Module - Governance and Directorships

Distinguishing Business Ownership from Business Control

Tell Me

Business ownership
We have briefly viewed how US law views the different business types. In the UK a similar
classification exists that identifies the following business types:

Sole trader – these are usually based on individuals who wish to trade as companies and
are quite common with manual work trades
Partnerships – these forms are usually popular in industries where expertise and skills are
shared in order to generate a more valuable intellectual capital
Private companies – these businesses are based on capital collection from shareholders
but the number of shares remains small in order to maintain control within the core of the
shareholders
Public companies – such businesses are able to attract more investors but control is
shared between a large number of shareholders
Franchises – these forms of business are based on a main company allowing setting up of
smaller businesses in order to sell a service or a range of products owned by the original
firm

We can describe, as well as compare, each of the business types based on a number of
criteria as follows:

Sole trader

Ownership – usually one trader

Control – the owner controls the business
Sources of finance – owner’s savings, bank loans and overdrafts as well as
business profits
Size – very small
Liability – unlimited
Profits – to the owner
Access to capital – limited sources available
Weaknesses – requires a lot of work and initial effort

Partnerships

Ownership – usually two or a few individuals

Control – the partners have joint and equal control of the business
Sources of finance – partners’ loans, overdrafts and business profits
Size – fairly small
 Liability – mostly unlimited
Profits – to the partners
Access to capital – usually fairly limited
Weaknesses – requires trust between partners and difficult sometimes to reach
consensus

Private companies

Ownership – usually a small number of directors

Control – the directors are responsible for strategic plans as well as day to day
decisions
Sources of finance – shares, bank overdrafts, venture capital and profits
Size – mostly small but can become large
Liability – limited
Profits – to the shareholders
Access to capital – various sources but with significant obstacles
Weaknesses limited financial sources and limited capital

Public companies

Ownership – shareholders
Control – the board of governors provides direction followed by directors and
managers
Sources of finance – shares, bank overdrafts, venture capital and profits
Size – large
Liability – limited
Profits – to the shareholders
Access to capital – extensive
Weaknesses – vulnerable to acquisitions and take-over attempts

Franchises

Ownership – the franchisee obtains the license from the franchiser

Control – the franchisee makes day to day decisions within a tight framework
guided by the franchiser
Sources of finance – franchisee’s savings and borrowing
Size – small individual ventures that are part of a very large network
Liability – limited
Profits – divided between franchisor and franchisee based on an agreed
percentage
Access to capital – limited by franchisee’s capital
Weaknesses – profits must be shared and decisions are regulated by franchisor
Show Me

In order to decide which business type is the most appropriate for a start up company, we must
consider the main advantages and disadvantages of the various business types.

The following lists are not definitive but provide a good starting point for comparing different
business types:

Sole proprietorship

Advantages

They are very easy to set up

They have a straight forward structure and operations
Offers full decision making control to owners
Business revenue can be used according to the owner’s wishes
Company profits flow directly to the owner’s personal tax returns

Disadvantages

Legal liability is unlimited

Personal assets are vulnerable if legal action is take against the business
Difficult to attract investors
Employees are likely to request a share of the business in the future

Business partnership

Advantages

Allowing sharing resources between individuals

Strategic alliances can be formed between partners
Raising funds has increased chances
Business profits directly to the owners

Disadvantages

There is a significant liability risk

Joint decisions may become problematic
Control battles may erupt
Sharing profits may cause friction

Limited Liability Company

Advantages

Personal liability is limited for any debts

Profits flow directly through the individual shareholders
Flexible management of the company
Ability to control strategy and operations

Disadvantages

Complex structure and organisation

Limited liability is a reason for lack of investment
Clients may be concerned due to the limited liability status
Resources may be an issue while company expands

Corporation

Advantages

Ability to raise funds by selling stock

Liability is relatively limited
Tax benefits are possible

Disadvantages

Requires a complex process to set up

Control is shared with others
Dividends are the main vehicle to draw funds but are also taxable

Involve Me

Consider what you are likely to need for starting your own business. Consider the different
business types and identify the main issues that you should address. Identify the main areas
you need to consider and decide on which aspects of the overall exercise you should focus.
Feedback
You should first consider your main goal and specific objectives. For example:

You wish to have a business through which you engage with your customers in your
line of profession as an individual
You wish to join forces with a colleague to increase the chances of getting bigger
jobs
You wish to engage in a more complex venture with a plan to expand and gain other
 work
You wish to attract investors and deploy a complex business structure with
ambitious expansion plans

You should also consider the main threats, including:

Lack of management skills

Poor practices and organisation
Complex structures and operations
Lack of necessary resources
Underestimated costs and effort required

Show Me More

Business ownership is a concept that may seem risky for most people whilst it may seem very
attractive to others. There are clear benefits from owning a business, such as:

There is potentially no limit in the amount of money one can gain as opposed to a fixed
salary
One can take his/her own decisions
One can be the boss of others
Ideas can be put into practice
Being your on boss means there is job security
Every aspect of the business requires your view and authorisation
A number of disciplines and business aspects become familiar
Ability to directly communicate and engage with customers
Helping local communities with sponsoring and even giving jobs to people
Enjoy working in your own dream job

