1. IB Business and Management
1.2 Types of Organizations

2. business organizations differ in:
Ownership (privately owned or government)
Finance (Private funds or taxes)
Objective (profit/non profit, or public welfare)
Legal type (how it is classified by law)
Sector (private or public)

3. The private and public sectors
Private sector: the producing sector of an economy that is owned by private parties, financed with private funds, and may be for-profit, e.g. Mitsubishi or non- profit, e.g. SOS.
Public sector: the producing sector of an economy that is owned by the government, financed through taxation, and aims for public welfare.

4. The public sector Public?? The public sector Local municipalities
Public corporations
Ministries

5. Private sector businesses
The private sector may be divided into two types of organizations
Private sector
For Profit
Non profit (NPO’s)

6. Private sector organizations
Businesses owned by private individuals or firms
These may have originated in the private sector or in the public sector but were privatized* (sold by the government to the private sector). The opposite is true where a private sector business is sold to the government (nationalization).
Their main aim is for profit or for other social objectives (NPO’s)
They may differ in size and legal standing
They are funded privately
*to be studied in detail later

7. NPO’s
Private sector organizations aimed at promoting special causes-social objective. E.g. museum
They may turn a profit (revenue>cost) known as a surplus.
The surplus is ploughed back into the business to enhance the service provided toward meeting the social objective for which it was established in the first place.
They may be divided into four categories

8. Types of NPO’s
They are:
NGO’s
QUANGO’s
Charities
Pressure Groups

9. 1. NGO’s
Operate in the private sector. Hence the name Non Governmental Organizations.
They are a type of NPO in that they do not aim for profit.
They aim to benefit society-social objective.
They are also known as PVO’s (Private Voluntary Organizations).

10. Types of NGO’s Two main types of NGO’s exist:
operational NGO’s Advocacy NGO’s
NGO’s

11. What are they??
Operational NGO’s are established for a particular purpose such as relief-based purposes. E.g. UNICEF
Advocacy NGO’s are established to promote a particular cause or defend a certain view by raising awareness through campaigns, demonstrations and political lobbying.
E.g. Greenpeace

12. 2. QUANGO’s??? Quasi (semi) Autonomous Non Governmental Organizations
They are:
Funded by the government
Run by independent individuals
They support a certain government interest.
An example would be environmental agencies

13. 3. Charities
A charity is another NPO collecting contributions or donations to support a particular cause of benefit to society. Charities use refined attractive marketing to drive donors to pay into them such as celebrity endorsements and banquets, often with concentrated use of social media networks. They strive to earn a surplus toward the same aim. Large charities include World Wildlife Fund

14. Benefits of charities:
Financial support toward societal causes
Exempt from paying taxes
Donors can write off contributions from their income (i.e. do not pay taxes on them)
They can enjoy limited liability (i.e. their employees’ and managers’ assets are protected)
HOWEVER………

15. Disadvantages of charities
Absence of the profit motive may produce sub standard services
Demotivation of employees as they may be paid low wages or no wages (volunteers)
Trustees (people managing the charity) are prohibited from receiving financial benefits (demotivation)
All financial activities must be recorded and reported to government to prohibit fraud
The limited liability means employees and managers may work inefficiently
Donations are often insufficient for charity continuity especially in difficult economic times

16. 4. Pressure groups
Non profit organizations established to promote or defend the founding members’ cause.
E.g. PETA (People for the Ethical Treatment of Animals).
These groups can exert significant pressure on businesses and society to modify behavior and decision making through mass media and other forms of influence. They can also foster and advance businesses and endorse them.

17. Types of ‘for profit’ businesses
Legal organization
‘For Profit’
Private limited companies
cooperatives
Sole trader
Public limited companies
Partnership

18. Two legal categories unincorporated
Unincorporated businesses-unlimited liability and no separate legal entity
unincorporated
partnership
Sole trader

19. Unlimited liability???
In case of debt, loss, or lawsuit, owners’ personal wealth may be lost.
The business legal entity is the same as the owners.
In case of loss, the investment as well as the personal wealth may be lost partly or completely.
Disadvantage? Indeed!!

20. Private limited companies
2. Incorporated
2. incorporated-limited liability and separate legal entity
Incorporated
Private limited companies
Public limited companies

21. Limited liability???
In case of debt, loss, or lawsuit, owners’/shareholders’ personal wealth is protected. Owners’/shareholders’ legal entity is separate from the business.
That is a significant advantage to shareholders (owners of shares in limited companies private and public) in that they do risk their investment but not their personal belongings.
In case of loss, the original investment may be partly or completely gone.

