Forms of Business Organisation

Meaning of Organization “An organization represents a group of people who work together for the achievement of common objective.” “An organization comes into existence when there are a number of persons in communication and relationship to each other and are willing to contribute towards a common endeavor.”

Process of organization Determination of objectives. Determination of objectives. Division of Activities. Division of Activities. Fitting Individuals. Fitting Individuals. Developing relationships. Developing relationships. Co-ordination. Co-ordination.

Advantages of organization Effective Management. Effective Management. Co-ordination and communication. Co-ordination and communication. Growth and diversification. Growth and diversification. Optimum use of technical innovations. Optimum use of technical innovations. Optimum use of human resource. Optimum use of human resource. Balance emphasis to various activities. Balance emphasis to various activities.

Principles of organization Principle of objectives. Principle of objectives. Principle of division of work. Principle of division of work. Principle of unity of command. Principle of unity of command. Principle of span of control. Principle of span of control. Principle of scalar chain. Principle of scalar chain. Principle of delegation. Principle of delegation.

Principles cont… Principle of parity of authority and responsibility. Principle of parity of authority and responsibility. Principle of co-ordination. Principle of co-ordination. Principle of flexibility. Principle of flexibility. Principle of efficiency. Principle of efficiency. Principle of continuity. Principle of continuity. Principle of exception. Principle of exception.

Business Organizations Ownership: The Private Sector Sole traders Sole traders Partnerships Partnerships Private limited companies Private limited companies Public limited companies Public limited companies Co-operatives Co-operatives Close corporations Close corporations Joint ventures Joint ventures Franchises Franchises

Business Organizations Ownership : The Public Sector Public corporations Public corporations Municipal enterprises Municipal enterprises

Ownership means Ownership means –title to and possession of the assets of enterprise, –the power to determine the policies of operation, and –right to receive and dispose of the proceeds. Sole Traders / Single Ownership/ Proprietorship/ Private Undertakings

The most common form of business organization. The most common form of business organization. Owned and operated by one person Owned and operated by one person Very few legal requirements for setting it up. Very few legal requirements for setting it up. Examples are – Printing press, auto repair shop, wood working plant, retail traders, small engineering firms,….

Sole Traders: Advantages Few legal requirements in setting up the business. Owner has complete control over the business. Close contact with customers. Incentive to work hard – do not have to share profits. Secrecy of business matters. Freedom to manage Easy to dissolve Taxes Taxes

Sole Trader: Disadvantages No shared ideas / decision making No shared ideas / decision making Unlimited liability – business not a separate legal entity, therefore owner is fully responsible for the debts of the business. Unlimited liability – business not a separate legal entity, therefore owner is fully responsible for the debts of the business. Limited access to capital – hard to grow Limited access to capital – hard to grow Limited skills Limited skills Hard to take leave Hard to take leave

Partnerships Group of 2 – 20 people. Group of 2 – 20 people. Each partner contributed capital. Each partner contributed capital. Each partner takes part in the running of the business. Each partner takes part in the running of the business. Each partner gets a share of the profits. Each partner gets a share of the profits. A Deed of Partnership / Partnership Agreement sets out the rights and responsibilities of the partners. A Deed of Partnership / Partnership Agreement sets out the rights and responsibilities of the partners.

Partnership Agreements Partnership agreements usually include: The amount of capital invested by partners; The amount of capital invested by partners; The tasks to be undertaken by each partner; The tasks to be undertaken by each partner; How profits are to be shared; How profits are to be shared; The lifespan of the partnership; The lifespan of the partnership; Arrangements for absences; Arrangements for absences; Arrangements for retirement and new partners being admitted. Arrangements for retirement and new partners being admitted.

Types of Partnerships General Partnerships – –All partners are responsible for the management and financial obligations of the business. – –All partners have unlimited liability. Limited Partnerships – –At least one partner is not active in the daily running of the business. – –Some partners have personal liability that is limited to the cash or property they invested in the firm.

