IGCSE 1.4 Types of Business Organisation

Business Studies – iGCSE
0450
1.4 – Types of Business Organisations

How to Answer a Paper 2 Question
Scenario Glossary 1.4.1 1.4.2 1.4.3 1.4.4 1.4.5 1.4.6 1.4.7 Exam Question
1 – Definition
LO2: Be able to prepare a2effective
– Application
Splash Screen3 and
– Analysis
Navigation Screen4 - Evaluation
In relation to XXXX, the YYYY (DEFINITION) is relevant (APPLICATION) to the
business by…
This means that … (ANALYSIS)
Therefor …. (BALANCE FOR ANALYSIS)
However …. (BALANCE FOR ANALYSIS)
Based on the evidence provided in the Case Study, I would agree/disagree about
XXXX because …. (Evaluation)
Example:
Q1 – Haltec, a computer company has decided to market the release of a new brand of
gaming mouse. In your opinion, how could they use Product as their unique selling
point.
A1 – In relation to the Product, marketing that is aimed at emphasizing the quality of the
product as the best thing about it, this means that Haltec would show the quality in
advertisements like magazine adverts. Therefor the audience would be made aware of
the good points like size, speed, ability. However this may conflict with its price or the
place where they advertise.
Based on the evidence provided in the case study, I would agree that if the product is of
good quality then using Product as the USP would benefit the company more than the
other P’s in marketing as this is what the customers will look for in computer equipment.
Assessment objectives
The four
LO2: Be assessment
able to prepare aobjectives in Cambridge
effective Splash IGCSE
Screen and Business
Navigation Studies are:
Screen
AO1: Knowledge and understanding
AO2: Application
AO3: Analysis
AO4: Evaluation
AO1: Knowledge and understanding Candidates should be able to:
• demonstrate knowledge and understanding of facts, terms, concepts,
conventions, theories and techniques commonly applied to or used as part of
business behaviour.
AO2: Application Candidates should be able to:
• apply their knowledge and understanding of facts, terms, concepts,
conventions, theories and techniques.
AO3: Analysis Candidates should be able to:
• distinguish between evidence and opinion in a business context
• order, analyse and interpret information in narrative, numerical and graphical
forms, using appropriate techniques.
AO4: Evaluation Candidates should be able to:
• present reasoned explanations, develop arguments, understand implications
and draw inferences
• make judgements, recommendations and decisions.
Assessment objectives
LO2:Relationship
Be able to prepare between assessment
a effective Splash objectives
Screen and Navigation Screenand
components The approximate weightings allocated to each
of the assessment objectives are summarised below.
Assessment Objective Paper 1 Paper 2 Weighting for
qualification
AO1: Knowledge and 40% 20% 30%
understanding
AO2: Application 30% 30% 30%
AO3: Analysis 12% 25% 20%
AO4: Evaluation 15% 25% 20%
Grade Descriptors – A Grade
 Grade descriptions are provided to give a general indication of the standards of

