Module-1

TYPES OF BUSINESS

ORGANISATION

CHAPTER TOPICS

1. WHAT ARE THE DIFFERENT TYPES OF BUSINESS ORGANISATIONS?

2. WHAT ARE SOLE TRADERS?3. WHAT ARE PARTNERSHIPS?4. WHAT IS A LIMITED COMPANY?5. WHAT IS A CO-OPERATIVE?6. WHAT ARE STATE OWNED ENTERPRISES?7. WHAT ARE THE CHANGING TRENDS IN

BUSINESS OWNERSHIP AND STRUCTURE?8. WHY DO BUSINESSES CHANGE THEIR LEGAL

STRUCTURE OVER TIME?

Business organisationsBusiness organisationsA A businessbusiness (also called a (also called a companycompany, , enterpriseenterprise

or or firmfirm) is a ) is a legally recognized organizationlegally recognized organization designed to designed to provide goods and/or servicesprovide goods and/or services to to consumersconsumers..

Businesses are predominant in capitalist Businesses are predominant in capitalist economies, most being privately economies, most being privately ownedowned and and formed to formed to earnearn profit that will increase the profit that will increase the wealthwealth of its owners and grow the business of its owners and grow the business itself. itself.

The owners and operators of a business The owners and operators of a business have as one of their main objectives have as one of their main objectives the the receipt or generation of a financial returnreceipt or generation of a financial return in in exchangeexchange for work and acceptance of for work and acceptance of risk.risk.

Notable exceptions include cooperative Notable exceptions include cooperative enterprises and state-owned enterprises.enterprises and state-owned enterprises.

Businesses can also be formed not-for-profit Businesses can also be formed not-for-profit or be state-owned. or be state-owned.

Factors Affecting the choice of Organisations

• Age: Many businesses change their legal status as they become older. • The Need for finance: A change in legal status may be forced on the

business.• Size: The size of a business operation is likely to affect its legal status.

• Limited Liability: Owners can protect their own personal financial position if the business is a Limited Liability company.

• Degree of control: Owners may consider retaining control of the business as important.

• The Nature of the Business: The type of business activity may influence the choice of legal status.

1. WHAT ARE THE DIFFERENT TYPES OF BUSINESS ORGANISATIONS?

• Sole Proprietorship• PARTNERSHIP• Corporations/ Company• CO-OPERATIVE • Non profit organizations

These business structures are going to be compared under the following headings:

1. Formation2. Dissolution3. Ownership4. Management & finance5. Profits & risk

2. What are Sole Traders?

Advantages Disadvantages 1. Formation &

Dissolution

Very easy to form/dissolve. It can be easily changed into partnership, ltd company etc.

If he/she dies then so does the business

2. Management & finance

Sole traders have full control of how business is run. Decision making is quick. Financial records do not have to be revealed to the public.

Long working hours are common and holidays are difficult to arrange due to the commitment needed to be a successful sole trader. Can be difficult to raise all start up finance and as a result loans are required. They can be expensive on the business start ups

3. Profit & risk Keeps all profit.Takes all the risk.

Takes all risk. They have unlimited liability. They may lose assets in the event of a debt needing to be paid.

This is a one person business run by the owner with his/her own money.

3. What are partnerships?

Advantages Disadvantages 1.Formation & Dissolution

Easy to form. You can start immediately, however if business name is different to that of partners you must register the company name.

If a partner leaves or a partnership ends a new partnership must be agreed.

2. Management & finance

Decision making is shared.

Responsibility is shared.Financial details not open

to be viewed by public

Disagreements can easily occur.

If someone dies the business is discontinued.

3. Profit & risk

Extra capital available to finance thebusiness

Unlimited liability, each partner is responsible for the debts of the business Profits must be shared between partners

Is an agreement between 2 or more people to gointo business with a view to making a profit? There

can be no less than 2 members and no more than 20.

4. What is a limited company?Ltd companies are regarded as separate legal

entities from the people who own and run them.The owners are called shareholders and only

gain/lose on the amount they put into the business.

There are two main types of company:• Private limited company (Ltd) – HEITON BUCKLEY• Public limited companies (PLC’s) – LIVERPOOL FC

The main difference is that shares of PLC’s can be freely bought and sold on the stock exchange

Limited Company FeaturesDissolution Advantages Disadvantages 1. Formation

& Dissolution

Companies can continue to exist even if a shareholder or director dies

The legal formalities of forming a company are more complex, time consuming & expensive than forming other business structures

2. Ownership Owned by its shareholders

3. Management & finance

Can raise finance for business start ups or expansion through selling of shares.

