BUSINESS AND MANAGEMENT

Topic 1 Business Organization and Environment

Unit 1.2

INTRODUCTION TO ORGANISATIONS

ContentTypes of Organisations• Profit non-profit and non-governmental• Sole Trader/Proprietors• Partnerships• Companies/Corporations• Charities• Cooperatives• Franchises

Private Sector and Public Sector

Learning Outcome

• Analyse local organisations of different types and identify their main features.

• Explain the advantages and disadvantages of each type of organisation identified.

• Relate each type of ownership to the degree of control.

• Distinguish between organisations in the Private and Public Sectors.

READING

• Hoang, Unit 2.1 p 20-40• Hall, Jones, Raffo, Business Studies 3rd Edition, Units 6

& 7.

Context

If you walk down any high street, you will notice that many of the shops display their names for all to see. It may be Robinsons the greengrocer, Simcocks solicitors, as well as known chain stores such as Marks and Spencer plc or All Sports. All are businesses, but each with a different status in terms of how is operated, who the owner is and how any profit is shared.

The Private and Public Sectors of the Economy

• The Private Sector comprises businesses owned and controlled by individuals or groups of individuals. In every country, most business activity is in the private sector.

• The Public Sector comprises organizations accountable to and controlled by central or local government. These usually include:

• Health and education services • Defense• Law and order• Some strategic industries.

THE ECONOMY

Private Sector Public Sector

TASK identify the features of the Private and Public Sectors of the Isle of Man .

The Private Sector Legal Structure

Private SectorBusinesses

SoleTrader Partnership

LimitedLimited Companies

Cooperatives

Private Limited Companies(LTD)

Public Limited Companies (PLC)

The Sole Trader/Proprietor

This is the most common form of business organisation. One person provides the finances and in return, has full control of the business and is able to keep all the profits.

The Sole Trader

Advantages

• Easy to set up-no legal formalities.

• Owner has complete control –not answerable to anybody else.

• Owner keeps all profits.

• Able to choose times and patterns of working.

• Able to establish close personal relationships with staff (if any are employed) and customers.

• The business can be based on the interest and skills of the owner – rather than working as an employee for a larger business.

Disadvantages

• Unlimited liability – all of the owner’s a assets are potentially at risk.

• Often faces intense competition from bigger firms, for example, food retailing.

• Owner is unable to specialise in areas of the business that are most interesting – it is responsible for all aspects of management.

• Difficult to raise additional capital.

• Long hours often necessary to make business pay.

• Lack of continuity- as the business does not have separate legal status, when the owner dies, the business ends too.

Task

• Question Hoang1.2.2 p25 CAM Flowers

Partnership

Partnerships are agreements between two or more people carry on a business together, usually with a view of making a profit. Usually a maximum of 20 partners allowed by law (exceptions: Solicitors and Accountants).

Partnerships usually raise money from personal funds of the partners who are active in the business. Also may raise capital from sleeping partners who ae entitled to a share of the profits but do not take part in the running of the business.

The Deed Of Partnership establishes the rights and privileges of the partners. This document includes issues such as voting rights, distribution of profits, The management role of each partner and who has the authority to sign contracts.

Partnership

Advantages

• Partners may specialise in different areas of business management.

• Shared decision making.

• Additional capital injected by each partner.

• Business losses shared between the partners.

• Greater privacy and fewer legal formalities that corporate Organisations (companies)

Disadvantages

• Unlimited Liability for all partners.

• Profits are shared.

• There is, as with sole traders, no continuity and the partnership will have to be reformed in the event of the death of one partner.

• All partners are bound by the decision of any one of them.

• Not possible to raise capital from selling shares.

• A sole trader, taking on partners will lose independence of decision making.

Tasks

Question 1.2.3

Hoang, p 27 EXP; The Chinese Experience

Question 2Hall Unit 6, page 43

Limited Companies

Characteristics of Limited Companies

• Limited Liability• Legal identity• Continuity• Capital is divided into shares• Companies are run by directors

Question: Discuss the characteristics of a Limited company and how these differ from the Sole Trader and Partnership forms of businesses.

Distinguish between the ownership and control of a Limited Company.

How Limited Companies are Formed

Memorandum of Association + Article of Association

Registrar of Companies

Certificate of Incorporation

Trading Begins

The Memorandum of Association

• Name of the company• Name and address of the company’s registered office• The objectives of the company and scope of its activities• The liability of members• The amount of capital to be raised and the number of shares to be

issued

Note: A limited company must have a minimum of two members.