LO2: Be able to prepare a effective Splash Screen and Navigation Screen
achievement likely to have been shown by candidates awarded particular grades. The
grade awarded will depend in practice upon the extent to which the candidate has met
the assessment objectives overall and it might conceal weakness in one aspect of the
examination which is balanced by above average performance in another.
A Grade - A candidate should demonstrate the following:
Knowledge and understanding
• an excellent ability to identify detailed facts, conventions and techniques in relation to
the content of the syllabus
• an excellent ability to define the concepts and ideas of the syllabus.
Application
• a thorough ability to apply knowledge and understanding, using terms, concepts,
theories and methods effectively to address business problems and issues
• a thorough ability to form conclusions from this information and to demonstrate these
conclusions clearly and logically.
Analysis
• an excellent ability to classify and comment on information presented in various forms
• an excellent ability to distinguish between evidence and opinion.
Evaluation
• an excellent ability to make clear, reasoned judgements and communicate them in an
accurate and logical manner.
Grade Descriptors – C Grade
A Grade
LO2: Be ableC
to candidate should
prepare a effective demonstrate
Splash Screen and the following:
Navigation Screen
Knowledge and understanding
• a sound ability to identify detailed facts, conventions and techniques
in relation to the content of the syllabus
• a sound ability to define the concepts and ideas of the syllabus.
Application
• a sound ability to apply knowledge and understanding, using terms,
concepts, theories and methods appropriately to address problems
and issues
• a sound ability to draw conclusions, and to present these in a clear
manner.
Analysis
• a sound ability to use and comment on information presented in
various forms
• a sound ability to distinguish between evidence and opinion.
Evaluation
• a sound ability to evaluate and make reasoned judgements.
Grade Descriptors – F Grade
A Grade
LO2: Be ableF
to candidate should
prepare a effective demonstrate
Splash Screen andthe following:
Navigation Knowledge and
Screen
understanding
• a limited ability to identify specific facts, conventions or techniques in
relation to the content of the syllabus
• a limited familiarity with definitions of the central concepts and ideas
of the syllabus.
Application
• a limited ability to apply knowledge and understanding, using terms,
concepts, theories and methods appropriately to address problems
and issues.
Analysis
• a limited ability to classify and present data in a simple way and a
limited ability to select relevant information from a set of data
• a limited ability to distinguish between evidence and opinion.
Evaluation
• a limited ability to understand implications and make
recommendations.
1.4 – Assessment Objectives
Outlines
LO2: Be ablebelow area the
to prepare objectives
effective for this
Splash Screen andsection of the
Navigation Screen
Unit. They should be revised as part of the exam
preparation. The difference
between who
 1.4.1 The main features of different forms of makes decisions
business organisation: Who owns the
• Sole traders, partnerships, private and public businesses
around you
limited companies, franchises and joint ventures What happens
• Differences between unincorporated businesses to the boss
and limited companies when they are
no longer the
• Concepts of risk, ownership and limited liability boss
• Recommend and justify a suitable form of Who is the boss
business organisation to owners/management in of a government
run business
a given situation The company
• Business organisations in the public sector, e.g. your parents
public corporation work for, who
owns it
1.4 – Glossary
Definitions:
Sole trader – A business owned by one person only.
Partnership – a form of business in which 2 or more people jointly own a business.
Partnership agreement – a written and legal agreement between business The difference
partners. It is not essential to have this but is recommended. between who
Limited Liability – the liability of shareholders in a company is only limited to the makes decisions
amount they have invested. Who owns the
Unlimited Liability – the owner of a business can be held responsible for the debts businesses
of the business they own. Their liability is not limited to the investment they made. around you
Un incorporated business – one that does not have a separate legal identity. Sole
traders and partnerships are unincorporated businesses. What happens
Incorporated Businesses – Companies that have separated legal status from their to the boss
owners. when they are
Shareholders – The owners of a limited company. They buy shares which represent no longer the
part of the company. boss
Annual General Meeting (AGM) – a legal requirement for all companies. Who is the boss
Shareholders may attend and vote on who they want to be on the Board of of a government
Directors for the coming year. run business
Dividends – Payments made to shareholders from the profits (after tax) of a The company
company. They are the return to shareholders for investing in the company. your parents
Franchise - A business based upon the use of the brand names, promotional logos work for, who
and trading methods of an existing successful business. The franchisee buys the owns it
license to operate this business from the operator.
1.4.1 – Types of Organisation – Sole trader
Scenario Glossary 1.4.1 1.4.2 1.4.3 1.4.4 1.4.5 1.4.6 1.4.7 Exam Question Page 35
LO2:Sole Traders
Be able is thea most
to prepare popular
effective Splashform of business
Screen and Navigation Screen
organisation. It is a business owned and operated by just one Owning the
person – the owner is the sole proprietor. One of the business and
taking all the
reasons it is such a common form of organisation is because profit
there are so few legal requirements to set it up, the only Being legally
ones that must be followed are: responsible for
• The owner must register with, and send annual accounts all the staff
to, the Government Tax Office Just because
• The name of the business sis important, in some countries you pay them,
does not mean
the name needs to be registered with the Registrar of you are not
Business Names. In other countries such as the UK, is it liable
sufficient for the owner to put the business name ion all All problems are
documents and to pout a notice in the main office stating your problems
who owns the business. Prestige, you
• In some industries, the sole trader must observe the laws could be the
which apply to all firms in that industry. These include next Branson,
Gates, Jobs or
health and Safety laws and obtaining an alcohol license, Martha Stewart.
for example, to sell alcohol or a license to operate a taxi.
LO2:Benefits
Be able toand Disadvantages
prepare – Case Screen
a effective Splash Study Example
and Navigation Screen
 Mehmed decided to start his own taxi business as a sole
trader. Owning the
• Advantages – There are few legal regulations for him to business and
taking all the
worry about when he set up the business. profit
• He is his own boss, he has complete control over the business Being legally
and there is no need to consult with or ask others before responsible for
making decisions. all the staff
• He has the freedom to choose his own holidays, hours of Just because
work, prices to be charged and whom to employ (unless he is you pay them,
does not mean
too busy) you are not liable
• He has close contact with his customers, the personal
All problems are
satisfaction of knowing his regular customers and the ability your problems
to respond quickly to their needs and demands. Prestige, you
• He has an incentive to work hard and keep all the profits, could be the next
after tax, and does not need to share it. Branson, Gates,
• He does not have to give information about his business to Jobs or Martha
Stewart and Ken
anyone else other than the Tax Office, enjoying complete Lay.
secrecy in business matters.
LO2:After operating
Be able the business
to prepare for several
a effective Splashmonths,
ScreenMehmed realized Screen
and Navigation that
there are also some disadvantages to being a sole trader.
• Disadvantages – He has no one to discuss business matters with as he Owning the
is the sole owner. business and
• He does not have the benefit of Limited Liability. The business is not a taking all the
separate legal unit, therefor he is responsible for all the business profit
debts. Unlimited Liability means that if the business cannot pay its Being legally
debts, then the people owed money (creditors) can force the company responsible for
to sell assets to pay for them. all the staff
• In order to expand the business and buy more taxis, he will need Just because
money he may not have. Finance sources for a sole trader and limited you pay them,
to the owner’s savings, profits and by bank loans. There are no other does not mean
owners to get money off, and banks are reluctant to lend large you are not liable
amounts of money to small businesses. All problems are
• The business is likely to remain small because capital for expansion is your problems
restricted. The business in unlikely to benefit from economies of scale, Prestige, you
and he cannot offer much training opportunities for the workers future could be the next
careers. Branson, Gates,
• If Mehmed is ill there is no-one to take control of the business, he Jobs or Martha
cannot pass on the business to his sons and if he dies the business will Stewart and Ken
be legally gone. This is because there is no continuity of business after Lay.
the death of the owner.
1.4.2 – Types of Organisation – Partnerships
LO2:ABepartnership
able to prepare is a groupSplash
a effective or association of at least
Screen and Navigation 2
Screen
people who agree to own and run a business Microsoft started
together. In some countries, such as India, there is this way with Bill
gates and Paul
a maximum limit of 20 people. The partners will Allen
contribute to the capital of the business, will have Apple started
a say in how the business is run and will share this with Steve
Jobs and Steve
profits. Wozniak (the
 Partnerships are set up easily, Mehmed could just Woz)
There tends to
ask someone (a verbal agreement) he knew to be a be one dominant
partner in the business. He would be advised to partner and one
silent.
create a written agreement called a partnership
Shared problems
agreement or deed of partnership. Without this and shared
document, partners may disagree who put the responsibility
One partner can
most capital into the business or who is entitled to buy out the other
more of the profits. Written agreements fix this. if allowed.
1.4.2 – Types of Organisation – Partnerships – Case Study
LO2:Mehmed offersa effective

