3 forms of bs

UNIT 3Forms of business organistion : 

UNIT 3Forms of business organistion Main forms of business organisationin the private sector Sole traders Partnerships Private limited companies Public limited companies Co-operatives

Sole Traders : 

Sole Traders It is a business owned and operated by just one person. Although the sole trader can employ others, the owner is the sole proprietor. Legal regulations to be followed The owner must register and send annual accounts to the government tax office. The name of the business is significant. The sole trader must observe certain laws. It includes health and safety laws and obtaining license

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Advantages few legal regulations complete control over one’s business freedom close contact with one’s customers incentive to work hard as one is able to keep all the profits enjoys complete secrecy – need not give information about business to any one else

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Disadvantages No one to discuss business matters do not have the freedom of limited liability finance limited to one’s own savings, profits made by the business and small bank loans cannot afford specialists – should do unskilled jobs to remain small as capital for expansion is restricted no one to take control when owner is sick; after death business no more exists

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Limited liability It means that the owners of a company – shareholders – cannot be held responsible for the debts of the company they own. Their liability is limited to the investment they made in buying the shares. Unlimited Liability It means if the business cannot pay the debts, then the creditors can force the owner to sell his possessions in order to pay them. To whom does a sole trader business suit? setting up a new business do not need much capital dealing mainly with the public, for example retailing or services like hairdressing

Private limited companies : 

Private limited companies A company is a separate legal unit from its owners. This means that: a company exists separately from the owners and will continue to exist if one of the owners die. a company can make contracts or legal agreements company accounts are kept separate from the accounts of the owners Shareholders are the owners of a limited company. They buy shares which represent part ownership of a company

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Advantages Shares can be sold to a large number of people. The sale of shares could lead to much larger sums of capital to invest in the business than the two original partners could manage to raise themselves. The business could expand more rapidly. All shareholders have limited liability. If the company fails with debts owing to creditors, the shareholders cannot be forced to sell their possessions to settle the debts. The shareholders can lose their original investment in the shares – their liability is limited to original investment. The people who started the business are able to keep control of it as long as they do not sell too many shares to other people.

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Disadvantages There are significant legal matters which have to be dealt with before a company is formed. Two important documents should be prepared to be sent to the Registrar of Companies. They are: The Articles of Association contains the rules under which the company is managed. The Memorandum of Association contains very important information about the company and the directors. After getting Certificate of Incorporation from the Registrar of Companies, the company can start trading. The shares in a private limited company cannot be sold or transferred to anyone else without the agreement of the other shareholder. So people will be reluctant to invest in such a company. The accounts are not confidential. Each year the latest accounts must be sent to the Register of Companies and members of the public can inspect them. For rapidly expanding businesses, the company cannot offer its share to the general public.

Partnerships : 

Partnerships A partnership is a group or association of between two and twenty people who agree to own and run a business together. A partnership agreement is the written and legal agreement between business partners. It is not essential for partners to have such an agreement but it is always recommended. Points in a partnership agreement the amount of capital invested in the business by both partners the tasks to be undertaken by each partner the way in which the profits would be shared out how long the partnership would last arrangements for absence, retirement and how new partners could be admitted

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Advantages More capital could be invested into the business. Responsibilities of running the business are shared. Motivated to work hard because both benefit from the profits. Losses will be shared. Disadvantages Partners did not have limited liability Business did not have a separate legal identity. If one partner dies, the partnership ends. Partners can disagree on important business decisions and consulting all partners takes time. Because of one inefficient or dishonest partner, others will suffer. Most countries limit the number of partners to 20 and the business growth will be limited by the amount of capital that 20 people could invest.

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Suitable situations for this kind of partnership where people wished to form a business with others but wanted to avoid legal complications where the professional body, such as medicine and the law, only allowed professional people to form a partnership, not a company where the partners are well known to each other and want a simple means of involving several of them in the running of the business Uncorporated business An uncorporated business is one that does not have a separate legal identity. Sole traders and partnerships are uncorporated businesses.

Public limited companies : 

Public limited companies This is most suitable for very large businesses. The belief that the public limited companies are in the public sector of industry is not true. They are not owned by the government but by private individuals or private businesses and so they are in the private sector of industry. The title given to public limited companies can cause confusion.

Procedure for converting a private limited company to a public limited company : 

Procedure for converting a private limited company to a public limited company A statement must be made in the Memorandum of Association that the company is now a public limited company. A certain minimum value of shares must be issued(50,000 in the UK). Accounts must be laid out in a certain way and made available to members of the public. The company will apply to the Stock Exchange for a ‘listing’ and it will be easy for shareholders to buy and sell shares. When these stages have been completed, the company must issue a prospectus. A prospectus is a detailed document issued by the directors of a company when they are converting it to public limited status. It is an invitation to the general public to buy shares in the newly formed plc.

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Advantages This form of business organization still offers limited liability to shareholders. It is an incorporated business and is a separate legal unit. There is continuity should one of the shareholders die. Opportunity to raise very large capital sums to invest. There is no limit to the number of shareholders. No restriction on the buying, selling or transfer of shares. Has high status and can easily attract suppliers and banks.

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Disadvantages Legal formalities to form such a company are complicated and time consuming. More regulations and controls to protect the interests of the shareholders, including the publication of accounts. Difficult to control and manage Selling shares to the public is expensive Danger of the original owners losing control inspite of becoming rich by selling shares.