However, owning a business also comes with several drawbacks, such as:

Taking financial risks

Lack of free time till the company reaches certain growth
Heavy schedules and continuous involvement is required
There are time consuming aspects associated with the more mundane tasks of running a
business
Income may be subject to fluctuations
At times cash flow may be a problem
Certain tasks are not enjoyable, for example, firing people and resolving conflicts
 There are so many disciplines that require expertise, experience and time to master

Tell Me

Business control
We have discussed so far that the ownership of a business is a concept that may generate
contrasting feelings. There are different business types, meaning that business ownership may
vary significantly. Sometimes it is possible for a business owner to have no control on certain
aspects of the business. It sounds strange but sometimes business control and business
ownership are not aligned and quite often the same people do not possess both ownership and
control.

Some of the most typical activities associated with the business control process are as follows:

Establishing standards for assessing business performance

Monitoring business performance with certain key indicators
Reporting business performance with the aid of measurable criteria
Evaluating performance based on certain benchmarks and sector standards
Identifying areas for further improvement and specific inefficiencies
Taking corrective action against certain causes of poor performance

In order to control a business, managers and directors need to evolve their personal traits and
skills. There are clear stages that can be followed in order for individuals to become capable of
controlling a business. More specifically these include:

Identifying areas for further improvement and specific inefficiencies

Identifying individual areas for improvement
Gaining the necessary skills through training programmes in business control
Establishing business control processes tailored to the needs of the specific business
Assessing organisational controls that are deployed for their effectiveness
Establishing a business control strategy that is part of the leadership ethos of the
organisation

We could distinguish between two types of control, namely strategic and operational control.
Strategic control involves the on-going reflection on the business strategy with emphasis on
any areas for improvement based on any evidence for the strategy’s success or failure. The
scope of this control process is to provide a strategy that is responsive to the business needs
and the environment’s influences. On the other hand, operational control is concerned with the
way the business strategy is executed. Operational controls are usually in the form of specific
goals, objectives and standards that help assess business performance. Some of the most
common operational controls include:

Return on investment
Net profit
 Cost
Product quality
Production rate

Control types may include (i) feed forward control that focuses on assessing what actions we
can take in the future in order to achieve our plans, (ii) concurrent control that focuses on
monitoring on-going activities and making the appropriate adjustments and (iii) feedback
control that focuses on collecting information about a completed activity with the aim to improve
similar activities in the future.

We can view any control activities as part of a loop containing the following stages:

Planning – this stage involves the creation of the necessary strategy for the business to
follow
Organising – this stage involves setting up the necessary structures and putting in place
the required resources for the business operations
Leading – this stage involves any activities that are part of the business plan and the
actions that are taken to ensure the activities are performed as required
Controlling – this stage involves the collection of information which is essential for
corrective actions before a new loop is entered

Show Me

There are several internal controls that a business can put in place to ensure that its operations
and processes are in line with its plans. At the same time the organisation can assess its
performance and take the necessary actions. Some of the most common internal controls
include:

Aligning business objectives – ensuring that everyone has common goals and that the
business strategy is clear at all times
Safeguarding assets – making sure that the organisation’s assets are protected from
external and internal malicious attacks including fraud, theft as well as accidents and
human errors
Preventing fraud and errors – putting in place monitoring and control mechanisms that
detect and prevent both intended attacks and accidental errors
Encouraging good management – providing guidelines and a framework of good practice
to share positive experiences and past success stories
Taking action against poor performance – having a clear procedure that takes corrective
action when unacceptable performance is observed
Reducing exposure to risks – engaging in a thorough risk assessment, leading to the
identification of threats and vulnerabilities and the suggestion of specific responses

Producing appropriate financial reports – disseminating performance results by using the

necessary financial statements.
Involve Me

There are several internal control procedures that may be followed depending on the
organisation’s management style. Consider how you would reflect whether the internal control
procedures you have selected are adequate and appropriate for the business and its
operations.
Feedback
The following criteria can be used to assess whether the internal control procedures are
the appropriate ones:

Completeness – the extent to which control procedures provides all the necessary
information required for decision making
Accuracy – the provision of correct information to be used for assessing business
operations and activities
Authorisation – the ability of directors and managers to regulate control procedures
Validity – the assurance that the control procedure produces the appropriate findings
Existence – the correspondence of the findings generated by the control procedure
to the matching activities and operations
Error handling – the ability to identify and process errors
Duty separation – the assignment of distinct responsibilities to each role that is
associated with the control procedures
Disclosure – the preparation of timely and accurate reports

Show Me More

Some of the most common areas where internal control procedures can be deployed include:

Safeguarding assets
Producing accurate financial information
Generating reliable financial statements
Ensuring compliance with financial reporting standards
Achieving business objectives

Resources

You can find further reading and useful resources as follows:

Online case studies: http://businesscasestudies.co.uk/business-theory/operations/control-

of-business-activity.html#axzz2T6lla0FD
Video on the role of business control: http://www.youtube.com/watch?v=xkYdmRNXeOk
Video on controlling your business: http://www.youtube.com/watch?v=qLwOTXP5h6E