Articles of Association

• The rights of shareholders

• The procedure for appointing directors and scope of their powers

• The length of time directors should serve before re-election

• The timing and frequency of company meetings

• The arrangement for auditing company accounts

The Private Limited Companies Characteristics

• Tend to be relatively small companies.• Their business name ends in Limited or Ltd.• Shares can only be transferred privately and all shareholders must

agree to the transfer- shares cannot be sold on the open market.• Private Limited Companies are often family businesses owned by

members of the family or close friends.• The directors of these companies tend to be shareholders and are

involved in the running of the business.• Many manufacturing firms are Private Limited Companies rather

than Sole Traders or Partnerships

Private Limited Companies

Advantages

• Shareholders have limited liability.

• More capital can be raised as there are no limits on the number of shareholders.

• Control of companies cannot be lost to outsiders.

• The business will continue even if one of the owners dies.

Disadvantages

• Profits have to be shared out amongst a much larger number of members.

• There is a legal procedure to set up the business. This takes time and costs money.

• Firms are not allowed to sell shares to the public This restricts the amount of capital that can be raised.

• Financial information filed with the Registrar can be inspected by any member of the public. Competitors could use this to their advantage.

Task

Question 1.2.4

Hoang p34

Mars Incorporated

Question 3Hall Unit 6, page 46

Case study:Porterhouse Property Management

Formation of Public Limited Companies

Memorandum of Association + Article of Association + Statutory Declaration

Registrar of Companies

Certificate of Incorporation

Publish of Prospectus

FLOTATION

Public Limited Companies

• A PLC cannot begin trading until it has completed these tasks and has received at least 25% payment for the value of shares.

• It will then receive a Trading Certificate and can begin operating.

• The shares will be quoted on the Stock Exchange or the Alternative Investment Market (AIM).

The Stock Exchange is a market where second hand shares are bought and sold. A full Stock Exchange listing means that the company must comply with the rules and regulations laid down by the Stock Exchange.

The Alternative Investment Market (AIM) is designed for companies which want to avoid some of the high costs of a full listing.

Going Public is Expensive

• The company needs lawyers to ensure that the prospectus is ‘legally’ correct.

• A large number of publications have to be made available.

• The company must use financial institutions to process share application.

• The share has to be underwritten. A fee is paid to an underwriter who must buy any unsold shares.

• The company will have advertising and administrative expenses.

• The company must have a minimum of £50,000 share capital. (Usually £millions).

Investors

Investors will invest in a public limited company because:

Dividends paid usually 2x year which are the owners share of profits

Capital growth – over time the market price of shares will rise and fall on the stock market, and shareholders may sell at a profit.

Voting power – shareholders are entitled to vote at Annual General meetings to influence the management and operation of the business, ask questions and approve resolutions and approve the final accounts.

Exiting the Stock Market

Sometimes a business operating as a Public Limited Company is taken back into private ownership. Why does this happen?

Exiting the Stock Market

• Sometimes the business lose favour with the stock market.

• The business may be bought outright by a private individual.

• The people running the business might no longer be willing to tolerate interference from the external shareholders.

Question: Suggest why Richard Branson decided he wanted to buy back all the shares of Virgin after going public.

Public Limited Companies

Advantages

• Huge amounts of money can be raised from the sale of shares to the public.

• Production costs may be lower as firms gain economies scale.

• Because of their size, plc can often dominate the market.

• It becomes easier to raise finance as financial institutions are more willing to lend to plcs.

Disadvantages

• Setting up costs can be very expensive.

• Since anyone can buy shares, its possible for an outside interest to take control of the company.

• All company accounts can be inspected by member of the public.

• Because of their size they cannot deal with customers at a personal level.

• The way they operate is controlled by various company acts which aims to protect shareholders.

• There is divorce of ownership and control which might lead to the interest of owners being ignored to some extent.

• PLCs are inflexible due to their size.

Co-operatives

This is a common form of business organisation in some countries, especially in agriculture and retailing.

Forms of Co-op: Consumer Co-op e.g The Co-operative retail society – food, travel, funerals, financial

services. The societies owned by the membersWorker Co-op. The co-operative is owned by the employees e.g. Edinburgh Bicycle Co-

operative.Producer Co-op. The co-op is established to jointly produce and market goods, usually

agricultural products such as Fair Trade Coffee ,Features

• All members can contribute to the running of the business, sharing the work load, responsibilities and decision making.

• All members have one vote at important meetings.

• Profits are shared equally among members.

Cooperatives

Advantages

• Buying in bulk.

• Working together to solve problems and make decisions.

• Good motivation of all members to work hard as they will benefit from shared profits.

Disadvantages

• Poor management skills unless professionals are employed.

• Capital shortages because no sale of shares to the non-member general public is allowed.