Be able to prepare his friend Marta
Splash Screenthe
andchance toScreen
Navigation
become a partner in the taxi business. They have Microsoft started
prepared a written agreement which contains this way with Bill
gates and Paul
the points: Allen
1. The amount of capital invested in the business Apple started
this with Steve
by both partners. Jobs and Steve
2. The tasks to be undertaken by each partner. Wozniak (the
Woz)
3. The way in which the profits would be shared There tends to
out. be one dominant
partner and one
4. How long the partnership would last. silent.
5. Arrangements for absence, retirement and Shared problems
and shared
how new partners would be admitted. responsibility
 The two partners signed the agreement. After One partner can
the partnership had been running for some time, buy out the other
if allowed.
several advantages were seen:
1.4.2 – Types of Organisation – Partnerships – Case Study
Advantages
LO2: Be ableoftoa prepare
partnership –
a effective Splash Screen and Navigation Screen
 More capital could be invested in the business by Marta’s savings and this
would allow expansion of the business, buying more taxis.
 The responsibility for running the business is now shared. Marta specialized Microsoft started
this way with Bill
in the accounts and admin side, Mehmed on the marketing and services of
gates and Paul
the taxi form and on driving. Absences and holidays did not lead to major
Allen
problems as one of the partners was always available.
 Both partners were motivated to work hard because they would both Apple started
benefit from the profits. Also, any losses made would now be shared by the this with Steve
partners. Jobs and Steve
Disadvantages of a partnership – Wozniak (the
 The partners did not have limited liability. If it failed then creditors could still Woz)
force the partners to sell their own property to pay business debts. There tends to
 The business did not have a separate legal identity. If one of the partners be one dominant
died then the partnership would end (Both sole traders and partnerships are partner and one
said to be unincorporated businesses because they do not have a separate silent.
legal identity from the owners) Shared problems
 Partners can disagree on business decisions and consulting all partners takes and shared
time. responsibility
 If one of the partners is very inefficient or dishonest then the others could
One partner can
suffer by losing money in the business.
 Most countries limit the number of partners to 20 which limits the business buy out the other
if allowed.
growth by limiting the amount of capital that 20 people count invest.
1.4.2 – Types of Organisation – Partnerships – Activity 4.1
LO2:Mehmed
Be able toand Martaa discussed
prepare these points
effective Splash Screenwith
andaNavigation
solicitor. They
Screen
agreed it was good for some situations:
• Where people wished to form a business with others but Microsoft started
wanted to avoid legal complications this way with Bill
• Where the professional body, such as medicine and law, only gates and Paul
Allen
allowed professional people to form a partnership, not a
company. Apple started
this with Steve
• Where the partners are well known to each other, possible in
Jobs and Steve
the same family, and want a simple means of involving several of Wozniak (the
them in the running of the business. Woz)
 They each made it clear that they wanted to expand the business There tends to
further but wanted to reduce the personal risk. They wanted to be one dominant
protect their own possessions form business creditors in the event partner and one
of failure. silent.
 As partners they often discuss important business issues together Shared problems
and share ideas on how to run the business. and shared
 The solicitor advised them to consider forming a private limited responsibility
company. It was explained that this type of business type would One partner can
buy out the other
be very different from a partnership and would have its own if allowed.
benefits and drawbacks.
1.4.2 – Types of Organisation – Partnerships – Activity 4.1
LO2:Your friend
Be able Amel is aaneffective
to prepare expert computer engineer.
Splash Screen and He currentlyScreen
Navigation
works for a large computer manufacturer. He thinks that he could
run his own successful business. He has no experience of running Microsoft started
a business. He has very few savings to invest into it. this way with Bill
 Amel has a rich, friendly and bossy as he always thinks he knows gates and Paul
Allen
what is best. uncle who knows nothing about computers. He is a
retired businessman Apple started
 Amel asks for your advice about whether he should set up his own this with Steve
Jobs and Steve
business and what form of organisation he should choose. The 3 Wozniak (the
questions worrying him are: Woz)
1. Identify and explain two advantages to Amel of running his There tends to
own business rather than working for the computer be one dominant
manufacturer. partner and one
2. Do you think he should set up a sole trader business? Explain silent.
your answer. Shared problems
3. His uncle would like to become his partner in the business if and shared
responsibility
Amel decides to go ahead. Identify and explain two
advantages and two disadvantages to Amel of forming a One partner can
buy out the other
partnership with his uncle.
? if allowed.
1.4.3 – Types of Organisation – Limited Partnerships
 Homework
LO2:
 Be able to prepare a effective Splash Screen and Navigation Screen
In some countries it is possible to create a Limited Liability Partnership. This is a
new form of structure abbreviated to LLP. It offers partners limited liability but
shares in these businesses cannot be bought or sold. This type of partnership is a Microsoft started
separate legal unit which still exists after a partner’s death, unlike ordinary this way with Bill
partnerships that do. gates and Paul
 The kinds of business firms allowed in Egypt are determined by the Law of Allen
Commerce No. 17 of 1999 and the Companies Law No. 159 of 1981. The Law of Apple started
Commerce deals mainly with the sole proprietor and the simple partnerships, this with Steve
whereas the Companies Law regulates joint stock companies, limited partnerships Jobs and Steve
by shares, and limited liability companies.

