unit 2: business organisations. forms of business organizations you will learn …………………...
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CHAPTER 3 –FORMS OF BUSINESS
ORGANISATION
Unit 2: Business Organisations
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Forms of Business Organizations
You will learn …………………
The main forms of business organizations in the public and private sectors
The advantages and disadvantages of each form or organization
The appropriateness of each form in different circumstances
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Types of Business Organizations
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Sole Traders
Smallest and Most Common type of Business Organization
Owned and Operated by one personOne Man Show”
Can employ others but the owner is the sole proprietor
Easy to set up Few Legal Regulations
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Sole Traders
Do not require a lot of money to set up
Money usually provided by the owner
They are unincorporated Meaning that legally, the owner and
the business are the same They have Unlimited Liability
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Sole Trader Advantages Few Legal Regulations Own Boss Control Freedom / Flexibility Personal Customer Contact Decision Making Profit Secrecy
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Sole Trader Disadvantages× Unlimited Liability× Money / Finance× High Costs× Higher Prices× Raising Capital× Long Hours× Lack of Specialists× Health× No continuity
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Sole Traders
See Case StudyPage 30 & 31
InstructionsRead the case studyGroup 1 – Discuss AdvantagesGroup 2 – Discuss DisadvantagesGroup 3 – Discuss Mikes advice
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Partnerships
Usually small businesses Tend to be a little larger
than sole traders Two or more people run
the business that aims to make a profit
Maximum number of partners is usually 20.
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Partnerships
Money usually provided by the partners
Partnership Agreement or Deed of Partnership maybe used.
They are unincorporated They have Unlimited
Liability
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Partnership Advantages More Capital Shared Responsibilities Shared Decisions Motivation to work hard Losses shared by all
partners Greater opportunity for
specialization Easy to set up
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Partnership Advantages Less money needed by
partners to set up Can be a family run
business Accounts kept private
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Partnership Disadvantages× Unlimited Liability× Legal Costs for drawing up a “Deed of Partnership”× All partners liable for the debts of the others× No separate legal identity × Partnership dissolved on partners leaving or through
death
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Partnership Disadvantages× Potential for conflict× Time to consult other partners× Decisions of one partner binding on the rest× Limited access to capital× Limit on the number of partners
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Limited Partnerships Known as Limited Liability
Partnerships (LLP) These are possible in some
countries such as the UK Offers partners limited
liabilities Shares cannot be bought
or sold Separate Legal Identity
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Sole Traders and Partnerships
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Assignment & Presentation
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Private Limited Company Separate Legal Identity Denoted by
“Limited”, “Ltd”, or “Pty Ltd” Shares usually owned by
Original sole traderFamily, Relatives, Friends, Employees
Most Important Directors, Majority Shareholders
Continuity Make Contracts Legal Agreements
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Private Limited Company Advantages
Limited Liability Sale of Shares Separate Legal Identity Original Owner Retains
Control More Ability to Raise Capital Continuity Status
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Private Limited Company Disadvantages
Legal FormalitiesArticles of Association
Directors Rights & Duties Rules for Elections Official Meetings Issuing Shares
Memorandum of Association Name Address Contact Details Objectives Amount of Share Capital Number of Shares
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Private Limited Company Disadvantages
SharesExisting shareholders ONLYTransfer needs consent
Less PrivacyAccounts sent to the
Registrar of Companies Raising Capital for
Expansion
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Public Limited Company Very Large Businesses
Large Supermarket Chains
Factories Private Sector Denoted by
“PLC”, “plc” Selling of Shares to the
general public
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Public Limited Companies
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Public Limited Company Advantages
Limited Liability Incorporated Business Separate Legal Unit Continuity Raise Large Amounts of
Capital
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Public Limited Company Advantages
No Limit on the Number of Shareholders
Easy to Buy, Sell & Transfer Shares
Higher Status Easy to Attract Suppliers
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Public Limited Company Disadvantages
× Legal Formalities× Complicated & Confusing
× Regulations & Control× Protect shareholders interest
× Privacy × Publication of Accounts
× Difficult to Control & Manage
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Public Limited Company Disadvantages
× Expense of Selling Shares to the Public× Specialist Bank× Merchant Bank× Prospectus
× Original Owners Loss of Control
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Converting from Private to Public
Memorandum of AssociationStatement made Public Limited Company
Certain Minimum Amount of Shares must be Issued
