UNIT 3 FORMS OF BUSINESS ORGANISATION Forms of
UNIT 3 –FORMS OF BUSINESS ORGANISATION
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 person One 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
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 trader Family, 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 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 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 Association Statement made Public Limited Company Certain Minimum Amount of Shares must be Issued Accounts Specific Layout Made Available to the Public
Converting to 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 to 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 & Ownership Public Limited Company Shareholders Thousands, Millions Annual General Meeting (AGM) Election of Company Directors Professional Managers Responsibility to run the business Make Decisions Appoint Managers ○ Day-to-day operations
Control & Ownership Public 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
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 OMSCO-Largest in UK, ZEN-NOH in Japan(Revenue $55 b), Columbus Insurance Co-op in US 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 Economies Of Scale Arranging Selling of Output Attractive Prices to Large Customers
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 Disadvantages Limited to 10 people Not suitable for large businesses Disagreements / Conflicts Decision Making Issues
Joint Ventures (Dueshbank & Shanxi Insurance) Two or more businesses Work closely together One project Setting up a factory to supply components / parts to manufactures
Joint Ventures Advantages Shared Risks Reduced Costs Shared Research & Development costs Possible Profit Sharing Disadvantages Policy & Management Disagreements Conflicts Disputes
Franchising
Franchising Franchisor Large Business Product / Service Idea Does 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 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
KFC Corporation is the world’s most popular chicken franchise specializing in Original Recipe®, Kentucky Grilled Chicken™ and The Colonel’s Crispy Strips with home-style sides, Honey BBQ Wings and freshly made chicken sandwiches. KFC has been serving customers complete, freshly prepared, family meals since Colonel Harland Sanders founded the concept in 1952.
DISADVANTAGES TO FRANCHISOR The franchisee keeps profits from the outlet. Poor management of one franchised outlet could lead to a bad reputation for the whole business. DISADVANTAGES TO FRANCHISEE Huge License fee must be paid to the franchisor and possibly a percentage of annual turnover. Less independence and freedom as major instructions given by franchisor. Unable to take decisions that would suit the local requirements.
Public Sector Very Important to economies in all countries Includes all businesses Owned by Central or State or Local Government Provides Public Services such as School, Hospital, fire services etc.
Public Sector Two Main Types Public Corporations Municipal Enterprises
1. Public Corporations Wholly owned by state/central government They are usually “nationalized” businesses means they were once owned by private individuals, but later on purchased by the Government. ○ E. g. Rail Services, Water Supply Role of Government in Public Corporation: They are owned by Government but DO NOT directly operate business. Government Ministers appoint a Board of Directors (BOD) who has the responsibility of managing the business. Clear Objectives are set by the Government and the Directors run the business according to these objectives.
Public Corporation Objectives Social Objectives 1. 2. 3. To keep prices low so that all can afford the service. To keep people in job so that unemployment does not rise To offer service to the public in all areas of the country Other Objectives To Reduce cost, if necessary, by reducing the number of workers To Increase efficiency and operate more like a Company in the Private Sector To close loss-making services. What is Corporatization? The policy of reducing subsidies and operating more like a private sector business is called Corporatization. ( Preparing for “privatization”)
Public Corporation Advantages Government ownership is essential for Some industries/services which are considered important and Strategically necessary. Natural Monopolies are often owned by the Government to ensure that consumers are not exploited by private monopolies. If an important business is falling and likely to be closed down, the Government can nationalize it. Important public services such as Television & Radio broadcasting are often in the Public Sector.
Public Corporation Disadvantages There is No Shareholders to insist on high profits and efficiency. Subsidies can lead to inefficiency as managers always think that the Government will help them if business makes a loss. As there is no close competition, there is always a lack of incentive to increase quality and efficiency. Government can use the business for political gains which prevents it to be operated like a profit-making business.
2 Municipal Enterprises Operated by Local Government authorities or Municipalities. Some of these services are Free to the user. (Paid out of local taxes)Example-Street lighting, parks, Schools. Some services are Charged for. (at least to Break-even) Example - Swimming Pools, Theatres, Sporting Areas, Waste collection, Libraries. If they do not cover costs, a local Government is usually provided. Many services are now being privatized to cut down costs, to reduce the burden on local taxpayers.
- Slides: 53