1.2: Types of organizations

• Private and public sector• Starting a business• Profit-making organizations• Non-profit organizations and NGOs• Public-private enterprises/partnerships (HL)

private and public sector

• Organizations operate either in the private and the public sector and both sectors include profit making (business) and non-profit making organizations.

•

Private sector

• The private sector is that part of society which includes all organizations which are privately owned by individuals or groups of individuals, (e.g. sole traders, partnerships and companies)

• Most business organizations are in the private sector but this sector also includes many non-profit making organizations, (clubs, societies, charities …).

Public sector• The public sector is that part of society which is

made up of organizations owned or controlled by central/local government.

• Most public sector organizations are non-profit making, providing mainly public/ merit goods, such as education, health, etc., (ministries, municipalities)

• This sector includes a few organizations involved in business activities, (public corporations) .

Privatization

Public sector profit making organizations are less common today. Many of them are sold to the private sector.

Privatization is the process of selling public sector assets to the private sector

Benefits

Inefficient public corporations are forced to improve

There will be less financial burden for the government

Privatized companies are forced to reduced their costs of production in order to make profits and in turn offering more competitive prices for customers.

Reasons for Starting a business

Growth: the value of business assets tend to increase over time.

Inheritance: many get into business by inheriting it. Challenge: some people may see success in business

as a challenge. Independence: one may prefer to make his own

decision. Security: One may find more security starting his

own business, than being an employee.

• Identify a market opportunity that will create enough demand for the product or service – in order to be profitable

• These “enterprises” come from one of several sources:– Own skills or hobbies– Previous employment experience– Exhibitions and conferences– Small budget market research

Identifying Market Opportunities

Problems faced by start-ups

Lack of finance capital. Most owners of new businesses underestimate the amount of starting capital needed. They also faced difficulties to borrow from banks.

Cash flow problems. Starting capital may be used up in assets such as premises, fixtures, vehicles, stocks and debtors leaving little cash for daily running of the business

Marketing problems. New owners may lack the knowledge to supply the right products to the right market.

Unestablished customer base. It usually takes time to build a strong customer base.

Production. It is difficult for new businesses to forecast levelsof demand and can over/under produce. Costs of productioncan be high (not benefiting from economies of scale)

Legalities. Paper work and legal requirements for setting up new businesses can be time consuming and expensive.

External influences. New businesses are more vulnerable to external shocks such as oil crisis, economic recession, competition, etc.

Hall: Unit 5 Q1. (a) Explain

• Businesses fail for a number of reasons. • Chris Watkins’ business may have fail because of

relying on too _____ a market. He was selling mainly to _______ stores rather than supermarket chains.

• Another problem might be the $100 000 loan. He did not get an ________ loan. He had mortgage his house and therefore, may had to pay higher rate of _______.

• A third problem was the unexpected ______ of his marketing campaign. He ended up with a large amount of ________ stock.

May 09 H2 Q3c: eXamine?• One common difficulty that start-ups in developing

countries may face is the lack of ________. Most owners of new businesses _________ the amount of starting capital needed. They also faced difficulties to _______from banks when they want to expand.

• However, lending to small businesses in the world’s poorest countries is ___________ rapidly. It might become easier for small businesses to raise funds through organizations like _____________ and ______.

• Another difficulty …….

Planning: Hall P12 Table 2.1

Sources of finance

Personal savings

Funds from partners or investors (shareholders)

Leasing

Hire purchase

Banks or other financial institutions

Venture capitalist

Government funds

Assignment: Hall Q 4 Page 14

Private sector business organizations

Sole traderPartnershipCompanies: Private limited companies (Ltd)

Public limited companies (Plc)

Sole trader

• It is a one owner business and also known as sole proprietor but can employ other people .

• It is the most common form of business in the private sector. It is easy to set up. There is no legal formalities although in some type of business activity, a license is required.

• A sole trader bears all the risk of the business and therefore has unlimited liability.

Advantages

It is easy to set up with a small amount of capital and few legalformalities.

The owner reaps all profits, i.e. he does not have to share with others.

The owner makes his own decisions and therefore in full controlof his business

A sole trader has flexibility of hours of work

They can offer personalized service to customers

Enjoy privacy as financial records are not available to public

Disadvantages of sole traders

• Sole traders have unlimited liability. This means that if the business is bankrupt, the owner is personally liable to pay all its debts. There is no real difference between the owner’s personal money and the money tied up in the business.