22. 1. Sole trader/sole proprietor
Owned by one individual
May employ others or manage alone
Unlimited liability (unincorporated)
Retains all profits and bears all losses
I own my business

23. Benefits and drawbacks
Retains all profits
Has complete freedom
Able to provide personalized service
Privacy as accounts are kept confidential
Few legal formalities
Bears all losses
Unlimited liability
High risk
No continuity
Workload stress

24. partnerships Owned by 2 or more people
Most are owned by a maximum of 20 owners
The maximum number of owners varies from one country to another
Partners/owners have unlimited liability
A sleeping/silent partner (investor who is not involved in management) can enjoy limited liability
Few legal formalities as the partnership can be started through verbal agreement or through a document known as the ‘deed of partnership’
2 or more
usually 2-20

25. Deed of partnership This document includes:
Finance contributed by each partner
Responsibilities of each
Distribution of profits and losses
Conditions for taking in new partners
Partners’ Withdrawal conditions in case any want to leave the business
Closure procedures
Deed of partnership

26. Benefits and drawbacks
Few legal formalities
More skill into the business through the partners
More capital injected into the business
Privacy of accounts
No continuity
Conflict between partners
Unlimited liability
Decision making may be lengthy
Requires significant trust and harmony between partners
May be difficult to raise finance

27. Joint stock companies/incorporated businesses
Such businesses are called joint stock companies because they are jointly owned by their owners known as ‘shareholders’.
They are known as corporations in North America.
They are incorporated businesses as they have ‘limited liability.
Setting these companies involves a complex, lengthy and expensive legal process.
Shareholders elect a board of directors to run the company on their behalf.
The directors are responsible for decision making and day-to-day affairs
The directors are accountable (responsible) to the shareholders
Limited companies have to hold an Annual General Meeting (AGM) by law in which they discuss major company matters and plans and report to shareholders about the company’s financial position. Shareholders vote for new directors at the AGM.
Every share holds one vote. Hence, the largest shareholders hold more power when voting for new directors.

28. types of companies Joint stock companies are divided into two types:
1. Private Limited Company (LTD)
2. public Limited Company (PLC)

29. Private limited companies
Raises capital by selling shares privately to family, friends, and acquaintances
Depending on the country’s law, private limited companies usually have the letters (LTD) following their name
New shares can only be issued if the board of directors agree to it in order to maintain total control over the company
Many private limited companies are family businesses
Must go through a legal process to become LTD
Must produce an annual report, which is audited by an external auditor designated by government.

30. The legal process
Private limited companies must produce and submit to the proper government authorities two main documents:
1. Memorandum of Association-includes basic details about the company such as name, registered address and original amount of share capital (brief document)
2. Articles of Association-a long detailed document including all internal conditions and procedures of the company such as rights, duties and power of the board of directors and AGM conduct for the appointment of the directors. Sometimes, this document will include an item explaining distribution of profits.

31. Certificate of incorporation
Once the two documents are submitted and the government authorities are satisfied with their authenticity, a fee is paid and a certificate of incorporation is issued.
A certificate of incorporation is a license that legally recognizes the separation of identity between the company and its shareholders. This license allows the company to start trading.

32. Advantages of private limited companies
Shareholders have greater control than shareholders of PLC’s
Cheaper to set up than public limited companies
They can grow relatively large and gain efficiency
Usually low minimum capital is required. E.g. in the UK issuing two £ 1 shares is sufficient

33. Disadvantages of private limited companies
Growth is limited by the amount of capital raised from shares as new share must be approved by the board of directors
They cannot trade their shares on the stock exchange
Financial accounts must be disclosed

34. Public limited companies
Joint stock companies owned by shareholders
Share are sold to the general public on the stock exchange
Shareholders may sell their share to anyone anytime
Must carry the letters (PLC) in their name
Must hold an AGM
Must disclose its accounts to the public
Must produce an annual report and get audited by government
Have separation between ownership and control (divorce between ownership and control)
Must go through a lengthy legal process to ‘go public’

35. The legal process PLC’s must submit the same documents as LTD’s plus:
1.prospectus-document including financial information about the company and an invitation to buy the company shares
2. Initial Public Offering (IPO)-selling ‘first hand shares’ to the public. This is known as a floatation.
After the IPO, the re-selling of the same share to other shareholders on the stock market involves ‘second hand shares’

36. Why do shareholders buy shares??
Shareholders have a number of motives for buying share:
1. Dividends-a share of the company profits distributed biannually. It is important to remember that companies may or may not distribute generous dividends.
2. capital gain-they can buy shares when their value is low and sell them when their value is higher. The difference is their capital gain. Clearly, some companies’ shares are highly volatile and can fall as fast as they rise and shareholders may make capital losses instead of gains.
3. Voting rights-major shareholders could become highly influential in the company management as their votes count the most.

37. Annual general meeting
All companies must hold an AGM by law where:
1. shareholders have an opportunity to vote for new directors
2. Shareholders see and approve the financial accounts
3. Shareholders are informed of company plans or chief matters
4. Companies must produce an annual report and final accounts, which are audited by an external auditor designated by the government. This can be an expensive process for larger companies
If necessary, an emergency AGM can be held.

