profit-based (commercial) organizations

types of profit-based organizations

sole traders, partnerships, privately held comapnies/corporations, publicly held companies/corporations

main aim of profit-based organizations

to generate profit

how to caluclate profit

total revenue - total costs

total revenue

all the income received by the business in the same period of time

total costs

all the costs incurred by that business in the same period of time

unlimited liability

a legal obligation where the owners of a business are personally responsible for all its debts, meaning their personal assets can be used to repay the business’s debts

limited liability

a legal protection where the owners of a business are only financially responsible for the business’s debts up to the amount they have invested in it, protecting their personal assets

definition of sole traders

sole traders are a business owned and operated by one person. There is no legal distinctions existing between the business and the owner, so the owner has unlimited liability of the business and the business ceases to exist when the owner dies.

features of a sole trader

the sole trader owns and runs the business. there is no legal distinction between the sole trader and the business. Finance is limited.The business is geographically close. the sole trader has privacy and limited accountability, registrating is relatively easy and inexpensive.

why is finance limited for soletraders

because it comes from the personal savings of the sole trader or from a bank. Financial institutions may be reluctant to lend the soletrader money because of the high failure rate.

how is a soletrader geogrpahically close

soletraders are geographically close to their customers because they often operate within a local area, allowing them to interact with customers personally, understand their needs, and build strong relationships with them.

why do sole traders have privacy

A sole trader has greater privacy because they are not required to publish their financial accounts publicly, unlike some larger businesses.

why do sole traders have limited accountability

A sole trader has fewer people to answer to because they own and manage the business independently, without having to report to shareholders or a board of directors. This allows them to make decisions quickly and maintain full control over the business.

ease of registration sole trader

A sole trader is inexpensive and relatively easy to set up because there are fewer legal formalities and registration requirements compared to other types of businesses. This reduces start-up costs and makes it easier for entrepreneurs to establish their own business with limited capital.

advantages of sole traders

Control Freaks Prefer Legal Closeness, Arranging Profitable Personalities.

complete control over all important decisions. flexibility in working hours, products & services, changes to operations. privacy. minimal legal formalities. close ties to customers, providing a competitive advantage. simple to arrange. all profits to owner. high levels of personal satisfaction.

control, flexibility, privacy, legal, close, arrangement, profits, personal satisfaction

disadvantages of sole traders

Cash Leaves Skilled Chiefs Competing, Sweating, Evolving

limited capital because it causes a burden on businesses. unlimited liability. limited skill set. lack of continuity in the event of a serious accident or owner’s death. competing against established businesses is daunting. stress and potential ineffectiveness as sole trader makes all the decisions. there is a limited scope for expansions as the owner spends all time maintaining survival.

capital, liability, skill, continuity, competing, stress, expansion

partnerships definition

A business owned and managed by two or more people who share the responsibilities, profits and losses of the business. They have unlimited liability for the debts of the business.

deed of partnership

A legally binding document that outlines the rights, responsibilities, and profit-sharing arrangements of each partner in a partnership, helping to prevent disputes between partners.

features of a partnership

Decisions are made jointly by partners. No legal distinction between business and partners. finance is more available than sole traders. Some partners may be sleeping partners. Offers more varied services. Partnerships are more stable/higher continuity. partners dont share all profits equally

why do partnerships have more available finance

All partners can contribute capital to start the business or buy into an existing business, providing a larger pool of funds than a sole trader may be able to raise alone. This allows the partnership to finance start-up costs, purchase equipment, and expand its operations. Banks and other financial institutions may be more willing to provide loans to a partnership because several partners can contribute to loan repayments, reducing the risk of lending to the business.

what are sleeping partners

they perform no other role in the business

advantages of a partnership

efficient doctors examine stable comapnies

partnerships may have more efficient production because there is specialization, division of labor, and different skills & quality. partners bring more expertise than what one person can. partnerships have greater stability and lower risk. partners can help in an emergency when someone is ill or on holiday, increasing chance of continuity.

efficient, expertise, stability, continuity

disadvantage of partnership

Lazy Elephants Rarely Share Dessert.

