types of organizaton
TRANSCRIPT
Business Organization and
Environment(Unit one)
1.2 Types of business organization
Dr. Fereshteh Mohammadian
Main features of profit-based
(commercial) organization
The most common profit-making business types:
• Sole traders
• Partnerships
• Companies or corporations
• For-profit social enterprises
– Cooperatives
– Micro-financers
– Public-private partnerships (PPPs).
The common feature is to generate profit.
Profits = total revenues – total cost
profits
turnover
employeeassets
equity
Sole trader
The main features of a sole trader include:
• owns and runs the business by themselves
• have unlimited liability
• finance is usually limited (personal saving or limited loan from lender)
• close to the customer (more personalized service)
• has privacy and limited accountability (no need to declare their finance except of tax authorities).
• Easy, inexpensive and quick business registration
Advantages of operating as a sole trader:
• complete control over all the important decisions
• flexibility in terms of working hours, products and services,
and changes to operations
• privacy, as sole traders generally do not
need to divulge information
• minimal legal formalities
• close ties to customers, which can give a
competitive advantage.
Disadvantages of operating as a sole trader:
• Daunting challenge by competing with established businesses.
• Limited time for making all decision without any opportunity to seek advice form others.
• limited scope for expansion
• focus on having sufficient cash for day-
to-day operations instead of looking to the
future.
• unlimited liability of the owner for any
faults, debts, or mistake made.
partnerships
This type of business is formed by two or more people with related
qualifications.
The main features include:
• decisions made by the partners
• owned and managed by more than one person (2-20 partners).
• unlimited liability and legal payment for 100 percent of partnership’s debts
• finance is more available than for a sole trader business
• “sleeping partners” (only investor)
• more varied services than a sole trader
greater degree of accountability than a sole
trader according to the partnership’s
contract (responsibilities, financing,
division or profits, liabilities and
procedures for changing circumstances)
• more stable than sole traders and higher
likelihood of continuity
• share profits according to percentage of
ownership
Advantages of partnership compared to sole
traders
• more efficient production, more expertise,
• access to more finance for greater stability and lower risk of a failed business
• help each other in emergencies,
• more chance of continuity if one partner dies,
Disadvantages of partnership
• Only based on the partnership’s deed, some partners
declared “limited partners” otherwise all will have
unlimited liability on the business debts and actions of
other partners.
• Limited finance compared to companies (corporations)
will prevent their business from expanding or
maximizing their opportunities.
• An individual partner does not have complete
control over the business and will rely on the
work and goodwill of others.
• Profits have to be shared among the partners.
• Disagreed partners could break up the
partnership.
Companies or corporations
The most important type of business is company which may have the following abbreviations after its logo:
• INC - Incorporated (USA/ Canada)
• LLC - Limited Liability Company (UK)
• PLC – Private or Public Limited Company (UK)
• PTE – Private Limited Company (UK)
• LTD – Limited Company (various)
• SA – Sociedad Anomia (Latin America except Brazil and Mexico)
• SA – Sociedads Anomias (Brazil, Portugal)
• SpA – Societa per Azioni (Italy)
• AB – Aktiebolag (Sweeden)
• BhD – Berhad (Malaysia, Brunei)
• GIE – Groupement D’Interet Economique (France)
• GmbH- Gesellschaft mit beschraenktr Haftung (Austria, Germany, Switzer land)
Company’s Features• the business and the owners of the business are legally separated and the
liability of the company is distinct from the liability of those who own it.
• Each owners has a fraction of the company in the form of “shares” (shares of stock or equity shares)
• Company employs executives to manage and workers to handle day-to-day
operations.
• Should obey the laws of the land and pay taxes.
• Owners (shareholders) decide to pay all or a portion of profits to the shareholders in the form of dividends at the discretion of company and based on the proportion of the shares of stock.
• Shareholders who own a lower percentage could have less
deciding weight in the decisions.
Investing reward ways to the
shareholders in a company
1. increasing of the share’s price2. depends to the number of shares (pay as dividends each 3-
4 months)3. not responsible for any company’s debts but they are the
last party to receive monies from sale of the assets of a business (all debts should be paid first).
