Unit 6: Chapter 19

Business Organisations

Aims

You need to know the following for each type of business organisation

1. Definition2. Examples3. Formation4. Characteristics5. Advantages/Disadvantages

The following types of business organisations will be discussed:

Sole Trader Partnership Private Limited Company Stage One

Franchising Co-operatives Public Limited Company Alliances Stage Two

Transnationals State-owned Companies Stage

Three Indigenous Firms

Factors affecting choice of Business Structure

1. The investment needed2. Finance available, or that needs to

be borrowed or raised from investors

3. The tax it will have to pay on its profits

4. The effect a business collapse will have on their invested funds

1. Sole Trader A business owned and run by one person

eg. farmer, grocer, hairdresser, publican, local chemist, newsagent, etc

Regulations The health regulations when supplying food All safety regulations When turnover exceeds certain levels then the

business must register to collect and pay VAT When employing workers, all labour laws must be

obeyed

Characteristics Common for of business Easy to set up Unlimited Liability Capital provided by owner Owner controls all aspects of the business.

Formation

If the sole trader trades under his own name, he may start immediately

eg.: Wilson’s Wine Bar. If he is using a name different to his

own, eg, The Vineyard, then he must register the business under the Business Names act 1963.

A business must register for PAYE and PRSI if there are employees and it must also register for VAT if turnover is greater than a certain amount.

Advantages1. Easy to set up

Few legal requirements No permission is needed

2. Keeps all profits3. Independence

Full Independence.4. Confidentiality of

InformationThey do not have to publish accounts.

5. CustomersThe sole traders usually know their customers personally. This ensures customer loyalty.

Disadvantages1. Unlimited Liability

Owner personally responsible for all debts

2. Work Load, Long Hours and Stress

3. Finance – difficult to raise

4. Taxation

5. Responsibility

2. Partnership

A Partnership is a business relationship that exists between at least 2 and 20 people eg.: solicitors, doctors, accountants

Characteristics partnerships have between 2 & 20 partners Easy to set up Unlimited Liability Not separate legal entity Owners provide the capital and run the

business.

Formation If the partners operate under their own

names, the partnership can immediately start. Otherwise it must be registered under the Business Names act 1963.

The partners will usually draw up their own rules. This is called a Deed of Partnership. This sets down: Financial arrangements Share of profits Duties of each partner.

Advantages:

1. Easy to Set up and run

2. Easier to raise capital

3. More Skills and Experience in the group

4. Confidentiality of Accounts

5. Losses are shared

Disadvantages

1. Unlimited Liability – partners responsible for all losses

2. Slow Decision-making among many partners

3. Disagreements – among many partners

4. Profits shared among all based on investment

3. Private Limited Company A business owned by between 1 - 50 shareholders:

has limited liability seen as a separate legal identity in the eyes of the law.

Formation The rules for setting up a private limited company are

contained in the Companies Act 1990

1. The company needs to decide on its name and use this name on all documentation together with the word ltd at the end of the name.

2. A number of documents have to be prepared and sent to the Registrar of Companies at the Companies Registration Office.

3. The Companies Registration Office will give it a certificate of incorporation (a ‘birth cert’ of a private limited company.)

4. The company calls its first meeting (statutory meeting) and begins trading

Memorandum of Association

It contains:

1. The name and address of the company. 2. The objectives of the company3. A statement that the shareholders have

limited liability. 4. The amount of authorised share capital

(the maximum no. of shares to be sold)5. A list of all the founding shareholders

names, addresses, shares and signatures

Articles of Association

This document sets out the internal rules and regulations for running the company.

It contains:1. Details of Share Capital and voting rights

attaching to shareholders2. Details of how meetings are to be called and

conducted3. Details of how the directors are to be elected

and removed4. The powers and duties of the directors5. How the company can be wound up (closed

down)

Characteristics

Shareholders: Between 1 and 50 shareholders

Limited Liability

Separate Legal EntityThe company is separate from its shareholders.The firm can be sued, its owners can’t.