Wozniak (the
The limited partnership by shares, is similar to the joint stock company with the
Woz)
exception that at least one of the founders has unlimited liability in meeting the
company's financial liabilities. There tends to
 The company is prohibited from conducting the business of insurance, banking, or be one dominant
savings or investing funds on other people's behalf (Article 3 & 5 of the Companies partner and one
Law). silent.
1. Explain or research why is it limited it is limited from insurance, banks and savings.
Shared problems
2. Research the liabilities of the other shareholders.
and shared
3. What would happen if the main shareholder wants to reduce the number of
responsibility
partners?
4. What would the benefits of less partners be for the founder of the company?
Support for this can be found at: ? One partner can
buy out the other
http:// if allowed.
www.amcham.org.eg/resources_publications/trade_resources/dbe/dbedtls.asp?sec=3
&subsec=11
1.4 – Types of Organisation – Partnerships – Revision
1.4.1Be- able
LO2: Revision Summary
to prepare – Sole
a effective traders
Splash and
Screen andPartnerships
Navigation Screen
Owner in No sharing of Incentive to East to set up

complete control profits work hard
But SOLE TRADERS But

No Limited
No Continuity
Liability
PARTNERSHIPS
Able to raise capital Responsibilities More ideas from Partners can

from all partners Shared new partner(s) specialise
Start
1.4.4 – Types of Organisation – Private Limited Company
LO2:There
Be ableistoone essential
prepare difference
a effective between
Splash a company
Screen and and
Navigation an
Screen
unincorporated business such as a sole trader or
partnership. A company is a separate legal unit from its
owners – they are incorporated businesses. This means Any Film you see
that: that has the
board voting off
 A company exists separately from the owners and will the chairman is a
continue to exist of one of the owners should die. Private Limited
 A company can make contracts or legal agreements. Company.
 A company accounts are kept separate from the John Lewis, McL
aren, JCB, Virgin,
accounts of the owner. Arcadia Group,
Wilkinson, Specs
 Companies are jointly owned by the people who have avers, River Islan
d
invested in the business. These people can buy shares in the
Companies do
company and they are therefor called shareholders. These not start out this
shareholders appoint directors to run the business. In a way but
private limited company, the directors are usually the most expansion leads
to this.
important or majority shareholders. This is usually not the
As long as the
case in a public limited company. shares owned by
others is less
than 49%
LO2:Case Study
Be able Example
to prepare – Mehmed
a effective and Marta
Splash Screenneed
andto know theScreen
Navigation
benefits of forming a Private Limited Company.
 Advantages
• Shares can be sold to a large number of people, likely to be
Any Film you see
friends and relatives, but they cannot advertise the sale of
that has the
shared to the general public. Sale of shares can lead to a much board voting off
larger capital to invest in the business than just the 2 original the chairman is a
members, allowing the business to expand more rapidly. Private Limited
• All shareholders have limited liability which is vital as it means Company.
that of the company fails with debts owed to the creditors, John Lewis, McL
aren, JCB, Virgin,
shareholders cannot be forced to sell their possessions to pay Arcadia Group,
for the debts. They would only lose their original share Wilkinson, Specs
avers, River Islan
investment. This means the shareholders have less risk d
• It is important that people who deal with a Private Limited Companies do
company are aware that it is not a sole trader as if the business not start out this
way but
goes broke, they cannot claim their owed money from the
expansion leads
shareholders. Therefor all Private companies must state Ltd. or to this.
Limited on the end of their name. As long as the
• The people who started the company, are able to keep control shares owned by
of it as long as they remain the majority shareholder. others is less
than 49%
 Disadvantages
• There are significant legal matters which have to be dealt with before
a company can be formed. In particular the Registrar of Companies
needs 2 important documents:
• The Articles of Association – Contains the rules under which the Any Film you see
company will be managed, the rights and duties of all the directors, that has the
director election rules, the holding of official meetings and share issue board voting off
procedures. the chairman is a
Private Limited
• The Memorandum of Association – This is about the company and Company.
directors, the official name and address of the registered offices, the
John Lewis, McL
objectives of the company and the number of shares bought by the aren, JCB, Virgin,
directors. Arcadia Group,
• These 2 documents make sure the company is correctly run, when this Wilkinson, Specs
avers, River Islan
is proved the company gets a Certificate of Incorporation is issued. d
• Shares in a LTD company cannot be sold of transferred to anyone Companies do
without the other shareholders agreement. Some people find this an not start out this
issue because it takes longer to sell their shares. way but
• By Law, each year the accounts must be sent to the Registrar of expansion leads
Companies and can be seen by any member of the public. to this.
• The company cannot offer the shares to the general public therefor it As long as the
will not be possible to raise a lot of capital quickly for investments. shares owned by
others is less
than 49%
1.4.4 – Types of Organisation – Private Limited Company - Revision
LO2:Success
Be ableTips – Whenaanswering
to prepare effective questions that refer
Splash Screen andtoNavigation
“companies” then the business must
Screen
either be a Private limited Company to Public Limited Company. The term “companies” should
not be used when referring to sole traders or partnerships.
Limited liability for shareholders Separate legal identity Continuity
Raise capital from