• Sole traders often find it difficult to get additional funds from banks because they cannot offer enough security for loans. Banks alsotend to charge them a higher rate of interest.

• Sole traders usually have high cost of production. Being small businesses, they do not benefit from economies of large scale.

• High risk of failure. They may lack certain expertise/skills and therefore may face difficulties to expand or compete.

• High workload and stress. They may have to work long hours.

Unit 7 Q 1 a and b

• (a)• One of the main disadvantages of operating as

a sole trader for ________ _______ is that she has _________ liability. This means that if her business ______ she is personally _______ for all its _____. If Joanna does not have enough cash, she may be ______ to sell her personal _______ to meet these debts.

(b)

• One advantage for Joanna to operate as a sole trader is that she will be able to keep all the ______. She does not have to share it with anyone else as she is the _____ owner.

• Sole traders like Joanna may also qualify for _____ support. For example, she is in the process of applying for an ……

Partnership

• A partnership is a form of business organization owns by two or more persons (usually up to a maximum of 20 in many countries).

• Partnerships are usually found among professionals, e.g., accountants, doctors, painters etc. and small businesses.

• There is no legal formalities to complete, when forming a partnership. However, partners usually draw a partnership agreement.

What is a partnership agreement?

• A partnership Agreement is also known as Deed of partnership. It is a legal document setting out the formal details of the partnership. The deed is signed by all partners and registered. It can be used in the event of disputes and usually covers:

•

How profits or losses will be shared between the partners

Rights and duties of each partner in running the business

The name and purpose of the business

How often profits can be withdrawn

How much capital (finance) each partner will contribute

Procedures for withdrawal of a partner or end of the partnership

If there no agreement, then the law assumes that eachpartner is equal. This means that capital, profits andresponsibilities are to be shared equally amongthe partners.

Sleeping or dormant partners do not take part in therunning of the business but only contribute to capital.Therefore they have limited liability (very few cases)

Advantages of partnership

It is easy to set up as there are no legal formalities to complete.

More capital/finance can be raised as there is more than one owner.

Division of labour is possible as partners may have different skills.

Workload and responsibilities can be shared. Problems of holidays,illness, long working hours can be reduced.

It is easier to obtain loans from banks as it is a larger business.

Better decision making due to shared knowledge and expertise

Enjoy privacy as financial records are not published

Disadvantages of partnership

Each individual partner has unlimited liability. This means that eachPartner (except dormant partner) is personally and jointly liable for the debts of the business as a whole.

Disagreement among partners are more likely to occur

There is no continuity of existence. When one partner dies,the partnership ends.

Profits have to be shared among more than one owner.

Hall; P 28 Q2 a,b,c

• (a)• A deed of partnership outlines, among other

things, how ______ should be ______ among the partners. If there is no deed, then the law says that profits will be divided _______ . In this case, each partner will get _______ of profit (i.e. ______ divided by _____).

(b)

• One advantage of operating a partnership is that the ______ and ________ for running the business can be ________. For example, Gillian, Sarah and Maria will be able to cover each other during _____, _______, and _______. They can also exchange ______ when making decisions.

• Partnerships are able to raise larger amounts of ______. In this case, the partners were able to contribute a total of _______. This amount may have been _________ for one person alone to find.

(c)

• One disadvantage of operating a partnership is that partners may disagree about the way to run a business. In this case, ……..

Past exam papers

• M08 HL P1 Q1a: Define partnership agreement• M08 HL P1 Q1b: Explain 2 disadv of ….. partnership • N04 HL P2 Q5a: describe 2 adv of …… partnership• M07 HL P2 Q4a: Describe 1 disadv of ……

partnership• N07 HL P2 Q5a: Describe 2 adv of partnership• N04 SL P1 Q1: Assess the reason … decided to

convert the partnership into a private company•

• N04 H2 Q5a Explain public limited company• M01 H1 Q2: Explain 3 reasons to change a partnership

into a public limited company• M05 H2 Q5a; Explain how the partners could take

control of a public company• N04 Hl P1 Q4 Evaluate whether river should become a

public company• N05 H2 Q1a: Define a private limited company• N04 S1 Q1?: Assess the reasons River Yacth decided to

convert the partnership into a company

Limited companies

• A company is a form of business organization with a separate legal entity. It is a legal person (entity) separate from its owners(shareholders). The company can own assets, form contracts sue and be sued on its own name. For example, it can commit crime, such as fraud and be fined.

