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Chapter 4 - Types of business organizations

Forms of business ownership in the private sector

Partnerships: owned and controlled by two or more people
Private limited companies: owned, financed & controlled by between 2 & 50 people
Public limited companies (PLCs): owned, financed & controlled by a minimum of 2 shareholders with no maximum number of shareholders. (Open for the general public to buy shares)
Franchise: A business which has bought the right to trade under an established name
Sole Traders: Owned, controlled & financed by one person
Co-operatives: groups of people who enter a business & share the benefits

Unincorporated: Legally, the owner & the business are the same

Incorporated: The owners & the business have separate legal identities

Liability: the legal debt a company owes to third-party creditors

Sole Traders

Smallest most common type of business organization
Owned & operated by one person
CAN employ others but is the sole proprietor
Unincorporated
Unlimited liability

%%Advantages of a sole trader%%	==Disadvantages of a sole==
Few legal regulations	Unlimited liability
Own boss therefore complete control	money/finance
Freedom & flexibility	high costs
personal customer contact	lack of training & lack of specialists
Decision making	raising capital
profit & secrecy	long hours

Recommended for people who:

Are setting up a new business
Not much capital needed
Personal contact with customers required (e.g. hairdressers)

Partnerships

Usually a small business, a little larger than sole traders
2 or more people required to run a business, to make a profit
Maximum number of partners = 20
Sharing of losses & profits - split risk based on portion of capital invested by each partner
Unincorporated
Unlimited liability

%%Advantages of partnerships%%	==Disadvantages of Partnerships==
More Capital - expansion & growth	Unlimited liability
Shared responsibilities & decisions	Legal costs for making a partnership agreement
Losses shared by all partners	All partners liable for debts of the others
Greater opportunity for specialization	no separate legal identity
Easy to set up	Partnerships dissolved in partners leaving or through death
Less money needed by partners to set up	Decision of one partner binding on the rest
Can be a family run business	Limited access to capital
Accounts are kept private	Limit on the number of partners

Recommended for people who:

I wish to form a business with others with few legal complications
Family business
Professional bodies not allowing formation of companies

Limited Partnerships

known as Limited liability Partnerships
Possible in some countries (eg uk)
Offers partners limited liability
Shares cannot be bought or sold
Separate legal identity
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^^Partnership Agreement / Deed of Partnership is used to clarify:^^

Amount of capital to be invested by partners
Tasks of partners
Profit sharing advantages
Durations
Absence / retirement agreements

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Private limited company

Separate legal identity - separate accounts from owner
Denoted by: ‘Limited’, ‘Ltd’ or ‘Pty Ltd’
Shares (represent % of ownership), owned by shareholders
Continuity

Legal formalities

Submit to ==‘ Registrar of companies ’== TO GET ==‘ Certificate of Incorporation ’==

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Articles of Association

Directors’ rights & duties
Rules for elections
Official meetings
Issuing shares

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Memorandum of Association

Name
Address
Contact details
Objectives
Amount of share capital
Number of shares

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Advantages of Private Limited Company	Disadvantages of Private Limited Company
Limited liability - less risk	Shares: Existing shareholders only, & transfer needs consent
Sale of shares	Less Privacy, as all accounts are sent to the Registrar of Companies
Separate legal Identity	Not available to the general public, therefore it isn’t possible to raise large amounts of capital for expansion
Original owner retains control
More ability to raise capital - expand faster
Continuity
Status

Recommended for people who:

For family businesses or partnerships who want to expand further with no loss of control & reduced risk to their own capital

Public limited company

Very large businesses
Private sector (not owned by govt)
Denoted by : ‘PLC’, ‘plc’ or ‘inc’
selling of shares to general public

Advantages of public limited company	Disadvantages of public limited company
Limited liability	Legal formalities are complicated & confusing
Incorporated business	Regulations & control - protect shareholders’ interest
Separate legal unit	Lack of privacy - publication of accounts
Continuity	Difficult to control & manage
raise large amounts if capital to expand internationally	Expense of shelling shares to the public - specialist bank, merchant bank, prospectus
No limits of amount of shareholders	original owner may lose control
easy to buy, sell & transfer shares
higher status
easy to attract suppliers & loans