Benefits
sale of shares
Start
PRIVATE LIMITED
COMPANIES
Cannot sell shares Limitations

to public
Legal Accounts must be Not easy to

Formailities available for public to see transfer shares
1.4.5 – Types of Organisation – Public Limited Company
LO2:This formtoofprepare
Be able business is suitableSplash
a effective for very large businesses.
Screen MostScreen
and Navigation
large, well known businesses do this in order to raise capital to
expand nationally or abroad. Microsoft started
 Students often make 2 mistakes about Public limited companies: this way with Bill
1. They are not in the public sector of industry, not owned by the gates and Paul
government but by private individuals in the private sector. Allen
2. In the UK they are termed PLC after their name to avoid Apple started
confusion, e.g. J.Sainsbury plc. In other countries the term this with Steve
Jobs and Steve
Limited is used which can be confused with the UK version of
Wozniak (the
Limited which is Private Limited Companies. Woz)
 The table below might help:
There tends to
Private Limited Companies Public Limited Companies be one dominant
partner and one
UK Limited or LTD. Plc silent.
South Africa Proprietary Limited or (Pty) Ltd, Limited Shared problems
and others and shared
responsibility
 Do not worry about the different terms used. In the Cambridge One partner can
iGCSE examinations, the questions will make it clear what type of buy out the other
company is being referred to. if allowed.
LO2: Be
Case able- to
Study Express Taxis
prepare has beenSplash
a effective operating and expanding
Screen for years.
The two directors Mehmed and Marta, still own most of the shares. The
company owned 150 taxis and has diversified into bus services. It owned Microsoft started
35 buses. this way with Bill
 The government has decided to privatise all the country’s bus gates and Paul
Allen
services. Both directors were determined to expand the business
further by purchasing many of these bus routes from the Apple started
this with Steve
government. Many new buses would be needed. A huge investment
Jobs and Steve
of around $90M would be needed. Although profitable, the company Wozniak (the
could not afford this sum of money. Woz)
 The directors went to see a specialist financial business consultant at
There tends to
a large bank. The bank was impressed with the director’s plans and be one dominant
advised them to convert the company into a public limited company. partner and one
The consultant explained the procedure for doing this and the silent.
benefits and drawbacks of this change. Shared problems
1. How would the company be financially affected by being a Public and shared
Limited Company? responsibility
2. How would the management of the company be affected by the One partner can
change? buy out the other
3. With the government as a stakeholder in the success of the if allowed.
company, how could the company use this?
LO2:Activity
Be able4.2 – basedaon
to prepare the 4.1Splash
effective Scenario, Ameland
Screen hasNavigation
decided notScreen
to
form a partnership with his Uncle. Instead 5 years after setting up
the business, he is thinking of forming a private limited company. Microsoft started
Amel would sell shares in this new company to friends and this way with Bill
relatives but he wants to keep most shared himself. gates and Paul
 He is very busy repairing computers and fitting new computer Allen
systems for the large number of customers who appreciate Amel’s Apple started
this with Steve
IT skills and like the personal service he offers. Jobs and Steve
 He wants to raise capital to pay for a bigger workshop and two Wozniak (the
new vans. He plans to employ at least 2 other IT engineers. Amel Woz)
is also thinking of recruiting a manager to help him deal with There tends to
customers and the accounting side of the business. be one dominant
 Amel has ben told that when he creates a private limited company partner and one
his ‘personal risk will be reduced but he will still own most of the silent.
business.’ Shared problems
and shared
1. Identify and explain two advantages and two disadvantages to
responsibility
Amel of converting his business into a private limited
One partner can
company. buy out the other
2. Do you think that a private limited company is the appropriate if allowed.
form of organisation for Amel’s business? Justify your answer.
1.4.5 – Types of Organisation – Public Limited Company - Advantages
Advantages
LO2:This
Be able to prepare a effective Splash Screen and Navigation Screen
for of business organisation still offers limited liability to shareholders.
 It is an incorporated business and is a separate legal unit. Its accounts are kept
separately from those of the owners and there is continuity in the event of a Microsoft started
shareholder death. this way with Bill
 There is now the opportunity to raise very large capital sums to invest in the gates and Paul
business. There is no shareholder limit. Allen
 There is no restriction on the buying, selling or transfer of shares. Apple started
 A business trading as a public limited company usually has high status and should this with Steve
find it easier to attract suppliers prepared to sell goods on credit and banks willing Jobs and Steve
to lend to them.
Wozniak (the
Disadvantages
 Woz)
The legal formalities of forming such a company are quite complicated and time
consuming. There tends to
 There are more regulations and controls over public limited companies in order to be one dominant
protect the interests of shareholders including the publication of accounts for partner and one
anyone to see. silent.
 Some public limited companies grow so large that they become difficult to
Shared problems
manage or control.
 and shared
Selling shares to the public is expensive – The directors will often ask a specialist
responsibility
merchant bank to help in doing this which will charge a commission for its services
including the printing of the thousands of prospectus’s. One partner can
 There is a very real danger that although the owners of the business might buy out the other
become rich by selling shares in their business, they may lose control over it when if allowed.
it “goes public”.
1.4.5 – Types of Organisation – Public Limited Company – Control and Ownership
LO2:
InBe
all Sole
abletrading businesses
to prepare and partnerships
a effective Splashthe ownersand
Screen haveNavigation
control over how
Screen
their business is run. The take all the decisions and try to make the business
achieve the aims and objectives that are set. This is also the case in most private Microsoft started
limited companies which have relatively few shareholders. The directors are often
this way with Bill
the majority shareholders so they can ensure that their decisions are passed at all
gates and Paul
meetings.
 This is different with a {Public Limited Company. There are often thousands of Allen
shareholders, millions in large companies, and impossible for all these people to be Apple started
involved in decision making although they are invited to attend the Annual General this with Steve
Meeting (AGM) . The only decision that shareholders in this number can decide Jobs and Steve
upon is the election of a manager to be a company directors, running the business Wozniak (the
and making decision on their behalf. Woz)
 The directors cannot possibly control all of the business by themselves so they
appoint other managers. Who may not be shareholders, to make day-to-day
There tends to
decisions. be one dominant
partner and one
Shareholders May attend AGM (few do) Ownership silent.
Shared problems
and shared
}
Vote for Board of Directors who
take all important decsisions responsibility
Control and One partner can
Control
Ownership of a buy out the other
Public Limited Appoint managers for day-to-day if allowed.
Company business decisions
1.4.5 – Types of Organisation – Public Limited Company - Control
LO2:So, the shareholders