• Shareholders in a limited company have limited liability. The owners or shareholders can only lose money they have invested in the business.

Setting up a limited company : (incorporation)

• Every limited company must be incorporated (registered) with the Registrar of companies. To be registered, a company must submit two documents to the Registrar:

• Memorandum of Associations• Articles of Association

• And pay a small fee.

Memorandum of Associations

The name of the company

The address of the company’s registered office

A statement that the shareholders have limited liability

The authorized capital, i.e. the maximum amount each type of shares it can issue

The objectives of the company – what activities it intends to carry. It is also known as the Object clause. Any activity not within the objects is said to be ultra vires (beyond the law)

This sets out the constitution of the company, i.e. the rules concerning its existence. This must include:

Articles of Association

This sets out the rules for running the company. Examples:

Voting rights of shareholdersWhen annual general meeting (AGM) will be held Frequency of other meetingsHow profits are to be distributedThe number, the rights and duties of directorsThe procedures for appointing directors and auditors.

Certificate of incorporation

This is a document issued by the registrar once it is satisfied that all formalities for registration have been completed. The company is now incorporated, i.e. it has now a separate legal entity.

Advantages:

• Limited liability

• Compared to a sole trader or partners, Shareholders have limited liability. This means that if the company fails and is unable to pay its debts, shareholders have no additional liability to pay for the debts. Their liability is limited to the amount invested in shares. Therefore, more people are willing to risk their money in a company rather than in a partnership.

• Increased capital• Compared to a partnership, more capital can be

raised as there is no limit in the number of shareholders. In many countries, there is a limit on the number of persons that can form a partnership. (20 in UK)

• Continuity of existence• The business will continue even if one of the owners

dies; his shares will be transferred to another owner (wife or children) and also a company is a separate entity. This is not the case for a partnership.

Disadvantages of limited companies

Compared to a sole trader or partnership, profits have to be shared out amongst a much larger number of members.

It takes time and cost money to set a company as there is alegal procedure to follow. For example, documents such as Memorandum of association and Articles of association will have to be prepared and submitted to the Registrar of Associations

Financial Statement (Profit and loss account and balance Sheet) and annual report must be filed with the Registrar every year. These can be inspected by any member of the public, including competitors.

Types of limited companies

Private limited companies which have the letters ‘Ltd’ at the end oftheir names.

Public limited companies which have the letters ‘Plc’ at the end of Their names

Both private and public companies must have at least two membersand there is no maximum. However, in some countries, single member Private limited companies can be formed. This must be stated in theregister of members

Private limited companies

• Their business name ends in ‘limited’.• Shares can only be transferred‘privately’ , i.e. all

shareholders must agree on the transfer. • The directors tend to be shareholders. • Control of the company by the original shareholders

may not be lost to outsiders, as shares cannot be sold to new members unless all shareholders agree.

• Compared to a public limited Company, the amount of capital that can be raised is restricted. This is because shares cannot be sold to the general public.

Hall P30 Q1 (a)

From the case, there are various evidences which show that Gigisat is a limited company. These are:

The name of the company ends with the word _______It was ________ as a company on 16.10.200, has a registered

address (……) and a registration number (……)

B. (i)

The main legal obligation of Gigasat Ltd towards its shareholders is to organise an ________ _______ _______ (AGM). This means that the company must inform the shareholders of the ______ and place of the AGM. The shareholders should also received a copy of annual report and accounts

B (ii)A company also has obligations to the Registrar of Companies. Every year Gigasat Ltd has to file a copy of its annual _____ and _______ with the Registrar.

• (c).• One advantage of operating as limited company is

that shreholders have _________ liability. This means if the Gigasat Ltd goes bankrupt Chris Lay or any shareholder will lose only the amount they have _________ in their shares .

• Compared to a ______ ______ or __________, a private limited company can raise ______ capital. As there is no limit to the number of shareholders, Gigasat Ltd could invite more shareholders to contribute to capital if they chose to.