• Slow decision making if all members are to be consulted

Charities

• Charities are specialist organizations. They exist to raise money for particular causes and raise awareness to the needs of disadvantaged groups in society. E.g Age Concern, Oxfam, British Red Cross.

• Charities rely on donations for their revenue, and organize fund raising events. Large charities run business ventures such as Oxfam shops which sell donated 2nd hand goods to the public.

• Charities are generally run on business lines, employ people and aim to minimise costs.

• Charities are registered and are not required to pay tax, as profits are used to benefit the particular cause.

Not for profit and Non Government Organisations

• Non-profit organisations(NPOs) operate in the private sector, but differ from other private sector firms as their prime objective is NOT to make profits.

• NGOs provide services for society benefit. Eg’s are Greenpeace, Amnesty International.

• May take direct action to promote or defend a cause• Run by highly committed people, and raise funds by

charitable donations.

Charities Advantages and Disadvantages

• Provide financial support for welfare of society ether domestic or international

• As non profit organisations, charities are exempt from paying business tax

• Donors receive income tax allowance on the funds donated

• May register as Limited companies to protect employee interests

• Lack of profit motive may demotivate employees, and lower wages are paid to staff than in commercial firms

• Trustees receive no financial reward

• Financial records must be recorded and reported each year to protect donors interests and reduce fraud.

• Charities have to compete for donations, so need to advertise and rely on public goodwill (and ability to support good causes).

Franchises

This is a contract between two firms. The contract allows one of them, the franchisee, to use the name, logo and marketing methods of the other, the franchiser.

The franchisee can separately, then decide which form of legal structure to adopt.

There approx. 550 separate business franchises formats in the UK worth over £7billion in turnover.

• The franchisee pays an annual fee or Royalty, based on turnover to the franchiser.

Franchises

Franchiser Advantages• Business grows without debt• Regular income• Less organisation and staff• Keep control (inc. choice of

franchise)• Franchisees are usually highly

motivated

Franchisee Advantages• Less risk during start- up, with

a proven business format• Keep most of the profits• Sell an established product

and uses successful brand image

• Allows for national marketing at less expense

• Assistance and training available

Factors Affecting the choice of Organisations

• Age: Many businesses change their legal status as they become older. • The Need for finance: A change in legal status may be forced on the

business.e.g. Northern Rock Building Society forced into Government ownership in 2008

• Size: The size of a business operation is likely to affect its legal status.

• Limited Liability: Owners can protect their own personal financial position if the business is a Limited Liability company.

• Degree of control: Owners may consider retaining control of the business as important.

• The Nature of the Business: The type of business activity may influence the choice of legal status.

Public Sector Organisations

The Public Sector is made up or organisations which are owned and controlled by central or local government or public corporations. They are funded by government and in some cases from their own trading ‘surplus’ or profit.

Public Sector businesses still have important roles to play in certain areas of business activity.

Which Goods and Services does the Public Sector Provide?

Public Goods

Non- Rivalrous Non- Excludable

Consumption of the good/Serviceby one individual does not reduce the

Amount available for others

It is impossible to exclude othersFrom benefiting from their use

Merit Goods

These are services which people thing should be provided in greater quantities

Examples of merit goods are:• Education, Health Services, Public Libraries

If the individual is left to decide whether or not to pay for these goods, some may choose not to, or may not be able to.

Research and Writing Task

1. Identify three businesses within the Public Sector of your country and discuss the their nature in terms of the following:

• Features

• Role in the community

• Their Inter- relationship

2. Assess the reasons for Privatisation of some Public Sector entities.

3. What are the main arguments for and against privatisation of such entities.

4. Should the government of the Isle of Man privatise Manx Telecom or Manx Electricity Authority ? Give reasons for your answer.

Task

Case study : Network Rail

Source: Hall Unit 6, page 60.

Public-Private Enterprise

• P-P Enterprises arise when Governments create partnerships with the private sector to provide merit services.

• In the UK include: hospitals, prisons, schools and roads• Benefits are : private sector business expertise, source of funding

and efficiency• Local government often use Private firms in partnerships e.g. Bus

services, waste collection. • Private firms are required to tender for contracts, but: • May argue that Public service should be available for all, and no

place for profit motivated private providers who receive subsidies from the taxpayer.

• Who is accountable for failure e.g. Security at the Olympics 2012 required Govt intervention (Armed forces) when private firm G4S bungled recruitment?

Reading

• Hoang Business and Management IBID Unit 1.2

• Hall, Jones, Raffo, Business Studies, 3rd Edition, Causeway Press Ltd, 2005. Units 6 and 7.

• Marcouse Business Studies 2nd edition. Hodder Arnold. Unit 76

• www.startups.co.uk

END OF UNIT