Business Ownership Unit 1.2

Types of Business Organisations For Profit Non-profit / NGO / Charities Sole Trader/Proprietors Partnerships Companies/Corporations Cooperatives Franchises Distinguish between Private Sector and Public Sector

IB Specifications Distinguish between public and private sector Starting a business  Why, how, when? Explain the advantages and disadvantages of each type of business organization Relate each type of ownership to the degree of control.

Context If you walk down any high street/main street, you will notice that many of the shops display their names for all to see. It may be Carl’s Pharmacy, Explore Books, Reese Henry Company or Boogies, as well as known chain stores such as Gap, City Market, and Prada. All are businesses, but each with a different status in terms of how is operated, who the owner is and how any profit is shared.

The Private and Public Sectors of the Economy The Private Sector comprises businesses owned and controlled by individuals or groups of individuals. In almost every country, most business activity is in the private sector. The Public Sector comprises Organisations accountable to and controlled by central or local government. These usually include:  Health and education services  Defense  Law and order  Some strategic industries. THE ECONOMY Private SectorPublic Sector

Which Goods and Services Does the Public Sector Provide? Public Goods Non- Rivalry Non- Excludable Consumption of the good/Service by one individual does not reduce the Amount available for others It is impossible to exclude others From benefiting from their use

Merit Goods These are services which are often provided by business into the market at a level below optimum, usually because profits are lower Examples of merit goods are: Education, Health Services such as vaccinations, Public Libraries If the individual is left to decide whether or not to pay for these goods, some may choose not to, or may not be able to.

Business Activity Public Sector:  Business Activity owned, financed and controlled by the state through government or local authorities Government  key departments set policy and monitor implementation Local Authorities  School Boards, County Commissioners, City Councils Public Corporations  BBC in the UK

Objectives of Public Sector Activity Access  available to all regardless of location or income Quality  high quality services that do not cut corners Affordability  services offered at prices that are cheaper than private sector or free at the point of use Equity  available to anyone whatever their background: Status Income Class Race religion Economies of Scale

Range of Business Offered by the Public Sector Roads Airports Paths and Parks Schools Street Lighting Waste Disposal Trading Standards Cemeteries Environmental Health Museums and Arts Economic Development and Tourism Planning Licensing Care of the Elderly Social Services

The Private Sector Legal Structure Private Sector Businesses Sole Trader Partnership Limited Companies Cooperatives Private LTD Public LTD

Business Activity Primary Sector –  extraction of raw materials from the earth – mining, quarrying, fishing, agriculture, forestry Secondary Sector –  Processing of raw materials into finished or semi-finished products – manufacturing Tertiary Sector –  Service industries – leisure, transport, finance, distribution, retailing, wholesaling, communications Quarternary Sector –  Hi tech research, government, training, health, education

Business Activity Multiple Business Activity  e.g. BP involved in: Oil exploration and drilling (Primary) Refining oil – production of gas, petroleum, bitumen, lubricants, etc. (Manufacturing) Distribution of petrol from refineries to petrol stations and sales of petrol to consumer (Tertiary) Research and Development (Quarternary)

Business Activity: Private Sector Business activity owned financed and controlled by private individuals  Sole Traders  Partnerships  Private Limited Companies  Public Limited Companies (PLCs)  Co-operatives  Franchises  Charities

Reasons for starting a business Entrepreneurial  Taking a new idea or concept to market Work for yourself Control Financial “The Dream”

Process for starting a business Idea  Vision, Mission, Aims/Goals, Objectives, Strategies/tactics Market Competition Deal with the Problems:  Raise funds  Control over cash flow  Suitable location  Developing customer relations

Business Plan Components Executive Summary  Accurately describe the nature of your business venture  What is the USP?  Briefly describe your sales and marketing plan  Purpose of business plan If you are seeking a loan, how will you repay it. The Business Section  Organization of your business including your management team.  Address, location, etc Market Analysis Section  Details of sales and marketing plan and evidence of Research demand for your product or service the proposed market, trends within the industry a description of your pricing plan Financing Section  Personal balance sheet  Annual income projections  Break-even worksheet  Projected cash flow statements  Projected and/or actual company balance sheet. Management Section  Outline your organizational structure and management team  Include the legal structure of your business whether it is a partnership, corporation or limited liability corporation.

Objectives of Private Sector Business Objectives Profit Survival Share Price Market Power Sales and Sales Revenue Efficiency Quality and Innovation Image and Reputation Environment Satisficing Social Issues

Business Ownership Sole Trader:  Owned, financed and controlled by one individual but can employ other staff  Common in local building firms, small shops, restaurants, butchers, etc.

Business Ownership Sole Traders: Advantages Easy to set up Personal incentive – keep all the profits make key decisions high degree of control Flexibility Ability to offer personal service

Business Ownership Sole Traders: Disadvantages Unlimited Liability Limited access to capital Potential for long hours Pressure of being solely responsible Lack of continuity – business ceases once owner dies

Business Ownership Partnerships: Owned, financed and controlled by 2 or more partners Terms of Partnership agreed through contract  Common in professions lawyers, accountants, architects, surveyors, estate agents, vets, etc.

Business Ownership Partnerships: Advantages Greater access to capital Shared responsibility Greater opportunity for specialisation Easy to set up

Business Ownership Partnerships: Disadvantages Unlimited Liability (However since 2001, Partnerships can apply to be Limited Partnerships, also called Limited Liability Companies) All partners liable for the debts of the others Partnership dissolved on death of one partner Potential for conflict Decisions of one partner binding on the rest Limited access to capital

Business Ownership Limited Companies (Corporations):  Private Limited Company (Ltd) Owned by between 1 and 50 shareholders Shares are NOT publicly traded In the US, a similar structure is called Subchapter S corporation  Public Limited Company (PLC) Owned by minimum of 2 but no maximum number of shareholders Shares are publicly traded Has a separate legal identity – the company can sue and be sued More complex to set up

Business Ownership Limited Companies – Issues Divorce between ownership and control Potential for diseconomies of scale – communication, decision making, etc. Must publish accounts PLCs – shareholders may be large institutions – pension funds, insurance companies, etc. PLCs - Share value subject to volatility – affects company value PLCs – can be large, complex, possess market power

Business Ownership Co-operatives: Ownership, finance and control in hands of ‘members’ Exists for the benefit of ‘members’ Consumer co-ops – members buy goods in bulk, sell to members, divide profits between members Worker co-operatives – workers buy the business and run it – decisions and profits shared by members Producer co-operatives – producers organise distribution and sale of products themselves

Business Ownership Franchises: Method of business ownership backed by established ‘brand’ name Owner gets to run a business with less ‘risk’ Owner buys the right to use the established company’s name, format products, logos, display units, methods, etc. Speedy way for business to expand Become very popular Owner – (Franchisee) responsible for debts, pays a royalty to owners of the brand, keeps any remaining profit Franchisee – pays a fee for the purchase of the franchise Common franchises – The Body Shop, McDonalds, Caribou Coffee, Subway

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.

Acknowledgements Most of these slides, but not all, came from an IB BM colleague, A. Ashwin, and are used by permission.