each person has unlimited liability. compared to companies/corporations, partnerships have less access to loans so it prevents them from expanding or maximizing. the individual partner has to rely on the work and goodwill of others. profits are stored. partners may disagree.

liability, expanding, rely, stored, disagree

shareholder definition

an individual or organisation that owns shares in a company and therefore owns part of the business, making them part-owners of the business and potentially entitled to receive dividends from its profits.

disadvantages of shareholders

price of shares they hold may decrease in value if the company doesn’t perform well. the company may not issue dividends if they choose not to. the stakeholder may not have a meaningful say in decisions about the business.

definition of company

A business organisation that is legally separate from its owners (shareholders), with its own legal identity and limited liability for its shareholders.

reasons for starting a company

lazy students study for success

limited liability. enhanced status, generally recognized that business has been successful. selling status is a good source of finance. increases stability. improved chances of gaining further finance.

liability, status, success, finance, stability

types of companies

privately held companies. publicly held companies

features of a company

stakeholders own but don’t run the business, instead they provide finance but there will be no other input. the business and the owners are legally separate entities. details of the company’s formation are legally recorded and are matters of public. greater finance available. company held to high degree of accountability. greater stability and higher chance of continuity.

explain more about the company’s formations

to form a company, owners must have two documents, the memorandum association adnt he articles of association.

memorandum association

document recording the key characteristics and external activities of a company being created.

articles of association

document specifying how the company will be regulated internally.

how do companies have greater finance available

the initial offering of shares represents one-time injection of capital to business. Once the business sells its shares, it receives the price paid at the IPO.

why are companies held to a high degree of accountability

the owner and company are separate entities so the company must provide information to stakeholders to understand the condition of the investment.

advantages of companies

finances are more readily available than for traders and partnerships. stability and lower risk. limited liability. continuity. possibilities for expansion. established organizational structure exist.

how is there continuity in a company

the business will not necessarily end if a shareholder dies or sells their shares, or if any of the directors leave. therefore, they have a greater chance of continuity.

how is there possibilities for expansion for companies

companies have more opportunity to expand because gneerally they last longer and have more access to finance.

how do comapnies expand?

it needs to invest money in equipment, marketing efforts, or new activities

how do companies have an established organizational structure exist?

managers and workers do not have to chnage every time a shareholder sells shares.

disadvantages of companies

setting up takes time and costs a lot of money to fulfill the necessary legal requirements. owners risk particular loss of control of business. selling shares does not guarantee that the desired or intended amount of finance will be raised. loss of privacy. company has no control over stock market. company has limited control over who buys its shares.

selling shares does not guarantee the desired/intended amount of fiannce

sometimes ipo are unsuccessful, and a business has sold itself for relatively little cash.

how is there a loss of privacy in companies

a publicly held company is required to publish its accounts publicly. Therefore, if the company’s performance has been weak, the future performance can be further jeopardized, so some customers may not want to purchase from or do business with a weak company

what are privately held companies

an incorporated business offering limited liability to the owners. There are limits on the number of shareholders. Shares can only be sold privately to people known to the owner.

what are publicly held companies

an incorporated business offering limited liability to the owners. The shares are traded on public exchanges and therefore must disclose considerable informaiton about the company, including financial information

advantages of privately held companies

limited liability, access to greater finance/capital. easier to transfer ownership by selling shares. can have professional image and reputation

disadvantages of a privately held company

more expensive/time consuming to set up. more complex legal requirements than sole traders. annual financial reporting and audit required. less privacy. shareholders hold little countrol as founder/ceo improves their agenda

advantages of publicly held companies

more access to capital. shared risk. increase liquidity. access to greater expertise. greater public profile. succession.

how is there increased liquidity?

company’s shares become more liquid (bought and sold more easily) on public stock exchange. this increases the company’s share value and makes it easier to sell and buy

how is succession easier in publicly held corporations

stakeholders can sell shares, transfer ownership, or pass them to heirs. this makes it easier to plan for long-term continuity of a company

disadvantages of publicly held comapnies

they are subject to greater degrees of scrutiny because of less privacy. they are required to release detailed annual reports and media reports on strategy. they are also expensive to run