mob types of business organisations

8/11/2019 MOB Types of Business Organisations

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BUSINESS AND

MANAGEMENT

MODULE 1

Unit 1.1

INTRODUCTION TO

ORGANISATIONS


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Learning Outcome

Analyse local organisations of different types and identifytheir main features.

Explain the advantages and disadvantages of each type of

organisation identified.

Relate each type of ownership to the degree of control.

Distinguish between organisations in the Private and Public

Sectors.


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Evaluation of each type of business in terms of :

their characteristics

advantages and disadvantages

ability to raise finance appropriateness of legal structure

problems from changing from one

legal structure to another


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READING FOCUS

Hall, Jones, Raffo, Business Studies 3rdEdition, Units 6 & 7.

Stimpson, AS and A Level Business Studies, Chapter 1.

Jewell, An Integrated Approach to Business Studies 4thEdition, Chapter 1.

Barratt and Mottershead, AS and A Level Business Studies,Unit 3.


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The Private and Public Sectors of the Economy

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

The Public Sector comprises Organisations accountable to and

controlled by central or local government. These usually include: Health and education services

Defense

Law and order

Some strategic industries.THE ECONOMY

Private Sector Public Sector


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The Private Sector Legal Structure

PrivateSectorBusinesses

Sole

Trader PartnershipLimited

Companies

Cooperatives

PrivateLTD

Public

LTD


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The Sole Trader/Proprietor

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

Characteristics

It is a one man business It is easy to form Sole trader is fully responsible

for all debt and obligationsrelating to the business

Responsibilities of the soletrader Securing all capital for the

business Assuming all risk Paying all bills and taxes


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The Sole Trader/Proprietor

Advantages

Easy to set up-no legal formalities.

Owner has complete control notanswerable to anybody else.

Owner keeps all profits.

Able to choose times and patterns ofworking.

Able to establish close personalrelationships with staff (if any areemployed) and customers.

The business can be based on theinterest and skills of the owner rather than working as an employeefor a larger business.

Disadvantages

Unlimited liability all of the owners aassets are potentially at risk.

Often faces intense competition frombigger firms, for example, foodretailing.

Owner is unable to specialise in areasof the business that are mostinteresting it is responsible for allaspects of management.

Difficult to raise additional capital.

Long hours often necessary to makebusiness pay.

Lack of continuity- as the businessdoes not have separate legal status,when the owner dies, the businessends too.


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Limited Vs Unlimited Partner

Sometimes a partnership has limitedstatus or limited liability whichmeans that a person is only liable for

the amount of capital invested in thebusiness. An unlimited liability statusof a partner means that such partner

is responsible for debt incurred bythe business.


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Partnership

Advantages

Partners may specialise indifferent areas of businessmanagement.

Shared decision making.

Additional capital injected by eachpartner.

Business losses shared betweenthe partners.

Greater privacy and fewer legalformalities that corporateOrganisations (companies)

Disadvantages

Unlimited Liability for all partners. Profits are shared.

There is, as with sole traders,

no continuity and thepartnership will have to bereformed in the event of thedeath of one partner.

Al partners are bound by thedecision of any one of them.

Not possible to raise capital fromselling shares.

A sole trader, taking on partnerswill loose independence ofdecision making.


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Limited Companies

Characteristics of Limited Companies

Limited Liability Legal personality Continuity Capital is divided into shares Companies are run by directors

Question:Discuss the characteristics of a limited company and howthese differ from the Sole Trader and Partnership forms ofbusinesses.

Distinguish between the ownership and control of a LimitedCompany.


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Companies A Corporation is also known as a limited

company, is a legal entity that is separate anddistinct from its members(shareholders)

Features

When a company is incorporated, it acquires all of the

powers of an individual , an independent existence.Separate and distinct from its shareholders and anunlimited life expectancy.

The act of incorporation

Incorporation gives life to a legal entity known as acorporation.

Ownership interests in a corporation are usuallyeasily changed


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Companies Vs Partnership or Sole proprietorship

Limited liability normally no members can be

held personally liable for debts, obligations oract of the corporation beyond the amount ofshare capital the member has subscribed.

