1.2 - Types of Business Entities

Market Economy

Market Economy

A true _____ is an economy in which all resources are owned by individuals/groups. In ____ economies, supply and demand regulate the economy, rather than government intervention.

Planned Economy

An economic system in which a government or ruler makes most or all of the important decisions about the production and distribution of goods and services in the society.

Mixed Economies

An economic system that combines the elements of a market economy and the elements of a planned economy. A _____ economic system protects private property and allows a level of economic freedom in the use of capital, but also allows for governments to interfere in economic activities in order to achieve social aims.

The need for government intervention - Market Failures

Usually needed to address market failures such as

• Productive and allocative inefficiency - Markets may fail to produce and allocate scarce resources in the most efficient way

• Monopoly Power - Markets may fail to control the abuses of monopoly power

• Missing Markets - Markets may fail to form, resulting in a failure to meet a need or want, such as the need for public goods, such as defence, street lighting, and highways.

• Incomplete Markets - Markets may fail to produce enough merit goods, such as education and healthcare

Types of government interventions

• Provision public goods

• Direct provision of merit goods

• Reduce inequality through progressive taxation and benefits systems

• Regulate the provision of demerit goods and services (price floors, excise goods, bans, age limits, licenses)

• Legislate to protext employees, customers, and the environment

• Use of monetary policy

• Encouraging competition

• Providing information

*those in bold will be produced by public sector companies

Types of goods

Merit goods, Demerit Goods, Public goods

Merit Goods

Goods which are deemed to be socially desirable (positive externalities) and which are likely to be under-produced and under-consumed through the market mechanism.

Examples of ___ goods include education, health care, welfare services, housing, fire protection, refuse collection and public parks.

Demerit goods

Goods which are deemed to be socially undesirable (negative externalities) and which are likely to be over-produced and over-consumed through the market mechanism.

Examples of ____ goods are cigarettes, alcohol and all other addictive drugs such as heroine and cocaine.

Public Goods

Aree ones that when consumed by one person can be consumed in equal amounts by the remainder of society (non-rivalrous) , and where the possibility of excluding others from consumption is impossible (non-excludable).

Examples of ____ goods are national defence; the police service; street lighting; lighthouses; flood-control dams; Pavements; public drainage.

Public Sector Entities

Public Corporations, Public Sector Social Enterprises

Private Sector Entities

Unincorporated

• Sole Traders and Partnerships

Incorporated

• Privately Held Companies and Publicly held companies

Social Enterprises

• For profit: Social Enterprises and cooperatives

• Non-profit: NGOs, Charities, and other non-profit organisations

Public Sector Organisations

Owned and controlled by the state or government. Produce goods and services that are generally beneficial to society such as merit goods or public goods

Key objective: To provide goods/services that are affordable/accessible to all

Funded by: Government funds earned from tax revenue and reinvestment of surplus

Any profits will be added to government budget

Private Sector Organisations

Owned by individuals or groups

Produce goods and services that meet consumers wants/needs in order to generate a profit

Key objectives:

• To survive in a competitive market

• To produce goods and services that meet customers needs

• To maximise profits

• To grow the business

• To make returns for their shareholders

Funded by: Shareholder investment, Loan capital and reinvestment of profits

Profits are either retained or paid to shareholders as dividends

Social Enterprise

An organization that’s primary purpose is to achieve specific social objectives. Can be for-profit or non-profit

For-profit social enterprises

Enterprises whose core purpose is to benefit society, however they also seek to make a profit for their investors.

Some examples invlude TOMS and Bayani Brew.

Some specific types are microfinance providers, cooperatives, public-private partnerships

Cooperative

Autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly owned and democratically controlled enterprise'

Key features:

1. They are open and voluntary associations

2. They have a democratic structure, with each member having one vote

3. They have an equitable and fair distribution of economic results

4. Members have limited liability

Types of cooperatives: Consumer cooperative, worker cooperative, producer cooperative

Consumer Cooperative

Owned by its customers for their mutual benefit. It is a form of enterprise that is oriented toward service rather than pecuniary profit.

_____ cooperatives often take the form of retail outlets owned and operated by their consumers

Worker cooperative

A cooperative owned by its workers. Each worker owns one share, and all shares are owned by the workers who run the business

Producer Cooperative

____ owned cooperatives enable smaller producers to gain some of the benefits of being a larger organisations through cooperative marketing, support and/or purchasing.