38. Advantages of PLC’s Permanent capital raised Continuity
Efficiency (economies of scale)
Specialization
High profile
growth

39. Disadvantages of PLc’s
Financial information must be disclosed
More bureaucracy due to their size
Dividends paid biannually
Dilution of ownership
Communication and management challenges
Risk of takeover
Some countries have a minimum capital required for PLC’s
Complex costly legal process

40. Similarities between LTD’s and plc’s
They are both joint stock companies
They are both in the private sector
Shareholders of both types of businesses enjoy limited liability
They both have to produce a memorandum and articles of association
They both have to disclose accounts
Both have to hold an AGM
Both are run by directors
Both are audited by government
Both enjoy continuity

41. Differences between ltd’s and plc’s
Cannot sell share on the stock market
Board of directors (BOD) have to approve selling new shares
Have to include LTD in their name
Have to produce only two documents for government authorities
PLC’s
Sell share on the stock market
Freedom to sell shares-no need for BOD approval to sell new shares
Have to include PLC in their name
Have to issue a prospectus and IPO for government authorities
End

42. Cooperatives
A form of partnership whereby the business is owned and managed by all members.
May have more than 20 members (unlike most countries laws regarding ordinary partnerships).
Each member participates in running the business.

43. Types of cooperatives
Financial cooperatives
Housing cooperatives
Workers’ cooperatives
Producer cooperatives
Consumer cooperatives

44. Financial cooperative
Financial-such as a credit union providing cheaper lending rates to members.

45. Housing cooperative
Housing-building to provide Less expensive housing for members.

46. Workers’ cooperative
Workers’-workers are owners maintaining employment for the members.

47. Producer cooperative
Producer-usually small producers such as farmers uniting to share costs and benefit from Lower-cost production, used mostly in farming.

48. Consumer cooperatives
Consumer-providing goods and services for consumers who are members at lower costs.

49. Advantages and disadvantages of cooperatives
Employees have an incentive to work hard as they are part owners
Employees are involved in decision making driving further commitment to the success of the business
Socially responsible behavior sets cooperatives apart
They often enjoy public support
Disadvantages
Low pay and limited promotional opportunities may cause demotivation
Restricted sources of finance
Lengthy decision making

50. Micro finance providers
Providing small amounts of finance to those who would have difficulty obtaining it such as low income people, women, and rural farmers.

51. Micro finance
A financial facility provided to small entrepreneurial ventures particularly women and low income families in less developed and developing nations.
More often than not, finance to such groups is available at extremely high borrowing cost.

52. Micro finance to low-income individuals
Such as farmers..

53. Micro finance to women
Such as this seamstress..

54. Microfinance
Small businesses may find it difficult to obtain the finance necessary to implement their business ideas.
Women in less developed and developing nations are often uneducated with families to support.
As such, microfinance providers are regarded as social enterprises that enable society’s disadvantaged to access finance for owning their own businesses toward improve their standard of living. Another goal of microfinance goal is eradication of poverty.

55. Who is eligible??
While lenders may be providing an opportunity for a better life, they must ensure borrowers are able to repay loans.
This limits the number of recipients as many don’t qualify.
The poor receive microfinance..

56. Eligibility??
Generally, borrowers must produce proof of certain conditions such as poor means, lack of assets, often have to be of a certain nationality, wanting to operate in certain industries.

57. Microfinance
The World Bank declares that over 500 million people worldwide have directly benefitted from microfinance.
Advantages of microfinance providers include job creation, social welfare and accessibility to those who normally may not have it.
Disadvantages include the social view that profit is made from the poor borrowers, Finance is limited (micro), and few individuals qualify to receive it.

58. Public-private enterprise (PPP)
These are organizations that form when governments create partnerships with private sector organizations toward the provision of particular goods or services.
They are known as hybrid organizations as the private sector may provide innovation and quality while the government provides the finance.

59. Examples of PPP’s
The Swedish company Skanska which built the Eurotunnel

60. Main features of PPP’s Profit is important but is not the primary aim
Collaboration between the business and the local community
Greater democracy in decision making than other types of businesses
The business has the same major functions such as production, marketing, finance and accounting, and human resources as other businesses

61. benefits
The dynamism of the private sector and efficiency, integrated with the funding and support of the public sector can serve to produce better results than either sector separately. E.g. London’s Olympics Stadium and New York’s Central Park.

62. costs
PPP’s have been criticized for not living up to the high expectations and weighing down on government budgets.
There is also an issue of private and public sector objectives conflicting leading to the possible clash within the entity rendering it unsuccessful.

63. Factors influencing the strategic choice of type of organization
Available finance
Size and growth target
Limited liability
Degree of control owners require
Product type
Market size
The external environment

64. CUEGIS
NOW!!!
Can you relate the 1.2 chapter content to the CUEGIS concepts??
Type of organization??
Microfinance??
Charities??
Pressure groups??
NGO’s??
Other??