A creditor with a claim against the assets of the

company would normally have no right against itsshareholder maybe held liable.

Perpetual Succession- Because the corporationis a separate legal entity, its existence does not

depend on continued membership of any of itsmembers.


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Advantages of incorporation

Limited liability, possible tax advantages,

specialized management, ownership istransferable, continuous existence, easier to raisecapital

Disadvantages Closely regulated (file annual reports)

The company is required to maintain certaincorporate records

Most expensive form of business to organize(higher start- up cost for legal and accounting services)


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How Limited Companies are Formed

Memorandum of Association + Article of Association

Registrarof Companies

Certificate of Incorporation

TradingBegins


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The Memorandum of Association

Name of the company Name and address of the companys registered office The objectives of the company and scope of its activities The liability of members The amount of capital to be raised and the number of shares to be

issued

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


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Article of Association

The rights of shareholders

The procedure for appointing directors and scope of their powers

The length of time directors should serve before reelection The timing and frequency of company meetings

The arrangement for auditing company accounts


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The Private Limited Companies

Characteristics

Tend to be relatively small companies.

Their business name ends in Limited or Ltd.

Shares can only be transferred privately and all shareholders mustagree to the transfer.

Private Limited Companies are often family businesses owned bymembers of the family or close friends.

The directors of these companies tend to be shareholders and areinvolved in the running of the business.

Many manufacturing firms are Private Limited Companies ratherthan Sole Traders or Partnerships

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


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Private Limited Companies

Advantages

Shareholders have limited liability.

More capital can be raised as thereare no limits on the number of

shareholders.

Control of companies cannot be lostto outsiders.

The business will continue even if

one of the owners dies.

Disadvantages

Profits have to be shared outamongst a much larger number ofmembers.

There is a legal procedure to set upthe business. This takes time andcosts money.

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

Financial information filed with theRegistrar can be inspected by anymember of the public. Competitorscould use this to their advantage.


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Formation of Public Limited Companies

Memorandum of Association + Article of Association + Statutory Declaration

Registrar of Companies

Certificate of Incorporation

Publish of Prospectus


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Public Limited Companies

A public limited company is also an example of a joint stockcompany and is distinguished from a private company inthat the shares of a public limited company are openly soldon the stock exchange while a private company share isnot.

All PLC must have the letters PLC written after thecompanys name where as a private limited company hasco.ltd printed after the companys name.


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

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

The shares will be quoted on the Stock Exchange or the

AlternativeInvestment Market (AIM).

The Stock Exchange is a market where second hand sharesare bought and sold. A full Stock Exchange listing meansthat the company must comply with the rules andregulations laid down by the Stock Exchange.

The Alternative Investment Market (AIM) is designed forcompanies which want to avoid some of the high costs of afull listing.


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Going Public is Expensive

The company needs lawyers to ensure that the prospectus islegally correct.

A large number of publications have to be made available.

The company must use financial institutions to process shareapplication.

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

The company will have advertising and administrative expenses.

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


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Exiting the Stock Market

Sometimes a business operating as a Public Limited Companyis taken back into private ownership. Why does thishappen?


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Exiting the Stock Market

Sometimes the business lose favour with the stock market.

The business may be bought outright by a private individual.

The people running the business might no longer be willing totolerate 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.


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Advantages

Huge amounts of money can beraised from the sale of shares tothe public.

Production costs may be lower as

firms gain economies scale.

Because of their size, plc canoften dominate the market.

It becomes easier to raise financeas financial institutions are more

willing l to lend to plcs.

Disadvantages

Setting up costs can be veryexpensive.

Since anyone can buy shares, itspossible for an outside interest to takecontrol of the company.

All company accounts can be inspectedby member of the public.

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

The way they operate is controlled byvarious company acts which aims to

protect shareholders.

There is divorce of ownership andcontrol which might lead to theinterest of owners being ignored tosome extent.

Plcs inflexible due to their size.

Questions:What are the

limitations of being a

limited company in a highly

competitive market?


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Cooperatives

Cooperatives are business formed by groups with similar objectives

and interest. The groups maybe producers or users of productsand services. Cooperatives were first established by people inAgriculture.This is a common form of business organization insome countries, especially in agriculture and retailing.