The cost to the shareholders of
investing in a company
1. Decreasing of share’s price by decreasing of the value or the company profit
2. dividends may not pay (need of sufficient cash on hand or more investment in equipment and working capital in rapid growing)
3. don’t have meaningful role in giant company’s decisions with holding less amount of shares
The reasons to become a company
• increasing of the business stability
(any minor or major problems for
shareholders)
• Improve of gaining further finance
(loan from financial institutions or
governments) .
• shareholders want to have
limited liability
• recognition of successful
business
• good source of finance through
selling shares
Types of companies
• Private limited
– selling the shares only to whom that owners know (friends, family and associates)
– Limited shareholders (around 20)
• Public limited company
– offer the company shares in a public place
– no control over who buys their shares
Main features of a company
• The shareholders own but don not run the business.(decision by the
professional managers).
• The business and the owners are divisible (the owners can change by
selling their shares to others)
• The legal existence and many of the details are legally recorded and
matters of public record.
o Required legal documents to form a company
• memorandum of association: is a legal document prepared in the
formation and registration process of a limited liability company
to define its relationship with shareholders
• articles of association: internal regulation (the executives with
their titles and areas of responsibilities).
• Greater finance is generally available (any future gains (or loss) in price are to the benefit (or cost)
of the shareholders)
• A company is held to a high degree of accountability (inform to shareholders about the condition of
their investments by:
– Annual or quaternary of published, audited reports,
– An annual general meeting (AGM)open to all shareholders,
– An extraordinary general meeting (EGM) called by the shareholders.
• Greater stability and higher chance of continuity
• Access to finance is easier than sole traders and partnerships (greater stability and lower risk)
• The investor has limited liability (may only lose the values of shares and nothing else)
• There is continuity (with selling of the shares, leaving of any directors)
• Companies can go bankrupt and be liquidated (with all of assets sold off to pay all the liabilities)
to terminate their operations.
• There are possibilities for expansion (more access to finance for investing in equipment, marketing
effort and new activities)
• An established organization structure (help to keep the customers and suppliers because no need to
change managers and workers even with changing of the shareholders)
Disadvantages of operating as a company
• Setting up a company can take time and cost a great deal of money (to fulfill the
necessary legal requirements)
• The risk of selling shares when the company “goes public” (may can not guarantee to
provide desired or intended amount of finance)
• Owners risk partial or entire loss of control (if the company “goes public).
• There is loss of privacy (have to show company’s performance - less sale and negative
profits)
– may some customers do not purchase from or do
business with the company especially for some
products which need warranty or after-sales service.• A company has no control over the stock market. (some external factors(such as an
election, negative news about another business in same industry, a downturn in the
economy or a natural disaster) may decrease the share values.
• A company has limited control over who buys its share. (a competitor
may want to take over the business by buying the shares of one of the
shareholders or can be vulnerable to being taken over if their share prices fall).
For-profit social enterprise
• These organizations have social purposes and aim to improve human, social or environmental well-being
• but these aims nevertheless take priority of growth, maximizing sales or making profits.
• These organization can take the form of sole trader, partnership or company but often can see in form of– Cooperatives– Micro-financiers– Public-private partnership[PPP]
Cooperatives
A form of partnership which is owned and run by all the members(> 20).
• Financial cooperative: these businesses take profit with social and ethical aims.
– Social aims(lending money at lower rates of interest or non-lending services at lower cost of other financial institution.
– Provide finance (loans) to their members.
• Housing cooperative: provide housing for its members as opposed to providing rent for private landlords.
• Workers cooperative: is owned and operated by the workers and does not pay significant higher wages or salary to the managers
• Producer cooperative: a group of producers collaborate in certain stages of production (agriculture, grapes)– Maximizing the utilization of an expensive piece of
equipment/ achieving the cost efficiencies with carrying out of production stage on a large scale.
• Consumer cooperative: provide service to its consumers who are part owners of the business.
The cooperative’s priority is to provide products or services as close to cost price as possible,
they make some profit only for difficult period or unexpected expenses.
Micro-financiers
Provide small amounts of finance with low interest rate to those who can not have access
to it and need the finance for the first steps towards economic independence (such as low-
income individuals, families in rural communities and women)
Public- Private Partnership [PPP]
A PPP is a business created between a private sector business and the public sector. The public sector provides the finance and the private business the expertise.