Shares are not bought and sold by members of the public

SizePrivate limited companies are often small or

medium sized, run by directors who are appointed by the shareholders.

Advantages

Limited LiabilityThey only loose the amount of money they put into the business.

Capitaleasier to raise

TaxThe rate of corporation tax is low.

Separate Legal Entity The firm can be sued, its owners can’t.

Skills and ExperienceThey can split the workload between them, with each director having different skills and experience.

Disadvantages

Legal RegulationsThey cannot begin trading until they receive a certificate of incorporation.

ConfidentialityDetailed accounts have to be published each year - employees, customers, competitors, etc have access to sensitive information on the company.

ProfitsShared between share holders in the ratio of investments not effort

CostsThe costs involved in forming a private limited company and complying with the Companies Act are higher than sole traders

4. Franchise

A franchise is when an established business allows another business to set up and use its name and idea in exchange for a fee and a percentage of the sales.

It is a licence to sell another firms product or service.

Examples of franchises include McDonald’s, Eddie Rockets, Subway, Pizza Hut, O’Briens Sandwich Bars, Spar,

Formation1. The franchiser is an expanding

business and wants to open new branches but does not want to manage these branches.

2. She seeks out an interested party (franchisee).

3. The franchiser charges the franchisee a large once off fee for permission to open up the franchise business.

4. They sign an agreement setting out how the business should be run.

5. Every year the franchisee pays the franchiser a percentage of the profits.

Characteristics The franchisee pays a fee to the franchiser

and then a percentage of the sales revenue each year.

The franchiser provides the following in return:

1. Building specifications and designs that lay down the type of structure in which the business can operate

2. Management and accounting support3. Site recommendations for the location of the

new business4. Product specifications to ensure the product

being sold is the same as in every other outlet5. Raw materials to ensure standardised

products and continuity of supply6. Each branch contains the same standard

décor, logo, method of operation product range, pricing strategy, etc.

Advantages

AdvertisingThe franchisee (individual branch) benefits from national advertising and promotions.eg.: Domino’s Pizza sponsors The Simpsons on Sky One..

RiskDue to established name, the risk of failure is small.

Economies of Scale – lower costsHead office buys all stock for the individual franchisee.

Expansion and CapitalThe franchiser can open new branches without major expense, as the franchisee pays an initial fee. The individual franchisee provides the capital and labour.

Training and Ongoing SupportThe management team receives valuable professional training and advice from the franchiser.

Disadvantages

Image at RiskThe franchiser is taking the risk of the franchisee not running the business properly

CostsThe costs to the franchisee are high. An initial fee must be paid and an annual percentage of sales.

RestrictionsThere is not much room for the individual franchisee to be creative, as a standard formula must be followed.

4. Co-operative A co-operative is a business set up by a group

of people with a common need. Each member has an equal say in the running of the business.

Eg: Wexford Farmers Co-op,

Formation The members (a minimum of 7) who purchase

one share of €1 and choose a name and registers office for the co-op and draw up rules (similar to the memorandum and articles of association) of the co-op.

They send these, with a fee, to the Registrar of Friendly Societies.

If these are in order a certificate of registration is issued and the co-op can begin trading.

Characteristics Minimum of 7 owners – no

maximum Members of a co-op enjoy limited liability Co-ops are democratically run

i.e. each member has one vote regardless of the number of shares held.

Profits are distributed to the members based on the proportion of business they do with the co-op.

The co-op cannot sell shares to the general public.

Types of Co-operatives Credit Unions: a financial credit union Producer Co-operatives: A group of producers (eg.:

farmers) Worker Co-operatives: owned and controlled by

those who work in it.

