You are on page 1of 9


Business Units
People establish an organisation in order to achieve goals which they unable to achieve by
working alone as individuals. A company is a group of people, organised to carry out business
or industrial activity. Organisations are commonly classified according to their: Legal form;
Size; Ownership; Industry sector

Private sector organizations

1.) The sole trader
- It is operated by the proprietor (owner) alone or may employ several people, but the main
feature of it is that it is the owned by one person and tends to be a small business.
- This type of organisation doesnt have separate legal form, and the business and the
individual are considered to be legally indistinguishable. The individual carries on
business in his name, with the result that the individual assumes all the rights and duties
of the business.
- The size of my business means that I need less capital (money) to start the business
- Freedom and flexibility: I have independence and need not consult anyone when
making decisions
- He neednt share his profit with anyone else
- Personal contact with all of the business and customers.
- secrecy: there is no need to disclose business affairs, except to tax authorities and to
- Limited sources of finance:
- Limited scope for economies of scale
- Unlimited liability. This means that if the business goes bankrupt and hes unable to
pay his creditors, they can take his personal possessions
- Lack of continuity. This means that if he is unable to run the business, even
temporarily, then often there will be no one to run it
- It is particularly open to pressure from the larger business units.
- Restricted growth.
2.) Partnership
Two or more persons in partnership can combine their resources and expertise to form
business unit.
- The maximum number of people who can form a partnership is limited by legislation to 20
in the UK, although certain professional firms are allowed to have more than 20 people
- Partnerships are generally formed by contract between the parties. A Partnership Agreement
sets out the rights of each people, division of profits etc. If such a deed doesnt exist
then it is assumed that the profits or debts of the partnership are shared equally.
- A partner may be willing to introduce capital into a business but not wish to take an active
part in the running of the business. In such case he becomes a sleeping partner.
- It doesnt have its own legal personality, so the partner bear unlimited personal liability for
the debts of the business.
- The withdrawal of any one partner (either voluntary or upon death or bankruptcy) causes the
automatic termination of the partnership. A new partnership will come into being, if an
additional partner was admitted to the partnership.

Advantages over the sole trader:

- Additional sources of finance
- Specialisation
- Sharing of responsibilities
- Sharing of losses
- Because there are more people in a partnership, there is more experience and
knowledge available when making decision, and sometimes one or more partners have
specialist knowledge
- The partnership generally has unlimited liability and each partner is fully liable for the
debts of the business.
-Disagreements between partners and more partners there are, the greater is the
likelihood of disagreements occurring, and also, decisions by one partner are binding
on all of the others.
3.) Limited liability (or joint stock) companies
They are association of people who join together to contribute money to the company
- It has a separate legal personality from the owners. The act of incorporation creates a new
legal entity distinct from the shareholders who own the company
- The company can make contract and it can sue and be sued. All action taken by a company
are actions of the company rather than the action of individual owners.
- Legal position of a company is completely unaffected by the death or retirement of one of
the shareholders.
- Shareholders have limited liability, which means that they are liable to meet the debts of the
business only to a limited extent (extent, that they have invested in the business).
- The status of limited liability allows people to invest in a business without having to face the
risk of unlimited liability. When a business has limited liability, the investor is only
liable to lose the amount of money he has put into the business.
a.) Private Limited Company:
- The capital of the business is divided into shares, but they cant be advertised for sale
publicly. So it cant appeal to the public to subscribe to a share. The shares arent sold
on the Stock Exchange, new shareholders must be found privately.
- The minimum share capital is 100 pounds
- the minimum number of directors is one
- It can have more people contributing capital than the sole trader or partnership
- It has greater continuity than the sole trader or partnership
- They enjoy limited liability
- They arent allowed to sell shares to the public on the Stock Exchange and this may
limit the capital we can raise.
b.) Public Limited Company (PLC)
- It takes a minimum of 2 persons to form a public company and there is no maximum to
- The minimum share capital is 50000 pounds
- It must have at least 2 directors
- It has limited liability and obviously enjoys greater continuity than the other forms of