The main common features:
• Profit is important but not the priority
• There is collaboration between the business and the local community.
• There is greater democracy in the business than in other organizations (decision making tends to be more consultative and transparent )
• The business operates the same functions as any other business (HR, finance, marketing and operation).
Advantages of for-profit social enterprises
• A favorable legal status is achieved. – the legal structure allows individuals to engage in
activities without being personally liable or accountable to the stakeholders
• There is a strong communal identity.– the motivated employee and stakeholder work
together with a common sense of purpose
• There are benefits to the stakeholder community.– ameliorate human, social or environmental problems
which are not addressed by government and help reduce them in the community.
Disadvantages of for-profit social enterprises
• Decision making is complex and time consuming can limit the effectiveness of the business.
• There may be insufficient capital for growth in the long term (without large profits the social enterprise may struggle to survive and expand).
• There may be insufficient capital for financial strength (producing products as inexpensive as possible makes lower profit margins and profits which can not help them survive a recession or when finance is less available).
Non-profit social enterprises
The main features of NPOs are as follow:• The businesses which are social enterprises and
their main aim is social purpose do not make any profits whatsoever.
• They generate surplus which conceptually is similar to a profit and is used to advance the social purpose of its business
Surplus = total revenues – total cost
Two broad categories of non-profit social enterprises are NGOs and charities.
Non- Governmental Organization [NGOs]
These social enterprises support a cause that is considered socially desirable such as:• Save the Whales (single issue),• Greenpeace (broader spectrum), • Aga Kahn Development Network (apolitical-conduct their
programs without regarding faith, gender or origin), • Amnesty International & National Rifle Association (political
aim)
The common element NGOs is that they are not organized
or run by any government.
Charities
• Charities are a specific form of NGO whose aim is to provide as much relief as possible for those in need.
• They focus on philanthropy and a desire to help those who cannot help themselves.
Different type of charities are: – Emergency aid for specific natural disasters or war (single-
event)
– Save the children of Oxfam (single issue)
– Red Cross, Red Crescent and Half the Sky (apolitical)
– Catholic Charities USA (partisan or particular preferences
Business of charities is not run by any government and it operates in the private sector of the economy.
Charities have tax exemption.
Common features of non-profit social enterprises
• Profits are not generated. (generated surpluses are used directly to provide the goods and services for which the charity was created)
• Donations are important. (needs of voluntary donation from individual because governments funding or other forms of income are not enough)
• There is unclear ownership and control. (who are the owners, who decides about who sits on the board of directors, who selects new members, how are managers selected, what is an appropriate compensation?...)
Advantages of non-profit social enterprises
• They help people or causes in need (individuals, organizations and governments almost never have sufficient resources to solve all the needs of local people or community).
• They can foster a philanthropic spirit in the community (positive attitudes in a community can make it a better place to live and can improve the general business climate).
• They can foster informed discussions in the community about allocation of resources.
• They can innovate (because of not sufficient profits, they pushed people to be creative for finding solutions and tactics to address the problems).
Disadvantages of non-profit social enterprises
• The lack of control but intense lobbying can lead to socially undesirable goods.
• Sometimes the employees of non-profit social enterprises have a passion and zeal that ill serve the organization or its cause.
• Funding can be irregular (reliance on donations can make a problem in economic recessions).
PEST factors• Political – Here government regulations and legal factors are assessed in
terms of their ability to affect the business environment and trade markets.
The main issues addressed in this section include political stability, tax
guidelines, trade regulations, safety regulations, and employment laws.
• Economic – Through this factor, businesses examine the economic issues
that are bound to have an impact on the company. This would include
factors like inflation, interest rates, economic growth, the unemployment
rate and policies, and the business cycle followed in the country.
• Social – With the social factor, a business can analyze the socio-economic
environment of its market via elements like customer demographics,
cultural limitations, lifestyle attitude, and education. With these, a business
can understand how consumer needs are shaped and what brings them to
the market for a purchase.
• Technological – How technology can either positively or negatively impact
the introduction of a product or service into a marketplace is assessed here.
These factors include technological advancements, lifecycle of
technologies, the role of the Internet, and the spending on technology
research by the government.