chapter 4 forms of a business organisation

UNIT 2: BUSINESS ORGANISATIONS

Chapter 4 –forms of Business Organisation

Forms of Business OrganizationsYou 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

Types of Business Organizations

Sole Traders

Smallest and Most Common type of Business Organization

Owned and Operated by one person One Man Show\”

Can employ others but the owner is the sole proprietor

Easy to set upFew Legal Regulations

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 sameThey have Unlimited Liability

Sole Trader Advantages

Few Legal RegulationsControl Own BossFreedom / FlexibilityPersonal Customer ContactDecision MakingProfitSecrecy

Sole Trader Disadvantages

× Unlimited Liability× Money / Finance× High Costs× Higher Prices× Raising Capital× Long Hours× Lack of Specialists× Health× No continuity

Sole Traders

See Case Study Page 30 & 31

Instructions Read the case study Group 1 – Discuss Advantages Group 2 – Discuss Disadvantages Group 3 – Discuss Mikes advice

Partnerships

Usually small businessesTend to be a little larger

than sole tradersTwo or more people run

the business that aims to make a profit

Maximum number of partners is usually 20.

Partnerships

Money usually provided by the partners

Partnership Agreement or Deed of Partnership maybe used.

They are unincorporated They have Unlimited

Liability

Partnership Advantages

More CapitalShared ResponsibilitiesShared DecisionsMotivation to work hardLosses shared by all

partnersGreater opportunity for

specializationEasy to set up

Partnership Advantages

Less money needed by partners to set up

Can be a family run business

Accounts kept private

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

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

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

Sole Traders and Partnerships

Assignment & Presentation

Private Limited Company

Separate Legal IdentityDenoted by

“Limited”, “Ltd”, or “Pty Ltd”Shares usually owned by

Original sole trader Family, Relatives, Friends, Employees

Most Important Directors, Majority Shareholders

ContinuityMake ContractsLegal Agreements

Private Limited Company Advantages

Limited LiabilitySale of SharesSeparate Legal IdentityOriginal Owner Retains

ControlMore Ability to Raise

CapitalContinuityStatus

Private Limited Company Disadvantages

Legal Formalities Articles 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

Private Limited Company Disadvantages

Shares Existing shareholders ONLY Transfer needs consent

Less Privacy Accounts sent to the Registrar

of CompaniesRaising Capital for

Expansion

Public Limited Company

Very Large Businesses Large Supermarket Chains Factories

Private Sector Denoted by

“PLC”, “plc”Selling of Shares to the

general public

Public Limited Companies

Public Limited Company Advantages

Limited Liability Incorporated BusinessSeparate Legal UnitContinuityRaise Large Amounts of

Capital

Public Limited Company Advantages

No Limit on the Number of Shareholders

Easy to Buy, Sell & Transfer Shares

Higher StatusEasy to Attract

Suppliers

Public Limited Company Disadvantages

× Legal Formalities× Complicated & Confusing

× Regulations & Control× Protect shareholders interest

× Privacy × Publication of Accounts

× Difficult to Control & Manage

Public Limited Company Disadvantages

× Expense of Selling Shares to the Public× Specialist Bank× Merchant Bank× Prospectus

× Original Owners Loss of Control

Converting from Private to Public Memorandum of Association

Statement made Public Limited Company

Certain Minimum Amount of Shares must be Issued

Accounts Specific Layout Made Available to the Public

Converting from a Private to a Public “Stock Exchange”

Apply for a “listing” Easy for buying & selling

shares to shareholders Look carefully at accounts Trading record Ensure it is not poorly

operated

Converting from a Private to a Public Prospectus

Invitation to the Public Buy Shares in the company Detailed Document Past Records Plans for the future Reasons for raising capital How capital will be spent Full explanation

Control & OwnershipPublic Limited Company

Shareholders Thousands, Millions

Annual General Meeting (AGM) Election of Company Directors

Directors Professional Managers Responsibility to run the business Make Decisions Appoint Managers

Day-to-day operations

Control & OwnershipPublic Limited Company

Divorce Between Ownership & Control Shareholders Own Directors & Managers Control

Objectives Increase status Increase growth

Justify their large salaries Reduce Dividends

Expansion Plans Replacing Directors

Inexperience Bad publicity Unstable

Activity

See Case Study Page 41

Joint Ventures

Two or more businesses

Work closely together

One project

Joint Ventures

Setting up a factory to supply components / parts to manufactures

Advantages Shared Risks Reduced Costs Shared Research &

Development costs Possible Profit Sharing

DisadvantagesPolicy &

ManagementDisagreement

sConflictsDisputes

Co-operatives

Groups of people Agree to work together Pool resources

Features All members have one vote Help in running the business Shared workload Shared decision making Shared Profits Managers Appointed

Larger co-operatives

Co-operatives

Producer Co-operatives Groups of Workers Design Products Produce Products

Retail Co-operatives Aim to provide members with

good quality consumer goods & services at reasonable prices

Agriculture Co-operatives

Buy in Bulk

Worker Plants Seeds

Harvests to the Crop

Arranging Selling of Output

Attractive Prices to Large Customers

Economies

OfScale

Close Corporations

Similar to Private Limited CompaniesQuicker to set upFewer Rules & RegulationsMaximum of 10 peopleSimple Founding Statement

Registrar of CompaniesMembers are ManagersSeparate Legal IdentityLimited Liabilities

Close Corporation

Disadvantages Limited to 10 people Not suitable for large businesses Disagreements / Conflicts Decision Making Issues

Franchising

Franchising

Franchisor Large Business Product / Service Idea Does not want to sell to the

public directlyFranchisee

Use franchisor’s product / service idea

Sells it to the consumer

Franchising

Franchisor Advantages Franchisee

Pays for Expansion Pays for Shop Purchases License Uses product name

Rapid Expansion Brand Name & Products

Major Source of Profit No Operation of Retail Units

Franchising

Franchisee Advantages Reduced chance of failure

Well known brand/product Advertising paid for by

Franchisor Supplies from single source Franchisor makes many of the

decisions Fewer decisions to worry about

Training Provided Finance from Banks easier

Public Sector

Public Sector

Two Main Types Public Corporations Municipal Enterprises

Public Corporations

Public Corporation Objectives

Social Objectives Keep prices low and affordable Keep people in jobs to reduce unemployment Offer public service in ALL areas

Issues Keeping to objectives costs huge amounts of money Often make huge loses “Subsidies” often paid by government

Public Corporation Objectives

Other Objectives Reduce cost, even at the cost of jobs Increase efficiency Operate like a private sector firm Cut services that make a loss

Some consumers loose outCorporatization

Public corporation running as though it is in the private sector, not public sector

Preparing for “privatization”

Public Corporation

AdvantagesEssential / Necessary Services

owned & controlled by govt.

Natural Monopolies

Open Business & Secure Jobs

Availability for public use

Public Corporation

Public Corporation

DisadvantagesNo ShareholdersNo Profit Motive No Efficiency MotiveSubsidies lead to inefficiency Managers think that government there

for bailout all the timeUnfair

Subsidies not given to private sector

Public Corporation

DisadvantagesLack of Incentive

Increase consumer choice Increase efficiency

Used for Political Gain Offering more jobs at election

time

Municipal Enterprises

Operated by Local Government Some Free, Paid by local taxesSome Charged, to at least Break-even

Services include; Street markets Swimming pools Theatres Sporting Areas Waste collection Libraries

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