1. IB Business Management
Unit 1/Section 1.2
Types of Business Organizations

2. 1.2 TYPES OF ORGANIZATIONS On completing this chapter you should be able to
Distinguish between private and public sectors
Outline the main features of for-profit (commercial) organizations:
Sole Traders
Partnerships
Companies or Corporations
Outline the main features of for-profit social enterprises:
Cooperatives
Microfinance providers
Public-private partnerships (PPP)
Outline the main features of non-profit social enterprises:
Non-governmental organizations (NGOs)
Charities

3. PRIVATE VS. PUBLIC SECTORS
Private Sector: Owned and controlled by private individuals and businesses. The aim of most is to make profit (revenue- costs= $).
Public Sector: Owned and controlled by the government. Have objectives other than profits:
Ensures everyone has access to essential goods & services: education, healthcare, public parks & libraries, emergency services, national defense, public transport.
Protects citizens and businesses: police, courts
Creates employment: teachers, doctors, nurses.
Stabilizes the Economy
Prevents private monopolies
Maintains environmental standards

4. FOR-PROFIT COMMERCIAL ORGANIZATIONS
1. Sole Trader (sole proprietor): An individual who owns and runs a personal business. He provides the permanent finance and in return has full control and keeps all profits. Usually small businesses/profits no large enough to support growth/come to an end when the sole trader retires or dies/often a niche in the market.
Advantages
Disadvantages
Few legal formalities: Registering is easy, inexpensive, quick
Unlimited liability- no legal distinction between the business and the sole trader.
Profit taking: all
Limited source of finance (personal savings)
Being your own boss/complete control: quicker decisions, flexibility times & patterns of work
High risks – of failure/
Workload & Stress/
Limited scope for expansion
Personalized service: Usually a small business close to the customer
Limited economies of scale/prices less competitive
Privacy of financial records/limited accountability
Lack of continuity (holidays, illness, death)

5. FOR-PROFIT COMMERCIAL ORGANIZATIONS
2. Partnerships: Profit seeking business owned by 2 or more, with shared capital investment and usually shared responsibility. For ordinary partnerships the maximum # is 20. Usually professional people with related qualifications (doctors, lawyers, accountants).
Advantages
Disadvantages
More Financial strength than sole traders (all partners contribute, more access to finance)
Decisions are made jointly by partners.
Specialization/division of labour/ efficiency
An individual partner doesn’t have control, has to rely on work and good will of others.
Prolonged decision making/Lack of harmony
Business losses are shared between partners
Unlimited liability: No legal distinction. Responsible for debts wholly or severally. Profits are shared among partners
Financial privacy/fewer legal formalities than corporations.
Less access to loans than corporations
Typically more stable than sole traders, higher likelihood of continuity
Lack of continuity: disagreements and conflict.

6. FOR-PROFIT COMMERCIAL ORGANIZATIONS
3. Company or Corporation : A business established for a specific purpose and registered according to local or national legislation. Owned by multiple shareholders: individuals or other businesses that have invested money to provide capital for a company.
Incorporated: the company is a separate entity and has its own rights and duties.
Limited liability: the maximum a shareholder can loose is the value of his investment.
Share: a certificate confirming part ownership of a company and entitling the shareholder to dividends and certain shareholder rights. Usually each share equals one vote.
Shareholder: individuals or institutions that own shares in a limited company.
Shareholders own but don’t run the company.
A Board of Directors (BOD) is elected to run the company (responsible/accountable).
Individual shareholders do not control the business unless they own a majority of Shares.
Company keeps profit unless shareholders decide to pay in the form of Dividend.

7. FOR-PROFIT COMMERCIAL ORGANIZATIONS
When a business decides to become a company it can choose to be different types of organizations:
1.Private limited company: Cannot raise share capital from the general public, shares sold to privately (family members, friends, associates). Usually family businesses. Identified as ltd or Limited.
Advantages
Disadvantages
Separate legal personality
Legal formalities involved
Shareholders have limited liability
Continuity in the event of death of shareholder. Original owner is often able to retain control
Capital cannot be raised by selling shares to the general public.
Able to raise capital by selling shares
Quite difficult to sell shares

8. FOR-PROFIT COMMERCIAL ORGANIZATIONS
2. Public limited company: Able to advertise and sell its shares to the general public via the stock exchange. (Usually use PLC or Inc).
Advantages
Disadvantages
Access to Finance: Raising Capital by selling Shares.
Compliance Costs: Setting up can be complicated and expensive. (rules & regulations of stock exchange)
Limited liability for investors.
Company & Management: Accountable.
Shareholders own but do not run the business.
Directors influenced by short term objectives.
Greater Continuity & Stability (long-term relationships)
Communication problems (employees & customers)
Ease of selling shares
A company has no control over the stock market & loss of control over who buys its shares. Share prices subject to fluctuation/risk of takeover
Tax benefits
Disclosure of information: Many details are legally recorded and matters are of public record.