Partnership: Advantages More capital (than sole trader). More capital (than sole trader). Responsibilities can be shared. Responsibilities can be shared. Losses are shared. Losses are shared. Easier to take leave. Easier to take leave. Increased skills. Increased skills.

Partnership: Disadvantages Unlimited liability Unlimited liability Unlimited life – if one partner dies, the partnership ends. Unlimited life – if one partner dies, the partnership ends. Decision-making can be difficult when there are disagreements. Decision-making can be difficult when there are disagreements. One incompetent / dishonest partner could cause other partners to suffer. One incompetent / dishonest partner could cause other partners to suffer. Limited to capital of 20 people. Limited to capital of 20 people.

Private Limited Company (Ltd) Separate legal entity from owners. Separate legal entity from owners. Shareholders are the owners – they buy shares in the company. Shareholders are the owners – they buy shares in the company. Shares sold to a small group of people – not through the stock exchange. Shares sold to a small group of people – not through the stock exchange. The shareholders appoint directors to run the company. The shareholders appoint directors to run the company.

Private Limited Company: Advantages Shares can be sold to a large number of people. Shares can be sold to a large number of people. Limited liability – shareholders are not personally responsible for the debts of the business. Limited liability – shareholders are not personally responsible for the debts of the business. The main shareholders can keep relative control of the company. The main shareholders can keep relative control of the company.

Private Limited Company: Disadvantages Significant legal requirements when setting up. Significant legal requirements when setting up. Shares cannot be sold / transferred without the agreement of other shareholders. Shares cannot be sold / transferred without the agreement of other shareholders. Accounts are much less private than sole trader / partnership. Accounts are much less private than sole trader / partnership. Cannot sell shares on stock exchange – limits expansion. Cannot sell shares on stock exchange – limits expansion.

Public Limited Company (PLC) Suitable for very large businesses. Suitable for very large businesses. Owned by private individuals – don’t mistakenly think it is government owned. Owned by private individuals – don’t mistakenly think it is government owned. Shares sold on the stock exchange. Shares sold on the stock exchange.

Public Limited Company: Advantages Limited liability to shareholders. Limited liability to shareholders. Continuity should a shareholder die. Continuity should a shareholder die. Opportunity to raise very large sums of capital. Opportunity to raise very large sums of capital. No restrictions on the buying, selling and transfer of shares. No restrictions on the buying, selling and transfer of shares. Usually has a high status Usually has a high status

Public Limited Company: Disadvantages Complicated and time consuming legal formalities in setting up. Complicated and time consuming legal formalities in setting up. More regulations and controls. More regulations and controls. Is costly to sell shares to the public. Is costly to sell shares to the public. Shareholders have little control over the running of the company. Shareholders have little control over the running of the company.

Co-operatives Groups of people who agree to work together and pool their resources. Groups of people who agree to work together and pool their resources. All members have one vote. All members have one vote. All members help in running the business All members help in running the business Profits are shared equally among members. Profits are shared equally among members. Types: producer co-ops, retail co-ops, worker co-ops. Types: producer co-ops, retail co-ops, worker co-ops.

Close Corporations Similar to Private limited company but quicker to set up. Similar to Private limited company but quicker to set up. Fewer rules and regulations. Fewer rules and regulations. Limited to maximum of 10 people. Limited to maximum of 10 people. Members are also managers Members are also managers Separate legal entities – unlimited liability and continuity. Separate legal entities – unlimited liability and continuity.

Joint Ventures Two or more businesses agree to start a new project together. Two or more businesses agree to start a new project together. Common in the research and development of new products. Common in the research and development of new products. Spread costs and reduce risks. Spread costs and reduce risks. Can lead to disagreements and disputes over policy and management of the venture. Can lead to disagreements and disputes over policy and management of the venture.

Franchising A franchisor is a business with a product / service idea that does not want to sell to customers directly. A franchisor is a business with a product / service idea that does not want to sell to customers directly. The franchisee is the person who buys the idea from the franchisor and sells it to the public. The franchisee is the person who buys the idea from the franchisor and sells it to the public. The franchisee pays the franchisor an initial fee, then monthly fees to cover advertising etc. The franchisee pays the franchisor an initial fee, then monthly fees to cover advertising etc. The franchisee pays the franchisor a percentage of their profits. The franchisee pays the franchisor a percentage of their profits. Examples: McDonalds. Examples: McDonalds.