Advantages

1. Democratic Control

2. Limited Liability3. Share of Profits4. Contribution to

the Economy5. Credit Rating

Disadvantages

1. Formality and Regulations

2. Capital3. Confidentiality4. Profits5. Conflict

STAGE 2 – EXPANDING BUSINESSES Organic/Natural Growth

As a business grows, profits can be re-invested or ploughed back into the company (it expands). New machinery, equipments, land etc can be purchased. These profits are also known as retained earnings.

Other Forms of Growth Businesses can also grow by joining an alliance or if

it is a ltd, co-operative or semi state company it can turn itself into a public limited company.

Benefits of Growth1. Economies of scale; -costs fall and profits rise2. The business will be better able to seek out

new markets3. The business will have the funds to pay better

sallies and attract better works4. Greater profits will allow it to expand further

6. Public Limited Company (PLC)

This is a business owned by at least 7 shareholders.

There is no limit to the amount of shareholders in a plc.

Shares are bought and sold freely on the stock exchange.

eg.: Bank of Ireland plc, AIB plc, Aer Lingus plc, Glanbia, Kerry Group and Ryanair

Formation

A Public Limited Company grows from a private limited company, a co-operative or a semi-state body.

It has a memorandum of association, articles of association and a certificate of incorporation.

The company must have 7 shareholders willing to buy shares

Must get a trading certificate from Registrar of companies

They sell shares to the public and must get a quotation on the stock exchange.

When a company makes a decision about becoming a PLC it must:

i) Decide on the amount of money that it wishes to raise form the public.

ii) Produce a prospectus. This is a book that details the history of the company and invites members of the public to buy shares.

Characteristics

At least 7 shareholders and no maximum The letters PLC must appear after the

name Shares are bought and sold freely on the

stock exchange by whoever wants to buy them.

Accounts must be published each year. It must publish a prospectus.

Advantages:1. Limited Liability2. Tax:

The rate of corporation tax is low. How will this affect a company?

3. Capital : Plc’s can raise a lot of

capital as a result of being able to sell shares to the public on the stock exchange.

4. Publicity There is a freely

publicity with being quoted on the stock exchange.

5. Separate Legal Entity

Disadvantages:1. Legal Regulations

A lot of legislation governs running of a company

2. Confidentiality: full set of accounts must be published

3. Expense: huge expense to set up on stock exchange

4. Takeover’s: small PLC’s become the target of a takeover

5. Ownership and Control:As share numbers increase there is a big turnover and dilution of control

People involved in Companies1. Shareholders They own the company. They put their money into the company. They receive a share of the profits called a

dividend They vote in the Board of Directors and can

vote at AGM’s.2. Board of Directors They run the company for the shareholders. They are voted in by the shareholders, are

responsible for making the business a success and report back to shareholders.

They decide on the dividend.

3. Managing Director (MD)/Chief Executive Officer (CEO)

This person is in overall charge of the company

They are answerable to the board of directors. They appoint senior managers and delegate

duties to them

4. Chairperson This person is selected by the Board of

Directors to run the companies meetings. They act as a figurehead for the company.

5. Secretary This person is in charge of administration in the

company. They organise company meetings and send out the

notice and agenda for each. They take the minutes of meetings.

7. Alliance An alliance is an arrangement where

two firms agree to co-operate with each other on a single business project.

An alliance benefits both businesses. The businesses agree to come

together to share skills, expertise, costs, etc.

Example Postbank is a joint venture between

An Post and Fortis (a major international bank).

Formation An alliance is formed when two firms

decide that it would be beneficial for both of them to join up for some activity on a temporary basis.

Characteristics These are not an option for new

businesses, but are extensively used by existing firms as a method of entering new markets or acquiring new technology or products

Both firms retain their own identities The alliance may be short or long term.

Advantages1. Expertise, Costs

and Skills are shared

2. New Markets – increase market share

3. Easy to Form4. Economies of

Scale5. Brand Name of

both creates recognition

Disadvantages1. Profits and

Control Shared2. Lack of Choice

for consumers3. Disagreements

among management and employees

8. Transnational Companies A transnational/multinational is a company

with its headquarters in one country and branches in many other countries.