Be able own, but
to prepare a effective the directors
Splash andNavigation
Screen and managersScreen
control. Sometimes this is called the divorce between
ownership and control. Microsoft started
 Does this matter? It might be important for the shareholder. It this way with Bill
gates and Paul
means that the directors and managers may run the business Allen
to meet their own objectives. These could be increased status, Apple started
growth of the business to justify higher management salaries, this with Steve
or reducing dividends to shareholders to pay for expansion Jobs and Steve
plans. Wozniak (the
Woz)
 The shareholders will not be able to influence these decisions
There tends to
– other than by replacing the directors at the next AGM. Doing be one dominant
this would give the company very bad publicity and cause the partner and one
business to be unstable as the new directors may be silent.
inexperienced. Shared problems
and shared
responsibility
One partner can
buy out the other
if allowed.
1.4.5 – Types of Organisation – Public Limited Company – Case Study
LO2:Mehmed
Be able toand Martaadecided
prepare effectivetoSplash
convertScreen
the company into a public
one – Express Taxi and Bus PLC. By selling shares in the company
they not only raised the capital they needed but they had also Microsoft started
become very rich. They were elected as directors at the first AGM this way with Bill
for the new plc. The expansion into buying the privatised bus gates and Paul
companies was successful – at first. Profits rose and management Allen
salaries did too. However the new bus competitors were forcing the Apple started
bus fares down. Profits started to fall. The accounts published last this with Steve
Jobs and Steve
year showed the lowest profits for 3 years.
Wozniak (the
 Mehmed and Marta were voted off the Board of Directors. They no
Woz)
longer had a majority of the shares – when it was a private
There tends to
company they owned 50% of the shared each. Since ‘going public’ be one dominant
they owned only 20% of the total shares issues and lost control of partner and one
their business. The new directors owned few shares, they cut silent.
dividends to shareholders and announced a new expansion plan to Shared problems
increase profits. and shared
 Mehmed and Marta are rich but no longer control their business. responsibility
Mehmed missed being in control, he was thinking of setting up his One partner can
own business by buying a luxury hotel and plans to operate as a buy out the other
Sole Trader. if allowed.
1.4.5 – Types of Organisation – Public Limited Company - Revision
LO2: Be able
Success Tipsto–prepare
When answering
a effective questions that refer
Splash Screen to “companies”
and Navigation Screenthen the business
must either be a Private limited Company to Public Limited Company. The term
“companies” should not be used when referring to sole traders or partnerships.
Rapid expansion possible, Limited liability Continuity

specialist managers appointed
Can sell shares

to public Benefits
Start
PUBLIC LIMITED
COMPANIES
Limitations
Legal Disclosure of accounts Divorce between Expensive to

Formalities and other information ownership and control ‘Go Public’
1.4.5 – Types of Organisation – Public Limited Company – Activity
LO2:Activity 4.3prepare a effective Splash Screen and Navigation Screen

Be able to
a) How does the existence of limited liability benefit an individual shareholder?
b) Does limited liability make it easier or more difficult for companies to attract new
shareholders? Explain your answer.
c) Explain why a Sole trader might not want to convert the business into a partnership.
d) It is possible to convert a Public Limited Company back into a Private Limited
Company. This is done by individuals buying up a majority of the shares. Richard
Branson did this several years ago with the Virgin group. Why might Mehmed and
Marta have wanted to do this with the Express Taxi and Bus Company.
Risk, Ownership and Limited Liability - Summary
Business Risk Ownership Limited Liability
Organisation
Sole Trader Carried by Sole trader One person No
Partnership Carried by all Partners Several partners No
Private Limited Shareholders up to their original Shareholders – may be few Yes
Company investment or many but shares cannot be
sold to the public.
Public Limited Shareholders up to their original Shareholders – many Yes
Company investment
1.4.6 – Types of Organisation – Other Private Sector Firms
LO2:Joint
Be ableVentures
to prepare–a A joint venture
effective is when
Splash Screen and2Navigation
or more Screen
businesses agree to start a new project together, sharing Joint funding
the capital, the risks and the profits. Many European allowing for
more
companies have set up joint ventures in China with investment
Chinese businesses, as the local managers will have good Skills of one
with the history
knowledge of market needs and consumer tastes. of another
Often it is the
labour of
Advantages of Joint Ventures Disadvantages of Joint Ventures
another country
that helps.
Sharing of costs – very If the new project is successful, then Local
important for expensive projects the profits have to be shared with the knowledge like
such as new aircraft. joint venture partner. building
regulations,
Local knowledge when the joint Disagreements over important customer base,
venture company is already decisions might occur. employment
laws
based in the country
What f there is a
Risks are shared The 2 joint venture partners might falling out, what
have different ways of running a happens to the
business – different cultures. project.
1.4.6 – Types of Organisation – Other Private Sector Firms – Case
Study
 Case Study – Walmart’s Joint Venture in India