- It can sell shares to the public and the ownership of shares can easily be transferred to new
owners via market provided by the Stock Exchange, and therefore the number of owners
or shareholders can become very considerable.
- Their size enables them to enjoy economies of scale (advantage of size)
- being able to purchase in bulk, thus obtaining the most favourable terms, particularly
in relation to price.
- purchasing equipment which save labour and expense
- finding it easier to borrow money and obtain credit
Registration under the Company Act.
Companies are established by registration under the Company Act. The founders are required
to lodge a Memorandum and Articles of Association with the Registrar of Companies and to
pay certain fees. When these documents have been registered, a Certificate of Incorporation
will be issued (bejegyzsi igazols).
The Memorandum of Association (Alapt okirat)
It states the external relationship of the company, regulates the relationships of the company
with the outside world, and consists of 6 main clauses:
1. Name of the company
2. Situation clause
3. Object clause: this states the object for which the company is established.
4. Liability clause: this is straightforward statement that the liability of members is limited by
the amount invested in shares in the company
5. Capital clause: this states the amount of capital with which the company is to be registered
and the manner in which the capital is divided into shares.
6. Association clause: this is a declaration by the signatories implying that they wish to form
the said company and that they are prepared to take up and pay for the number of
shares shown on the form beside their names.
The Articles of Association (Trsasgi, mkdsi szablyzat)
It regulates the internal administration of the company, the relationship between the
company and its members and between the members themselves.
It covers matters as:
- nominal capital (i.e. face value of shares)
- issue and transfer of shares
- the rights of shareholders
- the way in which meetings are to be conducted
- appointment of directors
Structure of the a limited liability company:
a.) The shareholders (or members)
Of a company are the owners and as such are entitled to the ultimate say in the business.
In a large company the running of the business is delegated to directors, who are elected
to the board, called a Board of Directors, by shareholders. In theory the ultimate control
over a company lies with the members in general meeting:

Annual General Meetings at which dividends are declared, reports are issued and
directors are appointed

Extraordinary General Meetings: they discuss special business matters

b.) Considerable power resides in the Board of Directors, whose function:

- taking decisions on behalf of the
- monitoring progress
- company financing
- setting up objectives
- appointment senior executives
- determining strategy, policy
- approving plans
Directors have the authority to act on behalf of members. Action taken by directors are legally
binding on the company provided they are acting within their authority. To balance the
authority granted to directors, they have duties imposed on them by law:
- fiduciary duty (bizalmon alapul ktelezettsg): to use their power for the benefit
of the company and its members
- not to allow a conflict of interest to arise
- not to take secret profit from the company.
- duty of care (gondossg ktelessge) not to act negligently.
They can be removed by normal rotation, at the retirement age or by ordinary resolution in a
general meeting.
c.) Secretary:
On them law has placed a number of duties and responsibilities. It is responsible for legal
matters that concern the business. It is the chief administrative officer of the company,
usually chosen by the directors.
d.) There are some departments, each has own structure and duties:
- the administration department will co-ordinate and supervise the activities of other
sections of the firm whose function is to realise policies
determined by the Board of Directors.
- the finance and accounts department has a dual role to play. It will monitor the
debts owed to the firm by customers and by
the firm to its suppliers, at the same time
closely watching the overall financial status of
the company.
- purchasing department: will buy raw materials to be converted into manufactured
goods through production.
- sales and marketing department is responsible for the selling of finished goods, it
may be divided into separate sections to deal with
home sales and export sales.
In line organisation: staff in a department is responsible or accountable to one superior, the
head of the department. Its purpose is to ensure that staff have clean ideas about their duties,
and there is one source of instructions and little confusion.
In functional organisation: the horizontal communication is possible, but one employee may
get instructions from more director, which can create confusion.
Reports and accounts of companies
Companies are required to provide information.
Annual report consists of
- financial statements: profit and loss account (eredmny-kimutats), audited balance sheet

(mrleg), cash-flow statement

- reports from the chairman, the directors and the auditors. Include: review of results,
summary of financial result, statement of paid and proposed dividends (to give a true and
fair representation of the years transactions)
Termination of business enterprises
a.) Bankruptcy:
This doesnt apply to companies but only to individuals (sole traders, partnership) where
liabilities exceed assets, creditors can petition the courts to declare a debtor bankrupt. The
courts appoints a receiver to realise the bankrupts assets for the benefit of creditors. The
assets will be sold and the proceeds distributed among the creditors.
b.) Insolvent companies (fizetskptelen)
In the case of insolvent companies, creditors can apply to the courts for action to secure
repayment of money owing to them. This action will take forms:
- Liquidation: involves the closing down of an insolvent company. The liquidator
appointed by the court will attempt to realise the companys assets to pay
outstanding debts.
- Receivership: the receiver will dispose of assets while keeping parts of the business
- Administration: the administrator is appointed to rehabilitate (salvage) the company
rather than close it down.

