CHAPTER 3 –FORMS OF BUSINESS

ORGANISATION

Unit 2: Business Organisations

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

Types of Business Organizations

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

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

Sole Trader Advantages Few Legal Regulations Own Boss Control Freedom / Flexibility Personal Customer Contact Decision Making Profit Secrecy

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 StudyPage 30 & 31

InstructionsRead the case studyGroup 1 – Discuss AdvantagesGroup 2 – Discuss DisadvantagesGroup 3 – Discuss Mikes advice

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.

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 Capital Shared Responsibilities Shared Decisions Motivation to work hard Losses shared by all

partners Greater opportunity for

specialization Easy 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 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

Private Limited Company Advantages

Limited Liability Sale of Shares Separate Legal Identity Original Owner Retains

Control More Ability to Raise Capital Continuity Status

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

Private Limited Company Disadvantages

SharesExisting shareholders ONLYTransfer needs consent

Less PrivacyAccounts sent to the

Registrar of Companies Raising 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 Business Separate Legal Unit Continuity Raise Large Amounts of

Capital

Public Limited Company Advantages

No Limit on the Number of Shareholders

Easy to Buy, Sell & Transfer Shares

Higher Status Easy 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 AssociationStatement made Public Limited Company

Certain Minimum Amount of Shares must be Issued

AccountsSpecific LayoutMade Available to the Public

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

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

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

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

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

AdvantagesShared RisksReduced CostsShared Research &

Development costsPossible Profit

Sharing

DisadvantagesPolicy &

ManagementDisagreementsConflictsDisputes

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

Co-operatives

Producer Co-operativesGroups of WorkersDesign ProductsProduce Products

Retail Co-operativesAim 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

EconomiesOf

Scale

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

Close Corporation

DisadvantagesLimited to 10 peopleNot suitable for large businessesDisagreements / ConflictsDecision Making Issues

Franchising

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

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

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

Public Sector

Public Sector Two Main Types

Public CorporationsMunicipal Enterprises

Public Corporations

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

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”

Public Corporation

Advantages Essential / Necessary Services

owned & controlled by govt

Natural Monopolies

Open Business & Secure Jobs

Availability for public use

Public Corporation

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

Public Corporation

Disadvantages Lack of Incentive

Increase consumer choiceIncrease efficiency

Used for Political GainOffering more jobs at

election time

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

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