9. FOR-PROFIT social enterprises
Social enterprises are revenue generating businesses with social objectives at the core of their operations.
Aim to provide human, social or environmental well-being.
Operate the same functions as any other business.
Models:
Cooperatives
Microfinance providers
Public-private partnerships (PPP)

10. Cooperatives
1.Cooperatives: For–profit social enterprises owned and run by its members, such as employees or customers, with the common goal of creating value, by operating in a social responsible way (reducing costs to its members). All members have a vote and share benefits or any profit earned. May have more than 20 members.
Consumer Cooperatives: owned by customers who buy the goods and/or services for personal use.
Workers Cooperatives: set up, owned and organized by their employee members.
Producer Cooperatives: Producers join and support each other to process or market their products.
Advantages
Disadvantages
Incentive to work (motivation & productivity) by being owners
Disincentive effects (don’t pay high salaries) & limited promotional opportunities
Decision-making power: democratic
Slower decision-making
Social benefits: gains can be enjoyed by the wider community
Limited sources of finance (members)

11. Microfinance Providers
2. Microfinance providers: A type of financial service aimed to provide small amounts of finance to those who traditionally would not have access to it, like entrepreneurs of small businesses, rural communities, females and those on low incomes.
They enable the disadvantaged members of society to gain access to essential financial services, help eradicate poverty, and take the first steps towards economic independence.
Advantages
Disadvantages
Accessibility: to those in poverty
Immorality: providers are for profit organizations, that profit from poor and unemployed.
Job Creation: job opportunities
Limited finance: high risk of default
Social well-being: for successful candidates
Limited eligibility: not all poor people qualify

12. Public - Private Partnerships
3. Public-private partnerships (PPP) : Occur when the government works together with the private sector to jointly provide certain goods or services.
Hybrid organizations of both the public and private sector. (schools, hospitals or specific sites)
Benefits from dynamics, finance, expertise and efficiency of private sector and funding and support of public sector.

13. Non -PROFIT social enterprises
Some businesses operating in the private sector do not aim to make profits at all.
They are run as a business, they aim to generate surpluses rather than profits.
The surplus is used to advance the social purpose for which the business was set up, rather than distributed to the owners. (Surplus = total revenues – total costs). (surplus is not classed as profit because it does not get distributed to owners or taxed but is reinvested)
They are allowed to make surplus but it must be retained for capital requirements of the organization (self preservation and growth) or on the social purpose.
They are not organized or run by any government.
Donations are important.

14. Non -PROFIT social enterprises
1. Non-governmental organizations (NGOs): The aim is to support a cause that is considered socially desirable.
The UN defines NGO´s as “private organizations that pursue activities to relieve suffering, promote the interest of the poor, protect the environment, provide basic social services or undertake community development”.
Examples: Save the Whales, Greenpeace, Friends of the Earth, Unicef. Some have political aims: Amnesty International, National Rifle Association.

15. Non -PROFIT social enterprises
2. Charities: The aim is to provide as much relief as possible for those in need, their focus is on philanthropy and a desire to help those who cannot help themselves. They provide voluntary support for good causes. Its key function is to raise funds from individuals and organizations to support a cause that is beneficial to society.
They can be for a single event (natural disaster, war), or focus on a single issue: Save the children, Oxfam, Red Cross, World Wildlife Fund.
Charities are exempt from paying taxes, other NGO´s are not (laws vary in countries)

16. IN-CLASS WORKSHOP – 15 MARKS
Define what is the difference between private sector and public sector. AO1- 2
State three differences between a sole trader and a private limited company. AO1-3
Explain who (a) owns and who (b) controls a public limited company. AO2- 3
Explain in what way does limited liability make it easier for companies to raise finance. AO2-3
Explain two potential advantages to a country when its government uses Private Finance Initiatives to pay for new highways. AO2- 2
Explain two potential disadvantages to a country when its government uses public–private partnerships to pay for and manage health clinics. AO2- 2

17. IN-CLASS CASE STUDY – 36 MARKS (Cambridge pg. 29)
Read the case study below and then answer the questions that follow.

18. IN-CLASS CASE STUDY – 36 MARKS (Cambridge pg. 29)
Read the case study below and then answer the questions that follow.