Public sector organizations

Government has traditionally been involved in providing goods and services that cant be
sensibly provided by market forces: defence, education and basic health services, central or
local government has a controlling interest. They are owned and operated by the government
on behalf of the public.
1.) Nationalised industries:
Most countries have a nationalised industry sector. Some reasons why a business may be
1. Monopolies: Where a business is so strong that it can control the market price of the
service or product it supplies, perhaps because its competitors have been
forced out of business, a government may feel justified in nationalisation if
the business exploits or abuses the power it holds.
2. Unprofitable: There are some services which are essential to our welfare but by their
very nature are unlikely to be profitable enough for private enterprise to be
interested in exploiting them, e.g. sanitation, hospitals
3. To avoid unemployment: Where a business is likely to cease trading and thus cause a
considerable unemployment, the government may
nationalise to save the jobs at risk.
Advantages of nationalisation:
1. government has the resource to undertake vast capital equipment costs which may be
beyond private enterprise, e.g. Atomic Energy. In addition it can provide resources for
research into important but perhaps commercially unworthwhile areas, e.g. medical research

2. It provides essential but uneconomical services e.g. unprofitable railway lines

3. It eliminates duplication of equipment and services e.g. water pipes, railway lines.
4. It enables large sections of the economy to be planned as a whole
5. Profits are to the benefit of the whole country as opposed to private individuals.
Disadvantages of nationalisation:
1. Ultimate bosses are politicians who may not have the expertise that a businessman has. In
addition, there is a danger that political objectives may overrule business sense.
2. State enterprise often enjoys a monopoly, and the lack of competition can lead to self
satisfaction and inefficiency.
Now governments have chosen a number of methods to transfer state-owned industries to the
private sector:
a.) Sales of shares to the public privatisation: Before shares in a state owned organisation
can be sold to the public, a private sector limited company must be formed. Initially
all of the new companys shares are owned by the government, and privatisation
subsequently involves selling these shares to the public.
b.) Trade sale: smaller state-owned industries can often be easily sold to private sector
companies as a complete entity. (while large nationalised industries have been
broken away for sale to private buyers)
c.) Management/employee buy-out: In case of people-intensive business, which financial
institutions may have difficulty in deciding on a value, especially in industries with a
history of poor industrial relations.
2.)Local authority enterprises
In addition to providing basic services: roads, education, housing and social services,
local authorities have operated bus services and leisure facilities. Reasons:
- to provide a valuable public service
- to earn profit to supplement the local authoritys income
3.) QUANGOS quasi-autonomous national government organisations
They were removed from public-owned organisations, and have increased significantly in
importance in recent years. Characteristics:
- They provide services that are considered politically inappropriate for private
companies to dominate
- Their assets are vested in a body, whose constitution is determined by government,
and cant be changed without its approval.
- They have structures and process that resemble private sector organisations in terms
of their speed and flexibility.
E.g. National Health Service Trusts; Higher Education Corporations
Distinctive features of public sector organisations:
- They operate with relatively diverse and unquantified objectives
- Many of their aims that they seek to achieve are external
- They are accountable to a wider constituency of interest than private sector organisation
- For non-traded public services price is reflection of centrally determined social values
- They are frequently involved in supplying publicly beneficial services, where it can be
difficult to identify just who the customer is
- They may be required by law to supply service to specific groups, even though a market-

led decision may lead them not to do.

