1.2 Types of Organizations1.2 Types of Organizations

ContentContentTypes of OrganizationsTypes of Organizations Profit, non-profit and non-governmentalProfit, non-profit and non-governmental Sole Trader/ProprietorsSole Trader/Proprietors PartnershipsPartnerships Companies/CorporationsCompanies/Corporations

Vocabulary to get us started~Vocabulary to get us started~

Private Sector – Private Sector – business owned and controlled business owned and controlled by individuals or groups of individualsby individuals or groups of individuals

Public Sector – Public Sector – business owned and controlled business owned and controlled by a governmentby a government

PrivatizationPrivatization – selling – sellingpublic sector organizationspublic sector organizationsto the private sectorto the private sector

Vocabulary to get us started~Vocabulary to get us started~

Free-market economyFree-market economy – economic resources are – economic resources are largely owned by the private sectorlargely owned by the private sector

Command economy – Command economy – economic resources are economic resources are owned, planned, and controlled by the owned, planned, and controlled by the governmentgovernment

Mixed economy – Mixed economy – economic resources are economic resources are owned and controlled by both private and public owned and controlled by both private and public sectorssectors

Public Sector OrganizationsPublic Sector Organizations

The Public Sector is made up or organizations which The Public Sector is made up or organizations which are owned and controlled by central or local are owned and controlled by central or local government or public corporations. They are government or public corporations. They are funded by government and in some cases from funded by government and in some cases from their own trading ‘surplus’ or profit.their own trading ‘surplus’ or profit.

Public Sector businesses still have important roles Public Sector businesses still have important roles to play in certain areas of business activity.to play in certain areas of business activity.

Public CorporationsPublic Corporations

Public corporations are owned and Public corporations are owned and controlled by the government.controlled by the government.

Profit is not their main goal.Profit is not their main goal.They are meant to serve or meet the They are meant to serve or meet the

needs of citizens.needs of citizens.

Examples:Examples:PBS PBS

(Public Broadcasting Service)(Public Broadcasting Service)

United States Postal ServiceUnited States Postal Service

Public CorporationsPublic Corporations

AdvantagesAdvantages

Managed with social Managed with social objectives rather than objectives rather than

profitprofit

Loss-making services Loss-making services might be kept might be kept

operating if the social operating if the social benefit is greatbenefit is great

Finance raised mainly Finance raised mainly from the governmentfrom the government

DisadvantagesDisadvantages

Tendency towards Tendency towards inefficiency because inefficiency because no profit targetsno profit targets

Subsidies from Subsidies from government can government can encourage encourage inefficienciesinefficiencies

Government may Government may interfere in business interfere in business decisions for political decisions for political reasonsreasons

The Public Sector of the EconomyThe Public Sector of the Economy

Health and education servicesHealth and education services

Identify the Public Sector companies:Identify the Public Sector companies:

The Public Sector comprises Organizations accountable to and controlled by central or local government. These usually include:

Private Sector Organizations

Now the private sector...

The Private Sector of the EconomyThe Private Sector of the Economy The Private Sector comprises businesses owned The Private Sector comprises businesses owned

and controlled by individuals or groups of and controlled by individuals or groups of individuals. In every country, most business individuals. In every country, most business activity is in the private sector.activity is in the private sector.

Identify the private sector companies:Identify the private sector companies:

The Private Sector OutlineThe Private Sector Outline

Types of Private SectorBusinesses

SoleTrader Partnership

LimitedCompanies

For-Profit Social Enterprises

PrivateLtd

PublicPlc

The Sole Trader/ProprietorThe Sole Trader/ProprietorThis is the most common form of business This is the most common form of business

organization. One person provides the finances organization. One person provides the finances and in return, has full control of the business and and in return, has full control of the business and is able to keep all the profits.is able to keep all the profits.

