1. Unit 4: the firm as a producer
Types of Business Organisations

2. Main types of business in private sector differ in terms of:
Introduction
Main types of business in private sector differ in terms of:
Ownership
Control
Way finance is raised
Distribution of profits

3. Owned / run by one person. Rarely employ large no. of people.
Sole Trader
Owned / run by one person.
Rarely employ large no. of people.
Owner complete responsibility.
Main source of finance – personal savings, bank loans.
Simplest / most common structure.
Common in tertiary sector eg local butcher.

4. Trading Licence for certain goods eg alcohol.
Sole Trader
Legal Requirements on Formation
Trading Licence for certain goods eg alcohol.
Must pay relevant taxes

5. Small amount of capital. Personal control, independence, freedom.
Sole Trader
Relative Advantages
Easy to set up.
Small amount of capital.
Personal control, independence, freedom.
No formal set of accounts.

6. Keep profits (after tax). Speedy decisions.
Sole Trader
Relative Advantages
Keep profits (after tax).
Speedy decisions.
Direct contact with customers – feedback.
Closer working relationship - management / employees.

7. Owner responsible for debts.
Sole Trader
Relative Disadvantages
Owner responsible for debts.
Unlimited liability – personal assets at risk.
Difficult to raise capital – growth limited.
Long hours, difficult to cover holidays / illness.

8. Business worries not shared.
Sole Trader
Relative Disadvantages
Business worries not shared.
Division of labour / specialisation difficult.
Owner - non specialist – expertise thinly spread.
Lack of continuity.

9. Ordinary – all partners unlimited liability.
Partnership
Two or more owners.
Ordinary – all partners unlimited liability.
Some partnerships can have a partner who has limited liability – but at least one partner must have unlimited liability.
Professions – dentistry, solicitors, accountants.

10. Share in capital, profits / losses – “Deed of Partnership”.
Legal Requirements on Formation
Minimum 2, maximum 20. (Exceptions to above can exist dependent on countries etc.)
Share in capital, profits / losses – “Deed of Partnership”.
Disputes usually settled by majority.

11. More finance available – expansion easier. Management / risks shared.
Partnership
Relative Advantages
Easily formed.
More finance available – expansion easier.
Management / risks shared.
Financial affairs private.
Greater continuity.

12. Slower decision making. Possible conflict. Profits shared.
Partnership
Relative Disadvantages
Unlimited liability.
Slower decision making.
Possible conflict.
Profits shared.
Membership limited

13. Separate legal identity to owners.
Limited Companies
Separate legal identity to owners.
Incorporated businesses / registered companies.
Private (Ltd’s) & Public (PLC’s).
Shareholders elect directors to run the business. Directors appoint: Chairman, MD, Company Secretary.

14. One or more owner / shareholder. Directors – family or friends
Limited Companies
Private Limited Companies
One or more owner / shareholder.
Directors – family or friends
Generally smaller – common in UK.

15. Transfer of shares – restricted.
Limited Companies
Private Limited Companies
Transfer of shares – restricted.
Owner of family firm can enjoy greater capital, continuity and limited liability without giving up too much control.

16. Two or more owners / shareholders. Can sell shares to general public.
Limited Companies
Public Limited Companies
Two or more owners / shareholders.
Can sell shares to general public.
Larger than Ltd’s - greater capital - ease of share transfer.

17. Limited Liability. Greater capital. Greater continuity.
Limited Companies
Relative Advantages
Limited Liability.
Greater capital.
Greater continuity.

18. Opportunities for specialisation / economies of scale. Status.
Limited Companies
Relative Advantages
Opportunities for specialisation / economies of scale.
Status.
Ltd. – protected from take-overs (share transfer restricted).

19. Expensive to set up / run (particularly PLC).
Limited Companies
Relative Disadvantages
Expensive to set up / run (particularly PLC).
Less flexible – restricted to M of A and A of A.
Accounts audited – costly.

20. Personal guarantee may still be required for loans.
Limited Companies
Relative Disadvantages
Personal guarantee may still be required for loans.
Ltd – shares not offered for public sale.
PLC – lack of privacy.

21. PLC – threat of take-over. PLC – divorce of ownership / control.
Limited Companies
Relative Disadvantages
PLC – threat of take-over.
PLC – divorce of ownership / control.
PLC – shareholder interest – short-term profits.
PLC – many procedures – slower to react to change.

22. MEMORANDUM OF ASSOCIATION ARTICLES OF ASSOCIATION
Limited Companies Legal Requirements
PRIVATE
PUBLIC
Must register as a limited company
(at Companies House, Cardiff for UK firms):
Must submit
MEMORANDUM OF ASSOCIATION
Authorised Share Capital, Objects (activities), Name(s) of original subscriber shareholders.
ARTICLES OF ASSOCIATION
Internal rules eg Directors powers, conduct. Name(s) of original subscriber shareholder(s)
Issued a CERTIFICATE OF INCOPORATION
Can START TRADING
Must produce a PROSPECTUS
(history, prospects, invitation to buy shares)
Must issue SHARES to the value of at least £50,000
Must then receive a TRADING CERTIFICATE
from Registrar of Companies before it can start trading