A lot of paperwork including financial audits, reports etc

4. Profit & risk Shareholders have limited liability. If company has a lot of shareholders risk is minimal

Profits must be shared

How is a private limited company formedTo form a private limited company you must1. Have at least two shareholders and one director.2 Prepare a Memorandum of Association. This is a document

for public use. It details name of company, company objective, the number of shares of each shareholder. This document is kept in the Companies Office.

3. Prepare an Articles of Association. This is a document for shareholders. It details the internal rules of the company, types of shares issued, how meetings are run, the procedure for electing/replacing directors.

4. Register with REGISTRAR of COMPANIES in the COMPANIES OFFICE

5. The companies office issues a “birth certificate” called a CERTIFICATE of INCORPORATION

6. If you register as a public limited company you must obtain a TRADING CERTIFICATE

7. TRADING CAN NOW COMMENCE

The Memorandum of Association

• Name of the company• Name and address of the company’s registered office• The objectives of the company and scope of its activities• The liability of members• The amount of capital to be raised and the number of shares to be issued

Note: A limited company must have a minimum of two members.

Article of Association

• The rights of shareholders

• The procedure for appointing directors and scope of their powers

• The length of time directors should serve before reelection

• The timing and frequency of company meetings

• The arrangement for auditing company accounts

The Private Limited Companies Characteristics

• Tend to be relatively small companies.• Their business name ends in Limited or Ltd.• Shares can only be transferred privately and all shareholders must

agree to the transfer.• Private Limited Companies are often family businesses owned by

members of the family or close friends.• The directors of these companies tend to be shareholders and are

involved in the running of the business.• Many manufacturing firms are Private Limited Companies rather

than Sole Traders or Partnerships

Private Limited Companies

Advantages

• Shareholders have limited liability.

• More capital can be raised as there are no limits on the number of shareholders.

• Control of companies cannot be lost to outsiders.

• The business will continue even if one of

the owners dies.

Disadvantages

• Profits have to be shared out amongst a much larger number of members.

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

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

• Financial information filed with the Registrar can be inspected by any member of the public. Competitors could use this to their advantage.

Formation of Public Limited Companies

Memorandum of Association + Article of Association + Statutory Declaration

Registrar of Companies

Certificate of Incorporation

Publish of Prospectus

FLOTATION

Public Limited Companies

• A plc cannot begin trading until it has completed these tasks and has received at least 25% payment for the value of shares.

• It will then receive a Trading Certificate and can begin operating.

• The shares will be quoted on the Stock Exchange or the Alternative Investment Market (AIM).

The Stock Exchange is a market where second hand shares are bought and sold. A full Stock Exchange listing means that the company must comply with the rules and regulations laid down by the Stock Exchange.

The Alternative Investment Market (AIM) is designed for companies which want to avoid some of the high costs of a full listing.

Public Limited Companies

Advantages

• Huge amounts of money can be raised from the sale of shares to the public.

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

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

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

Disadvantages

• Setting up costs can be very expensive.

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

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

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

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

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

• Plcs inflexible due to their size.

How companies are run?AGM- a meeting held once a year involving directors,

shareholders of a firm discussing events of the previous 12 months & future plans

Board of Directors BOD – this board is responsible for overseeing the running of a company. These directors are the most senior managers of a limited company. Directors can be removed by a majority voting system.

The company chairperson – is a director and is elected by the board to chair AGM’s & EGM’s. They speak on behalf of the BOD.

The Managing Director MD/Chief Executive Officer CEO Is in charge of overseeing all aspects of company activities.

The CEO is answerable to the BOD

Cooperative

A co-operative is an 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.

International Co-operative Alliance, ICA, 1995

Features of a Co-operative… • A co-operative is a business enterprise with economic

interests that is owned and democratically controlled by its members. The starting point is equal cooperation of the members.

• The purpose is to promote the members’ economy by using the services provided by the co-operative. Profit-making is not the main goal.

• Power of decision is exercised by the principle: one member, one vote even if the members have different number of shares. The power of decision can, however, be differentiated by rules.

• Membership and share capital have not been determined in advance.

• There is no requirement for minimum share capital in a co-operative .

To be continued

…Features of a Co-operative

• Voluntarily/ Open membership: A co-operative can admit new members, membership is voluntary and one can resign from a co-operative. One can also be expelled from it.

• Distribution of Surplus: The surplus generated is normally allocated in proportion to the members’ transactions with the co-operative.

• Separate legal entity: The members are not personally liable for the obligations of the co-operative, unless extraordinary payments are stipulated in the rules.

• Registered under cooperative act;The Act applies to all co-operatives.

Advantages Disadvantages 1.Formation Must have a minimum of

7members. They register with the REGISTRAR OF FRIENDLY SOCIETIES.