Pros of cooperatives

Incentives to work - employees have a stake in the cooperative so are more interested in how it performs, enhancing staff motivation and productivity

Decision-making power - employees have a say in how the business is run as there is a democratic system of members having equal voting rights, thus improving the members commitment and employee loyalty

Social benefits - cooperatives are run on socially responsible principles, leading to gains for other members of society rather than only for the owners, creating social gains that can be enjoyed by the wider community

Public support - key advantage of cooperatives is that there tends to be public support, because people/consumers want to help them succeed because they believe in the cause the co-op stands for

Cons of cooperatives

Disincentive effects - There might be ineffective managers and employees as cooperatives do not pay high salaries and bonuses as incentives to work

Limited sources of finance - Cooperatives might suffer from a lack of finance as most of them cannot raise funds through stock exchange.

Slower decision-making - Decisions are likely to be delayed as all members of the cooperative work in a democratic way and are involved in the decision-making process.

Limited promotional opportunities - Cooperatives tend to have flatter organizational structures so there are fewer opportunities for employees to progress in their professional careers

Non-profit Social Enterprises

Businesses run in a commercial-like manner but without profit being the main goal. Instead, they use their surplus revenues to achieve their social goals rather than disturbing the surplus as dividends to its shareholders or owners

The main types are NGOs and charities

Non-governmental organisation (NGOs)

Private sector not-for-profit social enterprises that are independent of the government and operate for the benefit of others rather than aiming to earn a profit. They can be operational or advocacy. Charities are a very specific type of this

Charities

A specific type of NGO

Key features of charities

• Must be registered

• Are tax exempt

• Run by voluntary trustees

• Have to keep and report financial records

• Prevented by law from taking part in certain political and campaigning activities

Incorporation

The legal process of forming a corporation/company

A certificate of ___ is issued which means that there is a legal difference between the owners of a company and the business itself

Legal benefits of Incorporation

• Option to raise funds by selling shares

• Company can have a bank account

• Company has a seperate credit rating

• Protection of personal assets (Limited Liability)

• Continuity (ownership can be transferred)

• Profits are taxed at corporate rates

Unincorporated business

• Includes sole traders and partnerships

• Has owners

• The business has no seperate legal identity to its ownders

• Owners have unlimited liability

• Owners take drawings

• Does not have directors

• Income tax is paid on profits

Incorporated business

• Includes private and publicly held companies

• Has shareholders

• The business is a seperate legal identity from its owners

• Shareholders have limited liability

• Shareholders recieve dividends

• Has directors

• Corporation tax is paid on profits

Limited Liability

Indicates that even if a business if unable to repay a debt, the owners liability does not exceed the amount invested

Unlimited Liability

Indicates that if a business is unable to repay a debt, each of the business’ owners is equally responsible and personal wealth could be seized to cover the balance owed.

Types of unincorporated business

Sole trader - only one owner

Partnership - 2-20 owners

Types of companies

Privately Held Company (Ltd)

Publicly Held Company

Privately Held Companies

Has 1-50 Shareholders (and a minimum of 1 director)

Set up through the process of incorporation

Shares are traded privately

Copies of statutory accounts must be sent to shareholders, Companies House (UK), and HM Revenue and Customs (UK)

Public Limited Company

Has 2-thousands of shareholders (and a minimum of 2 directors)

Set up through the process of “going public”, “IPO”, Floatation

Shares are traded on the stock market to the public

Annual reports must be made available to the public. Accounts are independently audited to check that the financial accounts provide a true and fair reflection of the company

Board of Directors

An elected group of individuals that represent shareholders. The ___ is a governing body that typically meets at regular intervals. Can be made up of executive and non-executive directors. Every public company is required to have this

Factors to take into account when choosing the type of business ownership

Amount of finance - Sole traders and partnerships need less start-up capital than a privately held company

Size - The larger and more complex the business operations, the more likely it is to be a corporation

Limited Liability - The desire to protect the personal possessions of the owners

Degree of ownership and control - Those who wish to retain control and ownership of a business may prefer to stay relatively small as sole traders or even as privately held companies

Change - As a business grows and evolves, it may need additional sources of finance and human resources, and may decide to change it’s ownership status