UNIT 2: BUSINESS

ORGANISATIONS

Chapter 4 –forms of Business

Organisation
TAMIN 😂
 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

 Control
 Own Boss
 Freedom / Flexibility
 Personal Customer Contact
 Decision Making
 Profit
 Secrecy
 Sole Trader Disadvantages

× Unlimited Liability
× Money / Finance
× High Costs
× Higher Prices
× Raising Capital
× Long Hours
× Lack of Specialists
× Health
× No continuity
 Sole Traders

See Case Study

 Page 30 & 31
Instructions
 Read the case study
 Group 1 – Discuss Advantages
 Group 2 – Discuss Disadvantages
 Group 3 – Discuss Mikes advice
 Partnerships

Usually small businesses

Tend to be a little larger than
sole traders
Two or more people run the
business that aims to make a
profit
Maximum number of partners
is usually 20.
 Partnerships

Money usually provided by

the partners
Partnership Agreement or
Deed of Partnership maybe
used.
They are unincorporated
They have Unlimited
Liability
 Partnership Advantages

 More Capital
 Shared Responsibilities
 Shared Decisions
 Motivation to work hard
 Losses shared by all partners
 Greater opportunity for
specialization
 Easy to set up
 Partnership Advantages

 Less money needed by partners

to set up
 Can be a family run business
 Accounts kept private
 Partnership Disadvantages

× Unlimited Liability
× Legal Costs for drawing up a “Deed of Partnership”
× All partners liable for the debts of the others
× No separate legal identity
× Partnership dissolved on partners leaving or through
death
 Partnership Disadvantages

× Potential for conflict

× Time to consult other partners
× Decisions of one partner binding on the rest
× Limited access to capital
× Limit on the number of partners
Limited Partnerships

Known as Limited Liability

Partnerships (LLP)
These are possible in some
countries such as the UK
Offers partners limited
liabilities
Shares cannot be bought or
sold
Separate Legal Identity
Sole Traders and Partnerships
Assignment & Presentation
 Private Limited Company

Separate Legal Identity

 Denoted by
 “Limited”, “Ltd”, or “Pty Ltd”
Shares usually owned by
 Original sole 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 from 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 from 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
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

 Joint Ventures

Two or more businesses

Work closely together

One project
 Joint Ventures
 Disadvantages
Policy &
Setting up a factory to Management
supply components / Disagreements
parts to manufactures Conflicts
Advantages Disputes
 Shared Risks
 Reduced Costs
 Shared Research &
Development costs
 Possible Profit Sharing
 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

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 Arranging
Selling
Of of Output
Scale

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
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
Public Sector
 Public Sector

Two Main Types

 Public Corporations
 Municipal Enterprises
Public Corporations
 Public Corporation Objectives

Social Objectives
 Keep prices low and affordable
 Keep people in jobs to reduce unemployment
 Offer public service in ALL areas
Issues
 Keeping to objectives costs huge amounts of money
 Often make huge loses
 “Subsidies” often paid by government
 Public Corporation Objectives

Other Objectives
 Reduce cost, even at the cost of jobs
 Increase efficiency
 Operate like a private sector firm
 Cut services that make a loss
 Some consumers loose out
Corporatization
 Public corporation running as though it is in the private sector,
not public sector
 Preparing for “privatization”
 Public Corporation

Advantages
Essential / Necessary Services
owned & controlled by govt.

Natural Monopolies

Open Business & Secure Jobs

Availability for public use

Public Corporation
 Public Corporation

Disadvantages
No Shareholders
No Profit Motive
No Efficiency Motive
Subsidies lead to inefficiency
Managers think that government there for
bailout all the time
Unfair
 Subsidies not given to private sector
 Public Corporation

Disadvantages
Lack of Incentive
 Increase consumer choice
 Increase efficiency
Used for Political Gain
 Offering more jobs at election time
 Municipal Enterprises

Operated by Local Government

Some Free, Paid by local taxes
Some Charged, to at least Break-even

Services include;
 Street markets
 Swimming pools
 Theatres
 Sporting Areas
 Waste collection
 Libraries
 Municipal Enterprises

How do they cut cost?

How do they reduce the cost on local taxpayers?

Increase range of
services through
privatization
Reducing the role of
government in
providing goods and
services