Identify some of the advantages………… Identify some of the advantages…………

The Sole Trader/Proprietor AdvantagesThe Sole Trader/Proprietor Advantages Easy to set up-no legal formalities.Easy to set up-no legal formalities. Owner has complete control –not answerable to Owner has complete control –not answerable to

anybody else.anybody else. Owner keeps all profits.Owner keeps all profits. Able to choose times and patterns Able to choose times and patterns of working.of working. Able to establish close personal Able to establish close personal

relationships with staff relationships with staff (if any are employed) and customers.(if any are employed) and customers.

The business can be based on the The business can be based on the interest and skills of the owner – interest and skills of the owner – rather than working as an employee rather than working as an employee for a larger business.for a larger business.

The Sole Trader/ProprietorThe Sole Trader/ProprietorIdentify some of the disadvantages………… Identify some of the disadvantages…………

The Sole Trader/Proprietor DisadvantagesThe Sole Trader/Proprietor Disadvantages

Unlimited liability – all of the owner’s a assets are Unlimited liability – all of the owner’s a assets are potentially at risk.potentially at risk.

Often faces intense competition from bigger firms, for Often faces intense competition from bigger firms, for example, food retailing.example, food retailing.

Owner is unable to specialize in areas of the business Owner is unable to specialize in areas of the business that are most interesting – it is responsible for all that are most interesting – it is responsible for all aspects of management.aspects of management.

Difficult to raise additional capital.Difficult to raise additional capital. Long hours often necessary to Long hours often necessary to

make business pay.make business pay. Lack of Lack of continuitycontinuity- as the - as the

business does not have separate business does not have separate legal status, when the owner dies, legal status, when the owner dies, the business ends too.the business ends too.

PartnershipPartnership

Partnerships are agreements Partnerships are agreements

between two or more people between two or more people

carry on a business together, carry on a business together,

usually with a view of making a profit.usually with a view of making a profit.

The The Deed of PartnershipDeed of Partnership establishes the rights establishes the rights and privileges of the partners. This document and privileges of the partners. This document includes issues such as voting rights, includes issues such as voting rights, distribution of profits, The management role of distribution of profits, The management role of each partner and who has the authority to sign each partner and who has the authority to sign contracts.contracts.

PartnershipPartnership

Identify Identify advantagesadvantages of a partnership of a partnership

PartnershipPartnershipAdvantagesAdvantages

Partners may specialize in different areas of Partners may specialize in different areas of business management.business management.

Shared decision making.Shared decision making.

Additional capital injected by each partner.Additional capital injected by each partner.

Business losses shared between the Business losses shared between the partners.partners.

Greater privacy and fewer legal formalities Greater privacy and fewer legal formalities that corporate Organizations (companies) that corporate Organizations (companies)

PartnershipPartnership

..

Identify Identify disadvantagesdisadvantages of a partnership of a partnership

Partnership Partnership DisadvantagesDisadvantages

Unlimited Liability for all partners.Unlimited Liability for all partners. Profits are shared.Profits are shared. There is, as with sole traders, There is, as with sole traders, no continuityno continuity and and

the partnership will have to be reformed in the the partnership will have to be reformed in the event of the death of one partner.event of the death of one partner.

Al partners are bound by the decision of any one of Al partners are bound by the decision of any one of them.them.

Not possible to raise capital from selling shares.Not possible to raise capital from selling shares. A sole trader, taking on partners will loose A sole trader, taking on partners will loose

independence of decision making.independence of decision making.

Limited Company

3 Differences between limited companies and sole traders and partnerships

Limited companies have:1. Limited Liability2. Legal Personality3. Continuity

What is limited liability?

Financial protection in the event that the company fails. The financial liability is limited.

Sole Traders and Partnerships are financially responsible for all claims against the company.

What is legal personality?

A company is its own entity having an identify separate of that of its owners.

“It is its own person” so to speak in the eyes of the law.

What is continuity?

The company will continue to exist in the event of the death of its owners.