 Walmart is the world’s biggest retail business. The company wanted to
enter the Indian marker for the first time in 2009.m Walmart did not set up Joint funding
its own stores initially as it had little knowledge of the Indian market or allowing for
more
Indian consumers. Walmart set up a joint venture with Bharti Enterprises, investment
one of India’s largest business groups. The joint venture set up a business
Skills of one
called BestPrice Modern Wholesale which sells vegetables to hotels, with the history
restaurants and shops. One day Walmart might open their own named of another
stores in India – as it has in many other Asian countries. Often it is the
labour of
another country
that helps.
Local
knowledge like
 building
Activity 4.4 – Read the case study above and answer the following: regulations,
a) What is meant by “Joint Venture”? customer base,
b) Identify and explain 2 benefits to Walmart of setting up a joint venture employment
to enter the Indian Market. laws
c) Identify and explain 2 problems that Walmart might have in the future if What f there is a
it opens its own stores in India. falling out, what
happens to the
d) Extension – What issues might arise of Walmart open a store in your project.
country.
LO2:Franchising – This ais effective

Be able to prepare a very common form ofand
Splash Screen business practice,
Navigation Screen
the franchisor is a business with a product or service idea that it
Same store
does not want to sell to consumers directly. It appoints a layout across the
franchisee to use the idea or product to sell it to consumers. 2 world
of the best known international examples of a franchise are Country wide
McDonalds and the Body Shop. promotions like
Star Wars
To The Franchiser To The Franchisee themes
Guaranteed
Advantages • The franchisee buys the • The chances of the business failure consistency of
license from the franchisor are much reduced because a well- layout and quality
to use the brand name known product is being sold.
• Expansion of the • The franchisor pays for the Only local
franchised business is advertising. demographics
much faster than if the • All supplies are obtained from a and politics can
franchisor had to finance central source – the franchisor. affect them
all the outlets. • There are fewer decisions to make
• The management of the than with an independent business –
People feel safe
outlets is the responsibility prices, store layout and range of when they see
of the franchisee products will have been decided. the brand logos.
• All products sold must be • Training of staff and management is Think of what a
gained from the franchisor provided by the franchisor. McD’s or Body
• Banks are often willing to lend to Shop would look
franchisees due to relatively low risk. like in N. Korea.
To The Franchiser
LO2: Be able to prepare To The
a effective Splash Franchisee
Screen and Navigation Screen
Disadvantages • Poor management • Less independence than operating
of one franchised a non-franchised business. Same store
outlet could lead to • May be unable to make decisions layout across the
a bad reputation for that would suit the local area – e.g. world
the whole business. new products that are not part of
• The franchisee the range offered by the franchisor. Country wide
keeps profits from • License fee must be paid to the promotions like
Star Wars
the outlet. franchisor and possibly a
themes
percentage of the annual turnover.
Guaranteed
consistency of
layout and quality
Only local
demographics
and politics can
affect them
People feel safe
when they see
the brand logos.
Tips for Success – Many well known international businesses (multinational Think of what a
McD’s or Body
corporations) use franchising as a way of expanding into new foreign markets. Shop would look
The combination of a large well-known business and the local knowledge of like in N. Korea.
the franchisees can lead to very successful operations.
1.4.7 – Types of Organisation – Businesses in the Public Sector
LO2:The
Be able to prepare
Public Sectora iseffective
a very Splash
important part
Screen andofNavigation
the economy
Screen
of all mixed economies. The term “Public Sector” includes What the
all businesses owned by the state and local government, government in
your country
public services, such as hospitals, schools and the fire runs already
services, and government departments. What should
Public Corporations they run to
 These are wholly owned by the State or Central reduce
competition
Government, probably nationalized, meaning they were Why does
once privately owned but bought by the government. America not
Example sin many countries of these include Water and have a national
health service
Rail Services – but not always.
What was wrong
 Even though owned by the Government, they are not with
necessarily operated by the government. Governments communism and
everything being
appoint a Board of Directors who are responsible for state controlled
managing the business but the government will set the Could a Private
business objectives and the Directors will run the business train System
benefit India
according to these objectives.
Advantages
LO2: Be able of Public Corporations
to prepare a effective Splash Screen and Navigation Screen
 Some industries are so important that Government ownership is thought to be essential.
This includes water and electric supplies in many countries.
 If industries are controlled by a government monopoly then it would not be necessary to
have competitors – 2 sets of rail lines to a certain town for example – making sure the
consumers are not taken advantage of by private monopolies.
 If an important business is failing and likely to collapse, the government can step in to
nationalize it, keeping it open and securing jobs.
 Important public services like TV and radio are often in the public sector. Non-profitable but
important programs can still be made available to the public.
Disadvantages of Public Corporations
 There are no private shareholders to insist on high profits and efficiency, reducing the profit
motive and therefor quality of service.
 Government subsidies can lead to inefficiency as managers will expect the government to
support them if they make a loss. It may also be unfair if the public corporation gets a