Principles of Cooperatives

Open membership

Democratic control

Limited interest on capital

Patronage refund

Continuous education

Cooperation among cooperatives

NB. Make notes on each principles


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Feature

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

All members have one vote at important meetings.

Profits are shared equally among members.

Members get dividends based on the number of shares theyhold

Shares are NOT traded on the stock market but can beredeemed at the co operative

Controlled by elected committee, all of whom are members All members have one vote at important meetings.


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Cooperatives

Advantages

Buying in bulk.

Working together to solveproblems and make decisions.

Good motivation of allmembers to work hard as

they will benefit from sharedprofits.

Disadvantages

Poor management skills unlessprofessionals are employed.

Capital shortages because no saleof shares to the non-membergeneral public is allowed.

Slow decision making if all

members are to be consulted


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Types of Cooperatives in Jamaica

Coffee andCocoa growers

Sugar workers

Credit unions

Levels ofcooperativeSociety Primary

Secondary eg.Credit union

Tertiary eg.

National union ofcooperatives


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Research and writing in your book

Task

1. What are charities?. How are theydifferent from Cooperatives inrelation to the following:

Characteristics

Role in community development.

Advantages and Disadvantages


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YOUR READING TASK

For each of the following forms ofbusiness identify their: Definition

Characteristics

How they are organised

Advantages and disadvantages

1. Workers Cooperatives

2. Consumer Cooperatives

3. Building and Friendly Societies4. Charities


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Franchises

This is a contract between two firms. The contract allows one of

them, the franchisee, to use the name,logoandmarketingmethodsof the other,thefranchiser.

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


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Characteristics of Franchise

The characteristics of a franchise are dedicated by the nature of thebusiness, and the general operational guidelines set out by the parententity.

The franchise:

Bears the name of the parent entity and enjoys its goodwill

Is licensed by the parent entity

Pays a fee to the parent entity

Receives assistance from the parent entity in terms of professionaladvice

How are franchises identified?

By its logo By layout of buildings

NB. Please read and make notes on the benefits to franchise andthe franchisor, advantages and disadvantages


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Joint ventures

A joint venture is an organization established bytwo or more entities that combine their skills andassets in order to work closely on a particularproject.

Categories Joint venture with a local and a foreign firm

Including local government

NB. Make notes on examples of each categories,characteristics, advantages, disadvantages andmanagement


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Public Sector Organisations

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

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


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Which Goods and Services Does the Public Sector

Provide?

Public Goods

Non- Rivalry Non- Excludable

Consumption of the good/Service

by one individual does not reduce theAmount available for others

It is impossible to exclude othersFrom benefiting from their use


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Merit Goods

These are services which people thing should be provided in greaterquantities

Examples of merit goods are:

Education, Health Services, Public Libraries

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


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Research and Writing Task

1. Identify five businesses within the Public Sector of yourcountry and discuss the their nature in terms of thefollowing:

Features

Role in the community Their Inter-relationship

2. Assess the reasons for Privatisation of some Public Sectorentities.

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


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Liability of Public Sectors

The owners are liable or responsible for the debts of a companycompany and no more

Unlimited liability means the owner will have to sell some or all ofhis personal possessions to help pay of company debts

Limited liability means the owner loses only the money he has put

into the company

Types of public sector Firms

1) Nationalized industries or public corporations

2) Firms own by the government aim to operate in the interest of the

public3) State corporations operated with their own board of directorsappointed by the government


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Public Corporations/Statutory Boards

Make notes on the advantages anddisadvantages

Prepare arguments for and againstprivatization and nationalization


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Bibliography

Dave Hall, Rob Jones, Carlos Raffo, Business Studies, 3rdEdition, Causeway Press Ltd, 2005.

Stimpson Peter, AS and A Level Business Studies,

Cambridge University Press, 2000.

Barratt Michael, Mottershead Michael, AS and A Level

Business Studies, Pearson Education Ltd, 2000.

www.bized.ac.uk
http://www.bized.ac.uk/http://www.bized.ac.uk/

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