A sole trader or partnership is automatically dissolved.

Who owns a limited company?

ShareholdersThe company issues shares. Each share is a small ownership in the company.

Shareholders own shares in a limited company.

What is a Private Limited Company? (Ltd.)

It is a company – has issued shares.

Its shares are not available for sale to the public.

Private Limited CompaniesPrivate Limited Companies Tend to be relatively small companies.Tend to be relatively small companies. Shares can only be transferred privately Shares can only be transferred privately

and all shareholders must agree to the and all shareholders must agree to the transfer.transfer.

Private Limited Companies are often family Private Limited Companies are often family businesses owned by members of the businesses owned by members of the family or close friends.family or close friends.

The directors of these companies tend to The directors of these companies tend to be shareholders and are involved in the be shareholders and are involved in the running of the business.running of the business.

Many manufacturing firms are Private Many manufacturing firms are Private Limited Companies rather than Sole Traders Limited Companies rather than Sole Traders or Partnershipsor Partnerships

Private Limited Companies AdvantagesPrivate Limited Companies Advantages

Shareholders have limited liability.Shareholders have limited liability. The company has legal personality.The company has legal personality.

Able to sells shares to family and friends to raise Able to sells shares to family and friends to raise capital.capital.

Control of companies cannot be lost to outsiders.Control of companies cannot be lost to outsiders.

The business will continue even if one of the owners The business will continue even if one of the owners dies.dies.

Private Limited Companies DisadvantagesPrivate Limited Companies Disadvantages

There is a legal procedure to set up the business. There is a legal procedure to set up the business. This takes time and costs money.This takes time and costs money.

Firms are not allowed to sell shares to the public Firms are not allowed to sell shares to the public This restricts the amount of capital that can be This restricts the amount of capital that can be raised.raised.

Current stock holders may have difficulty selling Current stock holders may have difficulty selling their shares of stock.their shares of stock.

Financial information filed with the Financial information filed with the Registrar can be inspected by any Registrar can be inspected by any member of the public. member of the public.

What is a Public Limited Company? (Plc.)

It is a company – has issued shares.

Its shares are available for sale to the general public. Its share price is quoted on the stock exchange.

A board of directors control the management of the company appointed at an annual meeting.

Stockholders have voting rights at the annual meeting.

Advantages of a CorporationsAdvantages of a Corporations• Offers owners limited liability.Offers owners limited liability.

• Company has legal identity.Company has legal identity.

• Ease of buying and selling shares national Ease of buying and selling shares national stock exchange.stock exchange.

• People can easily enter or leave the People can easily enter or leave the business by buying or selling their shares.business by buying or selling their shares.

• Access to raising large amounts of capital Access to raising large amounts of capital through the public sale of shares of stock.through the public sale of shares of stock.

Disadvantages of a CorporationsDisadvantages of a Corporations•Start-up is costly – legal assistance is required as well as business consultants and financial advisors.

•Corporations are subject to more government regulations than partnerships or sole proprietorships

•Share prices fluctuate; risk of takeover

• Profit objectives of major shareholders may not be in the best interest of thecompany.

Public Limited CompaniesPublic Limited Companies

AdvantagesAdvantages Huge amounts of money can Huge amounts of money can

be raised from the sale of be raised from the sale of shares to the public.shares to the public.

Production costs may be Production costs may be lower as firms gain economies lower as firms gain economies scale. scale.

Because of their size, plc can Because of their size, plc can often dominate the market.often dominate the market.

It becomes easier to raise It becomes easier to raise finance as financial finance as financial institutions are more willing l institutions are more willing l to lend to plcs.to lend to plcs.

DisadvantagesDisadvantages

Setting up costs can be very Setting up costs can be very expensive.expensive.

Since anyone can buy shares, its Since anyone can buy shares, its possible for an outside interest to possible for an outside interest to take control of the company.take control of the company.