AccountsSpecific LayoutMade Available to the Public
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Converting to a Private to a Public
“Stock Exchange” Apply for a “listing”Easy for buying & selling
shares to shareholdersLook carefully at accountsTrading recordEnsure it is not poorly
operated
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Converting to a Private to a Public
ProspectusInvitation to the PublicBuy Shares in the companyDetailed DocumentPast RecordsPlans for the futureReasons for raising capitalHow capital will be spentFull explanation
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Control & OwnershipPublic Limited Company
ShareholdersThousands, Millions
Annual General Meeting
(AGM)Election of Company Directors
DirectorsProfessional ManagersResponsibility to run the businessMake DecisionsAppoint Managers
○ Day-to-day operations
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Control & OwnershipPublic Limited Company
Divorce Between Ownership & ControlShareholders OwnDirectors & Managers Control
○ Objectives Increase status Increase growth
○ Justify their large salaries○ Reduce Dividends
Expansion Plans
Replacing Directors○ Inexperience○ Bad publicity○ Unstable
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Activity
See Case Study Page 41
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Joint Ventures
Two or more businesses
Work closely together
One project
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Joint Ventures
Setting up a factory to supply components / parts to manufactures
AdvantagesShared RisksReduced CostsShared Research &
Development costsPossible Profit
Sharing
DisadvantagesPolicy &
ManagementDisagreementsConflictsDisputes
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Co-operatives
Groups of peopleAgree to work togetherPool resources
FeaturesAll members have one voteHelp in running the businessShared workloadShared decision makingShared ProfitsManagers Appointed
○ Larger co-operatives
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Co-operatives
Producer Co-operativesGroups of WorkersDesign ProductsProduce Products
Retail Co-operativesAim to provide members with
good quality consumer goods & services at reasonable prices
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Agriculture Co-operatives
Buy in Bulk
Worker Plants Seeds
Harvests to the Crop
Arranging Selling of Output
Attractive Prices to Large Customers
EconomiesOf
Scale
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Close Corporations
Similar to Private Limited Companies Quicker to set up Fewer Rules & Regulations Maximum of 10 people Simple Founding Statement
Registrar of Companies Members are Managers Separate Legal Identity Limited Liabilities
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Close Corporation
DisadvantagesLimited to 10 peopleNot suitable for large businessesDisagreements / ConflictsDecision Making Issues
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Franchising
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Franchising
FranchisorLarge BusinessProduct / Service IdeaDoes not want to sell to the
public directly Franchisee
Use franchisor’s product / service idea
Sells it to the consumer
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Franchising Franchisor Advantages
Franchisee○ Pays for Expansion○ Pays for Shop○ Purchases License○ Uses product name
Rapid ExpansionBrand Name & Products
Major Source of ProfitNo Operation of Retail Units
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Franchising Franchisee Advantages
Reduced chance of failure○ Well known brand/product
Advertising paid for by Franchisor
Supplies from single sourceFranchisor makes many of the
decisions○ Fewer decisions to worry about
Training ProvidedFinance from Banks easier
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Public Sector
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Public Sector Two Main Types
Public CorporationsMunicipal Enterprises
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Public Corporations
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Public Corporation Objectives Social Objectives
Keep prices low and affordableKeep people in jobs to reduce unemploymentOffer public service in ALL areas
IssuesKeeping to objectives costs huge amounts of
moneyOften make huge loses“Subsidies” often paid by government
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Public Corporation Objectives Other Objectives
Reduce cost, even at the cost of jobsIncrease efficiency Operate like a private sector firmCut services that make a loss
○ Some consumers loose out
CorporatizationPublic corporation running as though it is in
the private sector, not public sectorPreparing for “privatization”
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Public Corporation
Advantages Essential / Necessary Services
owned & controlled by govt
Natural Monopolies
Open Business & Secure Jobs
Availability for public use
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Public Corporation
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Public Corporation
Disadvantages No Shareholders No Profit Motive No Efficiency Motive Subsidies lead to inefficiency Managers think that government there
for bailout all the time Unfair
Subsidies not given to private sector
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Public Corporation
Disadvantages Lack of Incentive
Increase consumer choiceIncrease efficiency
Used for Political GainOffering more jobs at
election time
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Municipal Enterprises Operated by Local Government Some Free, Paid by local taxes Some Charged, to at least Break-even
Services include;Street marketsSwimming poolsTheatresSporting AreasWaste collectionLibraries
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Municipal Enterprises How do they cut cost? How do they reduce the cost on local taxpayers?
Increase range of services through privatization
Reducing the role of government in providing goods and services