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^^Memorandum of association^^ = A document containing all fundamental information which are required for the incorporation of the company

^^Articles of association^^ = A document containing all the regulations that governs the company

Converting from private to public

Memorandum of association - ensure statement clause allowing conversion to public limited
Certain minimum amount of shares must be issued
Accounts must be available to the public & must have a specific layout
Stock exchange
- apply for a listing
- easy for buying
- trading record
- ensure it is not poorly operated
Prospectus
- invitation to the public
- buy shares in the company
- detailed document
- past record
- plan for the future
- reasons for raising capital
- how capital will be spent

Control & ownership of a public limited company

Public limited companies have thousands (or even millions of shareholders)

Not possible for all shareholders to make decision of the company, therefore all shareholders are invited to annual general meeting (AGM) to ellect directors that form the Board of Directors (BOD)
Directors appoint managers for day-to-day operations

Divorce between ownership & control

Shareholders → Board of Directors → BOF appoints managers

Ownership → Control

Shareholders own; directors & managers control
Shareholders can’t influence decisions
Shareholders CAN replace directors but it brings bad publicity & loses stability as new directors may be inexperienced & may have contrasting ideas, goals and plans.

Joint Ventures

A joint venture is when 2 or more businesses agree to start a new project together, sharing the capital, risks & profits

Advantages of a joint venture	Disadvantages of a joint venture
Sharing of costs (reduced costs)	If new project successful, then profits will be shared
Shared risks	Possible disagreements over decisions
Local knowledge when needed	Different cultures & different methods

Franchising

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^^Franchise^^ : A business on the use of the brand names, promotional logos & trading methods of an existing successful business. The franchisee buys the license to operate this business from the franchisor.

The franchisee contributes capital, enterprise & management. The franchisor contributes original idea, use of brand name & products, and advertising & training.

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Franchisor :

Large business
Product/service idea
Does not want to sell
directly to the public & appoints franchisees

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Franchisee :

Uses franchisor’s product / service idea / logo / brand name
Buys license from franchisor & sells to the consumers

	To the franchisor	To the Franchisee
%%Advantages%%	Franchisee pays for : expansion, shops & license to use the brand name	Reduced chance of failure due to the well-known brand & product
	Rapid expansion than if the franchisor had to finance all new outlets	Advertising is paid by the franchisor
	Management of the outlets is the franchisee’s responsibility	All supplies are obtained from a single source
	All products sold (by the franchisee) must be bought from the franchisor → Major source of profit	Franchisor makes most decisions → fewer decisions to worry about
	No operation of retail units or management	Training for the staff provided by the franchisor
		Banks are often willing to lend to franchisees due to relatively low risk
==Disadvantages==	Poor management of one franchised outlet could lead to bad reputation for the whole business	Less independence than with operating a non-franchised business
	Franchisee keeps profits from their outlet	Maybe unable to make decisions that would suit the local area
		License fee paid & (possibly) a percentage of the annual turnover

Co-operatives

→ A group of people who enter business & share the benefits

→ A non-profit community organizations, consumer cooperatives, worker cooperatives

Public sector

Includes all businesses owned by the government & local government, & public services
2 types → Public corporations & other public sector enterprises
Essential services owned by government → strategically necessary
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Public Corporations

Their objectives :

keeps prices low
Keeps people in jobs to reduce unemployment
offer public services to ALL areas

Issues of these objectives :

Keeping to objectives costs huge amounts of money
Often huge loss-making
“Subsidies” often paid by government

%%Advantages of public corporations%%	==Disadvantages of public corporations==
Essential / necessary services owned & controlled by government	No private shareholder to insist on profitability & efficiency → no motivation
Natural monopolies → ensures customers aren’t taken advantage of	Subsidies lead to inefficiency : managers think that govt are there for bailout & unfair as subsidies are not given to private sector
Open business ready to collapse & secure job	Lack of incentive to : increase customer choice & to increase efficiency
Availability for public use → non-profitable	Used for political gain → offering more jobs during elections

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^^Corporatization : ^^