Public limited companies

A public limited company is a company whose name ends with “plc” and its shares can be sold to the public on the Stock Exchange. It must have a minimum amount of capital to start trading (in UK – £50 000)

To be registered as a plc, the following must be submitted to the Registrar of Companies:

1.Memorandum of Association2.Articles of Association3. Statutory Declaration: This is a document which states that all the requirements of the Company Acts have been met.

Once the Registrar is satisfied with all formalities, it will issue a certificate of incorporation which certifies that the company is registered or incorporated.

However, a public limited company cannot start operations until the Registrar has issued a Certificate of Trading.

The Registrar will issue a certificate of trading when the company has received the legal minimum of capital. Then the company can start operations.

When a plc has received its certificate of incorporation,it is common to issue a prospectus to raise capital. This is a document which advertise the company and invites the public to buy shares before a flotation.

Issuing a prospectus is very expensive as it involves the use of specialist lawyers or financial institutions, high quality publications, costly advertising and administrative expenses.

Prospectus

Flotation is the process of going public, being listed on the Stock Exchange and shares are available for sale

Flotation

Advantages of Plcs•Limited liability

•Continuity of existence

•Huge capital

•Large size

•Lower cost

• Easier finance

Limited liability

Shareholders enjoy limited liability. This means that in case the company is bankrupt and cannot pay its debt, a shareholder’s loss is limited to the amount invested in shares and no more.

Continuity of existence

If one shareholder dies, the company continues to operate as it is a separate legal entity/person. The share is inherited by someone else.

Huge capital

Huge amount of capital can be raised by a public limited company. As the shares can be sold on the Stock Exchange, many people are willing to invest in a plc because they can sell their share any time they want their money back. It is more difficult to sell the shares of a private limited company.

Large size

Public limited companies are usually large enterprises. Because of their size, they can dominate the market and face competition.

As they can operate on a large scale, their production cost tend to be lower. This is known as economies of scale

Lower cost

Easier finance

It is easier to raise finance such as loans, as banks and other financial institutions companies, e.g. insurance companies are more willing to lend to public limited companies. Very often they get finance at a lower rate of interest.

Disadvantages

Since anyone can buy shares in a plc, it is possible for an outsider to buy enough shares to take control of the company. Thus the original shareholders can lose control of the company they founded.

It is costly and complicated to set up. There is the need of specialist bankers/lawyers to draw up the prospectus. High quality publications, costly advertising and administrative expenses are also involved.

HallCase Study P 34 Q a,c,d

There may be a divorce of ownership and control, as directors are normally not shareholders. This might lead to the interests of the owners being ignored to a certain extent

Plcs have to publish more information than private limited companies. Competitors can use this information to their advantage

(a)

• The main reason why ImmuPharma has become a public limited company is to raise _____ to help develop its drugs. ImmuPharma needed money to finance initial ______...........

• Public limited companies can raise large amount of finance because there is no ______ to the number of _______ that can be sold and _____ can buy them.

(c)

• The floation will raise ______ x______ = ______

(d)

• There are many disadvantages of becoming a public limited company.

• Firstly, it is ______ to set up and this involves the publication of the _________ and other _________ expenses. A good proportion of the $2,8m flotation money will be used to meet these costs.

• Secondly, the original shareholders can lose ______ of the company since ………….

• Another problem is the ImmuPharma has to disclose _______ information to the Registrar. This means that anyone can _______the information even the ________

• Finally, …….

Divorce (separation) between ownership and control

Sole trader: no divorce

Partnership: divorce only for a dormant partner

Private limited company: most directors are shareholders

Public limited companies :As a business becomes larger (e.g; plc), the ownershipand control may become separated. The shareholdersmay have the money but not the time or management skillsto run the business. Directors are employed and the Shareholders are divorced from running the business for364 days. They will have their say at the Annual General Meeting (AGM) of the company

Factors determining the form of ownership of firms

Age: Many firms change their form of ownership as they become older. Many sole traders take a partner over timeand later become a company

The need for finance: Often, additional finance can only beraised if the business changes status. For example, many Private limited companies go public because they need toRaise large amount of funds for expansion.

Size: Small businesses tend to be sole traders orpartnerships. However, certain types of activities, such as chemicals manufacture, could not be effectively managedas sole traders.

