BUSINESS AND MANAGEMENT MODULE 1 BUSINESS ORGANIZATIONS & ENVIRONMENT

The Sole Trader/Proprietor This is the most common form of business organization. One person provides the finances and in return, has full control of the business and is able to keep all the profits.

The Sole Trader/Proprietor Advantages Easy to set up-no legal formalities. Owner has complete control –not answerable to anybody else. Owner keeps all profits. Able to choose times and patterns of working. Able to establish close personal relationships with staff (if any are employed) and customers. The business can be based on the interest and skills of the owner – rather than working as an employee for a larger business.

Continued… Disadvantages Unlimited liability – all of the owner’s a assets are at risk. Often faces intense competition from bigger firms, for example, food retailing. Owner is unable to specialise in areas of the business that are most interesting – it is responsible for all aspects of management. Difficult to raise additional capital. Long hours often necessary to make business pay. Lack of continuity- as the business does not have separate legal status, when the owner dies, the business ends too

Discussion Nancy is a self-employed florist who operates in Brockville. She is married with three young children, and her husband’s job keeps him on the road many days at a time. Nancy arranges and delivers flowers to hospitals and schools, and occasionally gets a large wedding order. Analyse the costs and benefits to Nancy in operating as a sole trader. Do sole traders benefit from entrepreneurs having a high degree of specialization?

Partnerships Partnerships are agreements between two or more people carry on a business together, usually with a view of making a profit. The Deed of Partnership establishes the rights and privileges of the partners. This document includes issues such as voting rights, distribution of profits, the management role of each partner and who has the authority to sign contracts.

Partnerships Advantages Partners may specialise in different areas of business management. Shared decision making. Additional capital injected by each partner. Business losses shared between the partners. Greater privacy and fewer legal formalities that corporate organizations (companies)

Continued… Disadvantages Unlimited Liability for all partners. Profits are shared. There is, as with sole traders, no continuity and the partnership will have to be reformed in the event of the death of one partner. All partners are bound by the decision of any one of them (mutual agency) Not possible to raise capital from selling shares.

Corporations Businesses that are owned by shareholders (individuals who have invested money to provide capital to the company) Unlike sole traders or partners, shareholders have limited liability They do not bear the responsibility of company debt and their personal assets are not linked to the company

Continued… Additional Characteristics Very complex and expensive set up Legal personality Continuity Two types of limited companies Private Public

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.

Private Limited Companies Advantages Shareholders have limited liability therefore I is easier to attract investors 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. Financial information is usually held in private Benefits from economies of scale

Continued… 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 therefore restricting the amount of capital that can be raised. As financial information can be withheld, interested shareholders may be turned off

Public Limited Companies Often called plc’s (in Europe) or simply a corporation in Canada Shares of plc’s can be bought and sold on a stock exchange Plc’s make up the smallest number of businesses in Canada, however they contribute greatly to Canada’s domestic growth

Continued… The company needs lawyers to ensure that the prospectus is ‘legally’ correct. A large number of publications have to be made available. The company must use financial institutions to process share application. The share has to be underwritten. A fee is paid to an underwriter who must buy any unsold shares. The company will have advertising and administrative expenses. The company must have a minimum of $50,000 share capital.

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 of scale. Because of their size, a plc can often dominate the market. It becomes easier to raise finance as financial institutions are more willing to lend to plcs.

Continued… 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. 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 are inflexible due to their size.

Franchises This is a contract between two firms The contract allows one of them, the franchisee, to use the name, logo and marketing methods of the other, the franchiser.

Cooperatives This is a common form of business organisation in some countries, especially in agriculture and retailing. Features All members can contribute to the running of the business, sharing the work load, responsibilities and decision making. All members have one vote at important meetings. Profits are shared equally among members.

Cooperatives Advantages Disadvantages Buying in bulk. Working together to solve problems and make decisions. Good motivation of all members to work hard as they will benefit from shared profits. Disadvantages Poor management skills unless professionals are employed. Capital shortages because no sale of shares to the non-member general public is allowed. Slow decision making if all members are to be consulted

Factors Affecting the Choice of Organizations 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.

Research and Presentation Task How are Charities different from Cooperatives in relation to the following: Characteristics Role in community development Advantages and Disadvantages Identify two Non-Governmental organizations which are currently working within your community and assess the impact of their contributions to the development of your community & internationally Be prepared to present your findings to the class in a 3 to 5 minute discussion

Case: James Hull Associates Formative Case Study Case: James Hull Associates Source: Jones, Hall, Raffo, Business Studies 3rd Edition, Unit 6, page 51.

DECA Connection You are the owner/manager of a local bookstore. You are interested in changing the ownership structure to either a partnership or corporation. You want to present your findings to your financial consultant. Your evaluation will consist of: Explain the types of business ownership Describe legal issues affecting businesses Explain the nature of tax regulations on the business Explain business risk