Some firms become transnational companies as a result of natural growth whilst others set out to conquer the world.

eg.: Dell, Intel, Sony, Ford, Toyota, etc Formation Firms become transnationals due to

growth and expansion of the business. They increase their profits and market

share by supplying world markets.

Characteristics

They tend to be the largest companies in the world.

example Sony, Shell, Coca Cola, Microsoft and

McDonald’s They sell standardised products all over the

world, sometimes with slight modifications to suit different countries – eg McDonald’s Irish Beef

All major decisions are usually made abroad for the good of the company.

Good communications and infrastructural networks are important for the success of transnational companies

Ireland and Transnationals The Industrial Development Authority (IDA)

attracts foreign companies to set up in Ireland.

E.g. Intel, Hewlett Packard, Google (European HQ. in Dublin), Amazon and eBay.

Reasons why they choose Ireland1. Tax Concessions2. Access to the EU Market3. Educated Workforce4. Grants5. Stable Currency

Advantages1. Create Employment2. Contribute Tax

Revenue 3. High level of

technologies, Products and Skills

4. Local Suppliers are available and benefit

5. Competition increases choice and lowers prices e.g. supermarkets

Disadvantages1. No loyalty to Ireland

– DELL moved to Poland

2. Repatriation of Profits

3. Competition - Irish firms suffer

4. Size and Power can influence government

9. State-owned Enterprises These are companies set-up,

owned, financed and controlled by the government.

E.G. Bus Eireann semi-state companies are part

owned by government E.g. Aer Lingus

Formation These companies are usually set

up by an Act of the Oireachtas (eg.: CIE, ESB, RTE, etc).

These don’t have shareholders but have a board of directors appointed by the relevant minister.

They may be set up as limited companies with the government as the major shareholder

E.g. Dublin Port Company

Characteristics Each state company is under the

control of a government minister, who appoints a board of directors to run the company.

The annual reports and accounts of these bodies are sent each year to the relevant Government minister

State firms are both commercial and non-commercial.

Reasons for the Establishment of State-Owned Enterprises

1. Many bodies were set up to develop vital sectors of the economy such as tourism (Bord Failte)

2. The I.D.A. attracts foreign firms into the country

3. Enterprise Ireland encourages the establishment of home-based firms.

4. To provide a particular good or service, eg.: Coillte - Forestry

5. Provides essential services which are neededeg.: buses to rural areas, An Post

Advantages1. Create

Employment2. Provide Essential

Services3. Increase

Economic Development

4. Develop Natural Resources

5. Profit made goes to government

Disadvantages1. Not profit

motivated2. Losses are

common3. Capital from

taxpayers 4. Government

Interference

10. Indigenous Firms Firms which are set up, owned and run

by Irish people. Their main place of business is Ireland. eg.: Lily O’Brien’s, Supermacs, Pat the

Baker, etc Characteristics The government supports the creation of

indigenous firms through Enterprise Ireland. The aim is to lesson our dependence on multinationals

Enterprise Ireland gives grants, advice and start up finance to indigenous firms.

Advantages1. Create

Employment2. Loyalty to Irish

produce3. Profits are kept

in Ireland4. Promotes

Culture of Enterprise

5. Tax Revenue for government

Disadvantages1. Competition –

difficult to compete against multinationals

2. Grants required from taxpayers money – failure brings no return

Changing Trends in Ownership and Structure

1. Increase in Franchises – less risk2. Mergers and Alliances –

Economies of scale3. Privatisation – raise finance for

govt 4. Co-operatives becoming Public

Limited Companies 5. Irish Businesses becoming

Transnationals – increase exports

Reasons for the Changing Trend in Ownership and Structure.

1. To raise Capital2. To increase Growth3. Reducing Risk4. Increase Sales and Profits5. To acquire New Skills and

Expertise