Can be quite difficult to form, time consuming and expensive.

2. Ownership

Co-ops mainly exist in the agricultural industry. Equal voting system exists regardless of the shares held. They file an annual financial return (report)

Conflict may exist between members in the need for business expansion.

A co operative is business owned and run by a group of people, AND each has a financial interest in its success.

They also have a say on how it is managedCo-ops mainly exist in the agricultural industry.

3. Management & finance

Management of co-ops are inspired by a spirit of democracy and mutual co-operation.

Slow decision making if all members are to be consulted.In some situations finance can be difficult to raise. This can hinder growth.

4. Profit & risk

Profits are shared equally. Members have limited liability.Large membership of co-ops make sure that there is high demand for goods

Profits must be shared amongst members. There may be reluctance to share profits with new members.Risk is quite minimal.

Types of cooperative

• Housing Cooperative• Retailer cooperative• Consumer cooperative• Cooperative Banking

Cooperative provide over 100 millions jobs around the world, 20% more than multinational enterprises.In India, 239 million cooperative , china 180 million cooperatives. In U.S. 40% people in cooperative.

Grey Area of Cooperative Sector

• Poor Infrastructure

• Lack of Awareness

• Lack of Quality management

• Over dependence on government.

• Lack of strong H.R. policy.

• Neglect of professionalism

• Restricted Coverage.

Not For Profit Organisations

ACCOUNTANCY

Class XII

Not For Profit OrganisationsNot For Profit OrganisationsOrganisations which are formed not for earning profits but for a charitable or social purpose are called as not for profit organisations. They are similar to profit-seeking businesses, but do not issue stock, pay dividends, or pay income taxes. The profits they produce are used to fuilfil the goals of the group.

FEATURES:-

1) Separate legal entity

2) Service motive

3) Form

4) Profit- not a motivator

5) Funding

6) Accounts

What are state owned enterprises?

Advantages Disadvantages

1. Formation The government provides the share capital and subsidies. These companies usually have a good understanding with financial institutions, (banks), railways

Lack of funding which in turn leads to borrowing more from government, this is especially true if the business is not making a profit (i.e IARNROD EIREANN)

.These are enterprises that are set up, financed and controlled by the government.

What are state owned enterprises?

Management and finance

They provide employment They promote industrial development, They provide services of necessity

The directors of some firms lack appropriate knowledge in the companies particular area (i.e agriculture), this is because they are appointed through political contactsThe lack of profit making, sometimes leads to lack of motivation in workplace

Ownership State owned

Forms of Ownership – A summarySole Trader Partnership Limited

CompanyCo-op

Formation Easy No paperwork

Easy No paperwork

PaperworkRegistration fee

PaperworkRegistration fee

Ownership Owned by sole trader

Owned by partners Owned by shareholders

Owned by members

Management & finance

Speedy decision makingAccounts are privateCan be difficult to raise finance

Shared decision makingDisagreements possibleAccounts are privateRaise finance through new partners

Managed by BOD

BOD elected by shareholders

Accounts submitted to Companies OfficeRaise finance through grants, loans & issuing of shares

Managed by Board elected by members. One member, one vote rule.Accounts submitted to Register of Friendly SocietiesRaise finance through grants, loans & issuing of shares

Profits & risk Keeps all the profitUnlimited liability

Profit sharedUnlimited liability

Profits shared among shareholdersLimited liability

Profits sharesMembers have limited liability

EXAMPLES SHOPKEEPERSTRADESPEOPLE like carpenters, plumbers

SOLICITORS, DOCTORS,DENTISTS.

Manchester UnitedLiverpool FCAIB

IFFCO, AMUL Cooperative

9. WHY DO BUSINESSES CHANGE THEIR LEGAL STRUCTURE OVER TIME?

Unlimited liability

Unlimited liability

Limited liability Limited liability

Sole trader

Partnership

State owned Comp.

State owned Comp.

Private Ltd Comp / Co-op

Private Ltd Comp / Co-op

Private Ltd Comp / Co-op

PLC Comp.

PLC Comp.

Businesses change their Business Structure from Sole Trader to Partnership to Private Limited Company to a PLC because:

1. It helps them bring in new skills, experience, resources

2. It reduces risk as the sole trader or the partners can now enjoy limited liability

3. Helps to raise finance through investors, stock exchange etc. for future expansion

4. Helps to market the company. Being a limited company enhances the image of the business. This adds to the reputation of the company as advertising and promotions will be more convincing to the intended customers.

5. Business profit prestige- changing a co-op owned company to a PLC offers the management and employees a stronger allegiance to making profit rather than operating for the goodwill of the local area farmers etc.