Other types of organization

1.) Co-operative societies
Owned and run by a society of persons whose aim is not to make a profit but to give
benefits to the members. Co-operative societies play a tiny and diminishing part in the
modern world. 2 types according to who owns them:
a.) Consumer co-operatives: societies that buy goods from a co-operative wholesale
society and sell them in a retail store.
b.) Producer co-operatives: are formed, where suppliers feel they can produce and sell
their output more effectively by pooling their resources. Popular among farmers
(by sharing manufacturing equipment and jointly selling out)
2.) Charities and voluntary organisations: (jtkonysgi; nkntes vll.)
Charities are registered with the Registrar of Charities. They are given numerous benefits
by the government such as tax concession. Charities and Voluntary organisation can act
very differently to private and public sector organisations.
- Customers may show a loyalty to the cause which goes beyond any rational
economic explanation.
- Employers often work for no monetary reward, providing a dedicated and low-cost
work-force which can help the organisation achieve its objectives.
3.) Building Societies (lakhzpt szvetkezet):
They operate on a non-profit-making basis and are concerned with personal rather than
business matters; consequently, they are considered to be on the fringe of commercial
They are intermediaries between small savers and people who wish to borrow money to
purchase or improve their own home. Most of the depositors to building societies are lent
out in this manner, but some of their funds have to be retained to meet demands for cash
4.) Franchise organisations
Franchise is an agreement, under which an exclusive rights (i.e. held by no one else) are
purchased for producing or selling goods and services under a specified trade-name and
within a specified geographical area.
Different forms:
a.) Dealership or distributorship: in which exclusive rights to sell certain products in a
defined area are granted by the producer
b.) Licence to manufacture a product in a defined area
c.) Tied public house in which the licensee obtains his stock from a single brewer.
Business format franchise:

The franchisor sells a business format in return for a fixed sum or a royalty.
The format includes a licence to trade under the franchisors name and to use its trade
mark and logo.
This right is limited to a specific area for a specific time period.

The franchisor provides a blueprint for the operation of the business and will provide
training and back-up services.
In return
the franchisee has to accept certain conditions relating to quality and purchase of
equipment and material.
He pays an initial franchise fee and further payments linked to turnover or profits are
also made to the franchiser.
Master franchising system:
In it a large foreign partners are selected and awarded the rights to a large territory in which
they in turn can subfranchise.
As a result, the franchisor gains market experience and an effective screening mechanism for
new franchises, without incurring costly mistakes.

The size of organisations

Organisational goals:
- Make a profit for their owners
- Maximise benefit to society or to their members
- Specific objectives: profit or market share maximisation , corporate growth or survival
Firms can grow:
1.) Internal (organic) growth: involves the expansion of the existing organisation.
2.) External growth: involves the acquisition of other firms by merger or take-over
a.) Merger implies:
- measure of voluntary agreement
- fusing of the organisation rather than just a change in ownership
b.) Take-over (acquisition): implies that a predator organisation swallows up
another firm by buying its shares. Usually the company which is taken over
remains distinct, but the controlling interest is enjoyed by the predator firm.
Direction of growth types of mergers and acquisition
1. Horizontal: the combining of 2 firms at the same stage in the production of
Reasons: to reduce competition, to secure market domination or secure the advantage of
being larger buyer of inputs, toprevent price wars
2. Vertical: merger or take-over of firms at different stages in the chain of production
- backward integration: the acquisition of the firm at an earlier stage
- forward integration: the acquisition of the firm at a later stage
Aims: to secure supplies, to control quality of inputs, to establish a distribution
3. Lateral: the merger or take-over of firms which produce related goods using similar
techniques of production but which dont compete directly with one another.
Aim: to diversify or to achieve economies of scale
4. Conglomerate: merger or take-over of firms in totally unrelated markets.
Aims: to overcome problems of seasonality in sales, to increase financial

Holding companies
In many cases merger or take-over is not followed by the integration of the business. The
separate elements owned by a conglomerate remain as separate companies. Legally the
companies are independent (retain their separate legal identity) but are wholly or partially
owned by a parent or holding company.
It is a combination of a number of businesses in this way might be used to bring together
several separate process into one unit.
Holding company: acts as an investment company and although strategy will be decided at
the centre, it is likely that the subsidiary companies will enjoy a considerable amount of
autonomy. It allows for decentralisation if necessary easy divestment or demerger.
Small Business
It is based on some measure of members of employees or capital employed.
1. Micro-organisations:
0-9 employees
2. Small:
3. Medium-sized:
4. Large:
500 +
They are important to the economy for some reasons, that is why government advocated
1. They offer much greater adaptability than larger firms. With less bureaucracy and
fewer channels of communication, decision can be taken rapidly.
2. They tend to be good innovators