subsidy but a private competitor does not.
 Often there is no close competition to public corporations, therefor there is a lack of
incentive to increase consumer choice and efficiency.
 Governments can use the business for political purposes, such as create jobs before an
election, this prevents them being operated like profit making businesses.
Other
LO2: Be Public Sector aEnterprises
able to prepare effective Splash Screen and Navigation Screen
 Local government authorities or municipalities usually
operate some trading activities. Some of these services What the
government in
are free to the user and paid out of local taxes, such as your country
street lighting and schools. runs already
 Other services are charged for and expected to break- What should
they run to
even at least. These might include street markets, reduce
swimming pools and theatres. If they do not cover their competition
costs, a local government subsidy is usually provided. Why does
 In order to cut costs and reduce the burden on local America not
have a national
taxpayers, an increasing range of services is now being health service
privatized, so reducing the role of local government in What was wrong
providing goods and services. with
communism and
everything being
state controlled
Could a Private
train System
benefit India
1.4-7 – Types of Organisation – Businesses in the Public Sector
International
LO2: Be able to Business
prepareIn aFocus – Private
effective Companies
Splash Screen‘Go
andPublic’
Navigation Screen
 TD Power Systems was incorporated as a private limited company in India in 1999. It has slowly
expanded its range if advanced electric generators. By 2011 the company needed more capital to:
• Pay back debt
• Invest in a huge expansion of its factory in Dabaspet.
 The private shareholders decided to sell at least 25% of their shares and convert the business into a
public limited company. The decision raised the capital needed.
 Reva Medical makes medical equipment in San Diego, US. The owners were keen to take the
business ‘public’ to raise capital for new research into heart medicine equipment. There was little
interest from shareholders in the US – they were worried the profits from the new equipment
would take several years to be earned. Reva’s directors looked abroad – and decided to convert to a
public company in Australia! The sale of shares on the Australian Stock Exchange allowed the
company to raise the finance needed. Share prices in Public Limited
 The owners of some young businesses have decided against Companies can fluctuate
‘going public’ because of the cost involved, the loss of control daily
and the need to make more information public.
Discussion Points:
• Do you think it would be better to keep a business such as
TD Power Systems as a private company or convert it into a
public limited company?
• Why are some business owners reluctant to convert their
companies into public limited companies.
http://i.telegraph.co.uk/multimedia/archive
Exam Styled Questions - Paper 1
1) When
LO2: Salah
Be able to losta effective
prepare his job Splash
with aScreen
fruit and vegetable
and Navigation shop
that closed
Screen
down, he decided to open his own store. He had good contacts with
suppliers. They said they would give him 1 month’s credit before he
paid for supplies. Salah had $5000 (35,000LE) in savings to invest in
the shop. He thought this would be sufficient to start the business.
He is an independent man, he never liked taking the manager’s
orders in the shop. He wanted to operate the new business as a sole
trader.
a) What is meant by ‘sole trader’? [2]
b) Identify two other types of business organisation. [2]
c) Identify and explain two benefits to Salah of operating his ?
business as a sole trader. [4]
d) Identify and explain two drawbacks to Salah of operating his
business as a sole trader. [6]
e) Do you think Salah should open new branches of his business by
selling franchises? Justify your answer. [6]
Exam Styled Questions - Paper 1
2) Amel
LO2: and
Be able Nouranaset
to prepare up N Splash
effective and A Partnership 10 years Screen
Screen and Navigation ago. It specializes in
handmade shoes and boots. The business now employs around 20 people.
Demand for the products is increasing rapidly. The partners need to invest
much more capital in the business but they need to avoid a lot of risk as they
both have families dependent on the income made from the business. Their
main competitor ShoesForU plc, which has a much larger market share than N
and A and can afford expensive advertising.
a) What is meant by ‘partnership’? [2]
b) Identify two possible benefits to Amel and Nouran to the partnership legal
structure. [2]
c) Identify two possible benefits to ShoesForU plc of being a public limited
company. [6]
d) Identify two possible drawbacks to Amel and Nouran to the partnership
form of legal structure. [6]
e) If the N and A Partnership business continues, recommend whether a
private limited company is a suitable form of legal structure for this
business. Justify your answer by considering the advantages and
disadvantages of a private limited company. [6]
?
Real Exam Questions - Paper 1
 June 2015 – Exam Paper 01 – 1.4 Question


IGCSE 1.4 Types of Business Organisation

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IGCSE 1.4 Types of Business Organisation

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Business Studies – iGCSE

1.4 – Types of Business Organisations

 Grade descriptions are provided to give a general indication of the standards of

LO2:Mehmed offersa effective

Owner in No sharing of Incentive to East to set up

But SOLE TRADERS But

Able to raise capital Responsibilities More ideas from Partners can

Limited liability for shareholders Separate legal identity Continuity

Raise capital from

Cannot sell shares Limitations

Legal Accounts must be Not easy to

LO2:So, the shareholders

Rapid expansion possible, Limited liability Continuity

Can sell shares

Legal Disclosure of accounts Divorce between Expensive to

LO2:Activity 4.3prepare a effective Splash Screen and Navigation Screen

 Case Study – Walmart’s Joint Venture in India

LO2:Franchising – This ais effective

 June 2015 – Exam Paper 01 – 1.4 Question

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