UNIT 1.2 – TYPES OF

ORGANIZATIONSIB BusinessLincoln High School

IN THIS CHAPTER YOU WILL LEARN . . . Difference between the private and public sector

The main features of sole traders, partnerships and corporation

The main features of cooperatives, microfinance providers and public-private partnerships

The main features of non-governmental organizations and charities

MAIN FEATURES OF PROFIT-BASED (COMMERCIAL) ORGANIZATIONS Profit-making businesses can be organized many ways. Most common are:

Sole traders

Partnerships

Companies or corporations

For-profit social enterprises Cooperatives Micro-financers Public-private partnerships (PPPs)

Common Feature – to generate a profit

PROFITS

Profits = Total Revenues – Total Costs

Revenue – aka Sales

SOLE TRADER OR SOLE PROPRIETOR Features:

The sole trader owns & runs the business

No legal distinction between the business and the owner

Finance is usually limited

Business is close to the customer

Sole trader has privacy and limited accountability

Registering the business is relatively easy & inexpensive and quick

ADVANTAGES & DISADVANTAGESAll profits stay with the owner Success depends on drive,

health & enthusiasm of sole trader

Complete control over important decisions

Competing against established businesses

Privacy Unlimited Liability

Minimal legal formalities Limited capital

Close ties to customers Lack of continuity in event of accident or owner’s death

Limited scope for expansion

Majority remain small; typically business comes to an end if the owner dies.Sole traders often have a “niche” in the market;

PARTNERSHIPS – 2 OR MORE PEOPLE Features:

Decisions are made jointly by the partners; owned and managed by more than one person

No legal distinction between business and partners;

Usually more financing available

Business can offer more varied service; more stable

Some partners may be “sleeping partners”

Typically a greater degree of accountability – partnership agreements

Partners do not necessarily share all the profits Depends on what is agreed to

ADVANTAGES & DISADVANTAGESVaried skills & qualities; more efficient production

Each partner has UNLIMITED liability** An exception is a “limited partner” in some countries

More partners = more expertise

Compared to corporations less access to loans

Perceived as having greater stability

Each partner must rely on the other; one doesn’t have complete control

Partners can help in emergency situations

Profits must be shared

Greater chance of continuity Disagreements can happen!!Safer than sole traders; more complex organizations

COMPANIES OR CORPORATIONS Look at corporation abbreviations from the US and other countries – page 23

The business is a joint stock or limited company

Businesses can become corporations by a simple, powerful process - Incorporation Legal difference between company and owners Liability of the company is separated from liability of owners Multiple owners, each owning a fraction

Shares

CORPORATION

Business has legal existence in its own right

Managers handle day-to-day operation

Has responsibilities in the community – paying taxes, etc.

Companies keep the profits unless they declare a dividend

Dividends – at the discretion of the company If issued, profit divided by number of shares to get a dividend per

share.

Usually many shareholders, especially in a large company

Small companies or family-owned companies Someone may own all the shares

HOW ARE SHAREHOLDERS REWARDED Price Increases If the company does well, in theory the price per share should

increase

Dividends Amount each shareholder receives varies Dependent on whether a dividend is issued, size of company, etc.

Limited Liability Single most important feature and benefit of a corporation Shareholder can only use the money they have put into the

corporation

COST TO SHAREHOLDERS Price of the shares they hold may decrease

Company may NOT issue dividends

As “owners” of only a fraction of the company, may not have a say in how the company operates

REASONS TO ORGANIZE AS A CORPORATION Limited liability

Enhanced status

Selling shares is a good way to raise capital

Increased stability of the company

Better chance of obtaining financing

PUBLIC V. PRIVATE LIMITED COMPANY Privately held corporation or private limited company Usually family owned

Public Limited Company Going public IPO – Initial public offering

MAIN FEATURES OF COMPANY Shareholders own but don’t run the business

Business and owners are divisible – Not liable for business debts

Legal existence a matter of public record Memorandum of association Articles of Association

Greater finance is available

Company held to a higher degree of accountability

Companies have greater stability and higher chance of continuity

CORPORATIONS

Board of Directors Elected by Shareholders

Limited Companies In U.S. LLC – limited liability company

Private Limited Company Shares sold to family members Private corporation in the U.S. Not publicly traded Easier to establish than publicly traded company

CORPORATIONS

Public Limited Company In the U.K. PLC after its name Sells shares to the general public

Examples of private and public corporations Table 1.2a page 31

Memorandum of Association

Articles of Association (Incorporation)

WHY BUY SHARES?

Dividends

Capital Growth

Voting Power

Risks associated with investing

Annual Meeting must be held

Auditor must examine accounts

ADVANTAGES OF CORPORATION Companies can raise large amount of capital

Companies have limited liability

Continuity in the company

Benefits from Economies of scale

Can hire specialists to run the firm

DISADVANTAGES

Financial information must be provided to all shareholders

Far more bureaucracy

Dividends only paid out if business makes a profit

Large corporations can suffer from communication problems

NON-PROFIT ORGANIZATIONS Definition Organization run like a business; but profit isn’t the objective. Examples:

Libraries, schools, museums, social services, community organizations, etc.

NON-GOVERNMENTAL ORGANIZATIONS Operate in the private sector

Not controlled by government

Include environmental protection groups, etc. Unicef Amnesty International;

CHARITIES

Registered not-for profit; Collect donations to support a cause

Advantages Provide financial support to help a cause Usually exempt from corporate tax Donors get a tax deduction Can register to be limited companies to protect interest of

investors.

CHARITIES - DISADVANTAGES Lack of profit may cause problems; motivation may be lacking

Must go through the process of registering

Charities survive solely on the giving of donations

Financial activities must be reported to the government

TYPE OF BUSINESS DEPENDS UPON .. Amount of finance

Size

Limited liability

Degree of ownership of control

Type of business activity

UNIT 1.2

Question 1.2.1.

Question 1.2.2

Question 1.2.4