anyone can buy shares, its possible for an outside interest to take control of the an outside interest to take control of the company.company.

All company accounts can be inspected by All company accounts can be inspected by member of the public.member of the public.

Because of their size they cannot deal with Because of their size they cannot deal with customers at a personal level.customers at a personal level.

The way they operate is controlled by various The way they operate is controlled by various company acts which aims to protect company acts which aims to protect shareholders.shareholders.

There is divorce of ownership and control There is divorce of ownership and control which might lead to the interest of owners which might lead to the interest of owners being ignored to some extent.being ignored to some extent.

Plcs inflexible due to their size.Plcs inflexible due to their size.

Questions: What are the limitations of being a limited company in a highly competitive market?

CooperativesCooperatives

This is a common form of business organisation in some countries, This is a common form of business organisation in some countries, especially in agriculture and retailing.especially in agriculture and retailing.

FeaturesFeatures

All members can contribute to the running of the business, sharing All members can contribute to the running of the business, sharing the work load, responsibilities and decision making.the work load, responsibilities and decision making.

All members have one vote at important meetings.All members have one vote at important meetings.

Profits are shared equally among members.Profits are shared equally among members.

CooperativesCooperatives

AdvantagesAdvantages

Buying in bulk.Buying in bulk.

Working together to solve Working together to solve problems and make decisions.problems and make decisions.

Good motivation of all Good motivation of all members to work hard as members to work hard as they will benefit from shared they will benefit from shared profits.profits.

DisadvantagesDisadvantages

Poor management skills unless Poor management skills unless professionals are employed.professionals are employed.

Capital shortages because no sale Capital shortages because no sale of shares to the non-member of shares to the non-member general public is allowed.general public is allowed.

Slow decision making if all Slow decision making if all members are to be consultedmembers are to be consulted

Research and writing in your book Research and writing in your book TaskTask

1.1. What are charities?. How are they What are charities?. How are they different from Cooperatives in different from Cooperatives in relation to the following:relation to the following:

CharacteristicsCharacteristics Role in community development.Role in community development. Advantages and Disadvantages Advantages and Disadvantages

FranchisesFranchises

This is a contract between two firms. The contract allows one of This is a contract between two firms. The contract allows one of them, the them, the franchisee, to use the franchisee, to use the name,name, logologo andand marketing marketing methodsmethods of the other,of the other, thethe franchiser. franchiser.

The franchisee can separately, then decide which form of legal The franchisee can separately, then decide which form of legal structure to adopt.structure to adopt.

YOUR READING TASKYOUR READING TASK

For each of the following forms of For each of the following forms of business identify their:business identify their:

DefinitionDefinition CharacteristicsCharacteristics How they are organisedHow they are organised Advantages and disadvantagesAdvantages and disadvantages

1.1. Workers CooperativesWorkers Cooperatives

2.2. Consumer CooperativesConsumer Cooperatives

3.3. Building and Friendly SocietiesBuilding and Friendly Societies

4.4. CharitiesCharities

Factors Affecting the choice of OrganisationsFactors Affecting the choice of Organisations

Age: Age: Many businesses change their legal status as they become Many businesses change their legal status as they become older.older.

The Need for finance: The Need for finance: A change in legal status may be forced on A change in legal status may be forced on

the business.the business. Size:Size: The size of a business operation is likely to affect its legal The size of a business operation is likely to affect its legal

status.status.

Limited Liability:Limited Liability: Owners can protect their own personal Owners can protect their own personal financial position if the business is a Limited Liability company.financial position if the business is a Limited Liability company.

Degree of control:Degree of control: Owners may consider retaining control of the Owners may consider retaining control of the business as important.business as important.

The Nature of the Business: The Nature of the Business: The type of business activity may The type of business activity may influence the choice of legal status.influence the choice of legal status.

Public Sector OrganisationsPublic Sector Organisations

The Public Sector is made up or organisations which are owned and The Public Sector is made up or organisations which are owned and controlled by central or local government or public corporations. controlled by central or local government or public corporations. They are funded by government and in some cases from their own They are funded by government and in some cases from their own trading ‘surplus’ or profit.trading ‘surplus’ or profit.

Public Sector businesses still have important roles to play in certain Public Sector businesses still have important roles to play in certain areas of business activity.areas of business activity.

Which Goods and Services Does the Public Sector Which Goods and Services Does the Public Sector Provide?Provide?

Public Goods

Non- Rivalry Non- Excludable

Consumption of the good/Serviceby one individual does not reduce the

Amount available for others

It is impossible to exclude othersFrom benefiting from their use

Merit GoodsMerit Goods

These are services which people thing should be provided in greater These are services which people thing should be provided in greater quantities quantities

Examples of merit goods are:Examples of merit goods are: Education, Health Services, Public LibrariesEducation, Health Services, Public Libraries

If the individual is left to decide whether or not to pay for these If the individual is left to decide whether or not to pay for these goods, some may choose not to, or may not be able to.goods, some may choose not to, or may not be able to.

Research and Writing TaskResearch and Writing Task

1.1. Identify five businesses within the Public Sector of your Identify five businesses within the Public Sector of your country and discuss the their nature in terms of the country and discuss the their nature in terms of the following:following:

FeaturesFeatures Role in the communityRole in the community Their Inter-relationshipTheir Inter-relationship

2. Assess the reasons for Privatisation of some Public Sector 2. Assess the reasons for Privatisation of some Public Sector entities.entities.

3. What are the main arguments for and against privatisation 3. What are the main arguments for and against privatisation of such entities.of such entities.

Maxi Case StudiesMaxi Case Studies

Case:Case: James Hull Associates James Hull Associates

Source:Source: Jones, Hall, Raffo, Business Studies 3 Jones, Hall, Raffo, Business Studies 3rdrd Edition, Unit 6, Edition, Unit 6, page 51.page 51.

Case:Case: Network Rail Network Rail

Source:Source: Jones, Hall, Raffo, Business Studies 3 Jones, Hall, Raffo, Business Studies 3rdrd Edition, Unit 6, Edition, Unit 6, page 60.page 60.

BibliographyBibliography Dave Hall, Rob Jones, Carlos Raffo, Dave Hall, Rob Jones, Carlos Raffo, Business Studies, 3Business Studies, 3rdrd

EditionEdition, Causeway Press Ltd, 2005., Causeway Press Ltd, 2005.

Stimpson Peter, Stimpson Peter, AS and A Level Business StudiesAS and A Level Business Studies, , Cambridge University Press, 2000.Cambridge University Press, 2000.

Barratt Michael, Mottershead Michael, Barratt Michael, Mottershead Michael, AS and A Level AS and A Level Business StudiesBusiness Studies, Pearson Education Ltd, 2000., Pearson Education Ltd, 2000.

www.bized.ac.ukwww.bized.ac.uk