Unit 1.2 – Types of Organizations IB Business Lincoln 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 & Disadvantages All 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 & Disadvantages Varied 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 Limited Companies 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; Advantages 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