Franchising: Advantages to Franchisor Expansion is paid for by franchisee. Expansion is paid for by franchisee. Expansion is fast and effective. Expansion is fast and effective. Franchisor can make large profits via franchisees. Franchisor can make large profits via franchisees. Franchisor does not have management problems of the individual retail stores. Franchisor does not have management problems of the individual retail stores.

Franchising: Advantages to Franchisee Reduced chance of failure. Reduced chance of failure. Advertising is paid for by franchisor. Advertising is paid for by franchisor. All supplies come from a single source – the franchisor. All supplies come from a single source – the franchisor. Many decisions have already been made for them. Many decisions have already been made for them. Franchisor provides training for staff. Franchisor provides training for staff. Banks more willing to loan money to franchises. Banks more willing to loan money to franchises.

Public Corporations Wholly owned by the state or central government. Wholly owned by the state or central government. Usually businesses that have been nationalised (sold by private individuals to the government). Usually businesses that have been nationalised (sold by private individuals to the government). The government appoints a Board of Directors to run the organisation. The government appoints a Board of Directors to run the organisation. The Board of Directors runs the organisation according to the objectives set by the government. The Board of Directors runs the organisation according to the objectives set by the government.

Public Corporations: Objectives Traditionally, objectives of public corporations included: To keep prices low so that everyone can afford the service. To keep prices low so that everyone can afford the service. To keep people in jobs. To keep people in jobs. To offer a service to all areas of the country. To offer a service to all areas of the country. This often led to public corporations making huge losses, which had to be subsidised out of taxes.

Public Corporations: Objectives Today, the objectives have become: To reduce costs (this may include reducing the number of workers). To reduce costs (this may include reducing the number of workers). To increase efficiency To increase efficiency To close loss-making services (even if this means some consumers are not provided the service). To close loss-making services (even if this means some consumers are not provided the service). This way of running public sector organisations is called corporatisation.

Public Corporations: Advantages Some industries are so important they need to be government owned e.g. electricity supply. Some industries are so important they need to be government owned e.g. electricity supply. Ensures consumers are not taken advantage of by privately owned monopolists. Ensures consumers are not taken advantage of by privately owned monopolists. Government can nationalise important businesses that are failing to get them on their feet again. Government can nationalise important businesses that are failing to get them on their feet again. Non-profit but important services can still be offered to consumers. Non-profit but important services can still be offered to consumers.

Public Corporations: Disadvantages Lack of profit motive may cause inefficiency. Lack of profit motive may cause inefficiency. Subsidies can further reduce efficiency. Subsidies can further reduce efficiency. Usually no close competition – lack of motive to increase consumer choice and efficiency. Usually no close competition – lack of motive to increase consumer choice and efficiency. Public corporations could be used for political reasons e.g. creating jobs to win votes before elections. Public corporations could be used for political reasons e.g. creating jobs to win votes before elections.

Municipal Enterprises Services offered by local government authorities. Services offered by local government authorities. Some services are free to the user and paid for out of taxes e.g. street lighting. Some services are free to the user and paid for out of taxes e.g. street lighting. Some services are charged for to cover costs e.g. public swimming pools. Some services are charged for to cover costs e.g. public swimming pools. These local services are increasingly being privatised. These local services are increasingly being privatised.

Key Terms Sole trader Sole trader Unlimited liability Unlimited liability Partnership Partnership Separate legal entity Separate legal entity Partnership Agreement Partnership Agreement Private limited company (Ltd) Private limited company (Ltd) Public limited company (PLC) Public limited company (PLC) Cooperative Cooperative Franchise Franchise Public Corporation Public Corporation Corporatisation Corporatisation Nationalisation Nationalisation Municipal enterprises Municipal enterprises