Control and ownership in a public limited company : 

Control and ownership in a public limited company In all sole trader businesses and partnerships the owners have control over how their business is run. They take all the decisions and they will try to make the business achieve the aims that they have set. This is also the case in most private limited companies, most of which have relatively few shareholders. The directors are often the majority shareholders, which mean that they can ensure that their decisions are passed at all meetings. With a public limited company the situation is very different. There are often thousands of shareholders – even millions in the case of the largest companies. It would be impossible for all these people to be involved in taking decisions. – although they are all invited to attend the Annual General Meeting (AGM). Annual General Meeting (AGM) is a legal requirement for all companies. All shareholders may attend. They vote on who they want to be on the Board of Directors for the coming year.

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Dividends Dividends are payments made to shareholders from the profits of a company after it has paid corporation tax. They are the return to shareholders for investing in the company. Co-operatives Co-operatives are groups of people who agree to work together and pool their resources. Common features All members have one vote, no matter how many shares they have bought. All members help in the running of the business. The workload and decision making are shared. In larger co-operatives it is common to find that a manager is appointed to manage the day-to-day matters of the business. The profit is shared equally amongst members

Two common forms (in the UK) : 

Two common forms (in the UK) producer co-operatives, which are groups of workers who design and produce products in just the same way as other manufacturing businesses. retail co-operatives, which have the aim of providing their members with good quality consumer goods and services at reasonable prices. (In other countries the main type of co-operative exists in the agricultural industry.)

Other business organizations in the private sectorClose corporations : 

Other business organizations in the private sectorClose corporations Key features They are limited to a maximum of ten people. A simple founding statement, sent to the Registrar of Companies, is all that is needed to set up the organization. The members are also the manager( no separation between ownership and control). They are separate legal units offering both limited liability and continuity. Criticisms As membership is limited to ten people, it is not a suitable form of organization for large businesses. As in a partnership, members may disagree over decision-making.

Joint ventures : 

Joint ventures A joint venture is when two or more businesses agree to start a new project together, sharing the capital, the risks and the profits. Advantages Sharing of costs – very important for expensive projects such as new aircraft If the new project is successful, then the profits have to be shared with the joint venture partner. Local knowledge when joint venture company is already based in the country. Disadvantages Disagreements over important decisions might occur. Risks are shared. The two joint venture partners might have different ways of running a business – different cultures.

Franchising : 

Franchising The franchisor is a business with a product or service idea that it does not want to sell to consumers directly. Instead it appoints franchisees to use the idea or product and to sell it to consumers. A franchise is a business based upon the use of the brand names, promotional logos and trading methods of an existing successful business. The franchisee buys the license to operate this business from the franchisor. Advantages The franchisee buys a license from the franchisor to use the brand name. Expansion of the franchised business is much faster than if the franchisor had to finance all new outlets. The management of the outlets is the responsibility of the franchisee. All products sold must be obtained from the franchisor. The chances of business failure are much reduced because a well-known product is being sold. The franchisor pays for advertising. All supplies are obtained from a central source – the franchisor .There fewer decisions to make than with an independent business prices, store layout and range of products will have been decided by the franchisor. Training for staff and management is provided by the franchisor.

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Disadvantages Poor management of one franchised outlet could lead to a bad reputation for the whole business. The franchisee keeps profits from the outlet. Less independence than with operating a non-franchised business. May be unable to make decisions that would suit the local area – e.g. new products that are not part of the range offered by the franchisor. License fee must be paid to the franchisor and possibly a percentage of the annual turnover

Business organistions : the public sector : 

Business organistions : the public sector The term public sector includes all businesses owned by the state and local government, public services, such as hospitals, schools and the fire services, and government departments. Two types of business organistions public corporations municipal enterprises Public corporations Public corporations are owned by the government but the government does not directly operate the businesses. Government ministers appoint a board of Directors, who will be given the responsibility of managing the business. The government will make clear what the objectives of the business should be.

Objectives of public corporations : 

Objectives of public corporations to keep prices low so that everybody can afford the service. to keep people in jobs so that unemployment does not rise. to offer a service to the public in all areas of the country. to reduce costs, if necessary, by reducing the number of workers to increase efficiency and operate more like a company in the private sector to close loss-making services, even if it means that some consumers are no longer provided with the service. The policy of reducing subsidies and operating more like a private sector business is sometimes called corporatization

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Advantages Some industries are considered to be so important – strategically necessary –that the government ownership is thought to be essential. If industries are controlled by monopolies because it would be wasteful to have competitors, then these natural monopolies are often owned by the government. It is argued that this will ensure that consumers are not taken advantage of by privately owned monopolies. If an important business is failing and likely to collapse, the government can step in to nationalize it. This will keep the business open and secure jobs. Important public services, such as TV and radio broadcasting, are often in the public sector.

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Disadvantages The profit motive might not be as powerful as in private sector industries. Subsidies can lead to inefficiency as the managers will think that the government will help them if the business makes a loss Often there is no close competition to the public corporations. There is a lack of incentive to increase consumer choice and increase efficiency. Governments can use these businesses for political reasons., for example just before election they could create more jobs.

Municipal enterprises : 

Municipal enterprises Local government authorities or municipalities usually operate some trading activities. Some of these services are free to the user and paid for out of local taxes, such as street lights and schools. Other services are charged for and expected to break even at least. These might include street markets, swimming pools and theatres. If they do not cover their costs, a local government subsidy is usually provided. In order to cut costs and reduce the burden on local taxpayers, an increasing range of services is now being privatized, so reducing the role of local government in providing goods and services.