All company accounts can be All company accounts can be inspected by member of the inspected by member of the public.public.

Because of their size they cannot Because of their size they cannot deal with customers at a personal deal with customers at a personal level.level.

The way they operate is The way they operate is controlled by various company controlled by various company acts which aims to protect acts which aims to protect shareholders.shareholders.

There is divorce of ownership and There is divorce of ownership and control which might lead to the control which might lead to the interest of owners being ignored interest of owners being ignored to some extent.to some extent.

Plcs inflexible due to their size.Plcs inflexible due to their size.

Question: What are the limitations of being a limited company in a highly competitive market?

For-Profit Social Enterprises

These companies are not These companies are not charities. They have profit charities. They have profit objectives as well as socially objectives as well as socially responsible objectives.responsible objectives.

1. Social Enterprise1. Social Enterprise

2. Cooperatives2. Cooperatives

3. Micro Finance Institutions3. Micro Finance Institutions

Social Enterprise

A business with social A business with social objectives that reinvests objectives that reinvests most of its profits into most of its profits into benefiting society rather benefiting society rather than maximizing returns to than maximizing returns to ownersowners

Triple bottom line:

Economic: Make a profit to reinvest

Social: Provide job support for community

Environmental: Manage business in a sustainable way

CooperativesCooperatives

A group consisting of many smaller A group consisting of many smaller organizations or individuals with similar organizations or individuals with similar needs who act together and pool their needs who act together and pool their resources for mutual gain.resources for mutual gain.

Examples (3 common categories):Examples (3 common categories):– REI - RetailREI - Retail– Florida Naturals Growers - AgriculturalFlorida Naturals Growers - Agricultural– State Employees Credit Union - WorkerState Employees Credit Union - Worker

Microfinance InstitutionsMicrofinance Institutions

Non-traditional institutions that make very small Non-traditional institutions that make very small loans to entrepreneurs, usually in under-loans to entrepreneurs, usually in under-privileged countries to encourage the privileged countries to encourage the development of small businesses.development of small businesses.

KIVAKIVA

Public-Private Partnerships (PPP)

PPP- involvement of the private sector, in the form of management expertise and/or financial investment, in public sector projects aimed at benefiting the public.1. Government funded2. Private sector funded3. Government-directed

Government Funded PPP

Government provides all or part of the funding

Private management to control costs and be efficient

Example: HopeClinicLukuli in Kampala, Uganda. Receives government funding for malaria prevention and HIV testingExample: Charter Schools in North Carolina

Private Sector Funded (PPP)

Large projects that are financed in the private sector releasing the government from the burden of funding.The gov’t then leases or pays rentKnown as PFI – Private Finance Initiative

Govt Directed with Private Financing and Management (PPP)

Private sector funding and private sector management of public projects.Example: London hospital was built with private financing, then leased to the government which manages and control hospitals health care services.

PPP Costs and BenefitsCosts

If managed by the private sector, can cut wages and benefits and workers no longer have protection of being employed by the public sectorReputation of large business earning large profits paid by taxpayersPrivate sector may lack experience managing such large scale projects

Benefits

Schools, roads, prisons, and hospitals have been built with this schemeThe goal is for private sector to make a profit causing cost efficiency not seen with government supervisionPublic service improvement without increasing taxes for capital improvements

Non-Profit Social Enterprises

Non-Profit: any organization that has aims other than making and distributing profit and usually governed by a volunteer board of directors.

Non-Governmental Organization (NGO): a legally constituted body with NO participation or representation of any government which has a specific aim to support disadvantaged groups in developing countries or advocating the protection of human rights.

Charities Pressure Groups NGO's

Charity

Profit is not the objective

Money raised is used to support or bring attention to cause

Pressure Group

Their goal is to change behaviors in:

CitizensBusinessGovernments

NGO

Their goal is to support disadvantaged groups in developing countries.

Amnesty International promotes human rights.