Limited liability: Many sole traders or partnerships moveto become companies to enjoy the status of limited liability.

Degree of control: Many owners choose to remain soletraders in order to retain control of their businesses. Many private limited companies do not go public in ordernot to dilute control by existing shareholders;

Not-for-Profit Making organisations in the private sector

Not-for-profit organizations are run according to business principles but do not aim to make a profit. They exist to provide benefits for their members or public. Their surpluses may be shared with members, employees or third parties.

CooperativesBuilding societiesCharitiesNon-government organisations (NGOs)Pressure groups

Co-operatives

• A cooperative an organization owned and operated jointly by a group of individuals for their mutual benefit. The aim is to make a surplus which is divided among the members. Members enjoy democratic ownership, i.e. each member has one vote.

• There are three main types of co-operatives:• Retail or consumers co-operatives• Marketing or trader co-operatives• Worker co-operatives

Worker cooperatives

• Here a group of workers join together to set up a workshop.

• all workers contribute to capital• all workers contribute to decision making• Surplus is divided according to hours worked.

Consumer cooperatives• This is probably the most familiar co-op. Here a a

group of consumers joining together to open a retail shop, also known as co-op shop.

• provide cheaper goods for members• democratic ownership – one member, one

vote• surplus distributed according to spending

marketing cooperatives

• Here a group of small businesses such as farmers, fishermen or craft-men join together to market their products. Surplus is divided according to the value of goods marketed.

Building societies

• A building society is an organization owned by its members as a mutual organization, i.e. for the benefits of its members.

• Members contribut into saving schemes for future housing loan facilities.

• Today, they have become big financial institutions and are competing with banks.

Charities and Non government organisations (NGOs

• These organisations are ‘not for profit’ and have public service goals such as:

• raise money for good causes,• provide a particular service,• raise public awareness on a specific issue• Most staff are volunteers and their main source of

finance include donations and fund raising activities

• Examples include: Paws, Medecins sans frontieres,•

Advantages of Charities and NGOs:

They provide financial support for the welfare of society such as medical research, protection of children, etc.

As a non-profit organisation, they are exempt from taxes.

Donors may get income tax allowances for the amount donated.

.

Disadvantages The lack of profit motive, low salaries may cause de-motivation among the staff.

Trustees, who are at the top, are not allowed to receive financial benefits.

They must go the lengthy process of registration with the authority who usually places restrictions on what they can do.

They survive solely on one source of finance – donations.

Pressure groups

• Advocacy groups (also known pressure groups, lobby groups and special interest groups) are groups of individuals formed to influence public opinion and/or policy.

• They can be structured like Green Peace or exist for a short period of time.

Public sector organisations

• The public sector is that part of society that is not in the private sector being owned, managed and controlled by the government.

• The public sector bases its existence on the fact that the private sector is imperfect in providing for the needs of society as a whole. The public sector fills the gaps; offering merit goods (e.g. education) and public goods roads).

Public sector organizations are mainly non- profit making:MinistriesGovernment departments/services: hospitals, post office…Local authority services: libraries, swimming pools, ..

There are a few profit making organizations in the public sector. They are known as public corporations.These are set up by law to run services or industrieson behalf of the government. Each corporation is run by a chairperson and a board .

Public Private partnership (PPP) – or Private Finance Initiative (PFI) - HL only

• PPP or PFI is a contract which involves the private sector in the financing and sometimes in the operations of public service organizations, say a school or a hospital.

• Under the scheme, a project has to be designed, built, financed and sometimes managed by a private consortium on a contract for say 30 years and rent instalments is paid regularly from government funds.

• Examples:London Olympic Stadium,• Hong Kong Disneyland.

Advantages

• The government does not have to make expensive one-off payment to build a large scale project.

• The risk of being out of funds is transferred to the private sector.

• The scheme has allowed governments to get many new hospitals, schools, etc., without the need to borrow or raise taxes.

• It is argued that the private sector is more efficient to run an enterprise.

Disadvantages

The total cost, over a long period of time, may be far greaterthan the initial cost if funded traditionally.

Once private firms get involved in providing public services, the quality of provision may fall down.

With the number of bailing out of private firms providingpublic services, it is questionable whether risk is really transferred to the private sector.

Past exam papers

May 11 h1 q4 a