1. Unit 6: Chapter 19 Business Organisations

2. Aims You need to know the following for each type of business organisation 1. Definition 2. Examples 3. Formation 4. Characteristics 5. Advantages/Disadvantages

3. The following types of business organisations will be discussed: Sole Trader Partnership Private Limited CompanyStage One Franchising Co-operatives Public Limited Company AlliancesStage Two Transnationals State-owned CompaniesStage Three Indigenous Firms

4. Factors affecting choice of Business Structure 1. The investment needed 2. Finance available, or that needs to be borrowed or raised from investors 3. The tax it will have to pay on its profits 4. The effect a business collapse will have on their invested funds

5. 1.Sole Trader A business owned and run by one person eg. farmer, grocer, hairdresser, publican, local chemist, newsagent, etc Regulations The health regulations when supplying food All safety regulations When turnover exceeds certain levels then the business must register to collect and pay VAT When employing workers, all labour laws must be obeyed Characteristics Common for of business Easy to set up Unlimited Liability Capital provided by owner Owner controls all aspects of the business.

6. Formation If the sole trader trades under his own name, he may start immediately eg.: Wilson’s Wine Bar. If he is using a name different to his own, eg, The Vineyard, then he must register the business under the Business Names act 1963. A business must register for PAYE and PRSI if there are employees and it must also register for VAT if turnover is greater than a certain amount.

7. Advantages 1.Easy to set up Few legal requirements No permission is needed 2.Keeps all profits 3.Independence Full Independence. 4.Confidentiality of Information They do not have to publish accounts. 5.Customers The sole traders usually know their customers personally. This ensures customer loyalty. Disadvantages 1.Unlimited Liability Owner personally responsible for all debts 2.Work Load, Long Hours and Stress 3.Finance – difficult to raise 4.Taxation 5.Responsibility

8. 2. Partnership A Partnership is a business relationship that exists between at least 2 and 20 people eg.: solicitors, doctors, accountants Characteristics partnerships have between 2 & 20 partners Easy to set up Unlimited Liability Not separate legal entity Owners provide the capital and run the business.

9. Formation If the partners operate under their own names, the partnership can immediately start. Otherwise it must be registered under the Business Names act 1963. The partners will usually draw up their own rules. This is called a Deed of Partnership. This sets down: Financial arrangements Share of profits Duties of each partner.

10. Advantages: 1. Easy to Set up and run 2. Easier to raise capital 3. More Skills and Experience in the group 4. Confidentiality of Accounts 5. Losses are shared Disadvantages 1. Unlimited Liability – partners responsible for all losses 2. Slow Decision-making among many partners 3. Disagreements – among many partners 4. Profits shared among all based on investment

11. 3. Private Limited Company A business owned by between 1 - 50 shareholders: has limited liability seen as a separate legal identity in the eyes of the law. Formation The rules for setting up a private limited company are contained in the Companies Act 1990 1. The company needs to decide on its name and use this name on all documentation together with the word ltd at the end of the name. 2. A number of documents have to be prepared and sent to the Registrar of Companies at the Companies Registration Office. 3. The Companies Registration Office will give it a certificate of incorporation (a ‘birth cert’ of a private limited company.) 4. The company calls its first meeting (statutory meeting) and begins trading

12. Memorandum of Association It contains: 1. The name and address of the company. 2. The objectives of the company 3. A statement that the shareholders have limited liability. 4. The amount of authorised share capital (the maximum no. of shares to be sold) 5. A list of all the founding shareholders names, addresses, shares and signatures

13. Articles of Association This document sets out the internal rules and regulations for running the company. It contains: 1. Details of Share Capital and voting rights attaching to shareholders 2. Details of how meetings are to be called and conducted 3. Details of how the directors are to be elected and removed 4. The powers and duties of the directors 5. How the company can be wound up (closed down)

14. Characteristics Shareholders: Between 1 and 50 shareholders Limited Liability Separate Legal Entity The company is separate from its shareholders. The firm can be sued, its owners can’t. Shares are not bought and sold by members of the public Size Private limited companies are often small or medium sized, run by directors who are appointed by the shareholders.

15. Advantages Limited Liability They only loose the amount of money they put into the business. Capital easier to raise Tax The rate of corporation tax is low. Separate Legal Entity The firm can be sued, its owners can’t. Skills and Experience They can split the workload between them, with each director having different skills and experience. Disadvantages Legal Regulations They cannot begin trading until they receive a certificate of incorporation. Confidentiality Detailed accounts have to be published each year - employees, customers, competitors, etc have access to sensitive information on the company. Profits Shared between share holders in the ratio of investments not effort Costs The costs involved in forming a private limited company and complying with the Companies Act are higher than sole traders

16. 4. Franchise A franchise is when an established business allows another business to set up and use its name and idea in exchange for a fee and a percentage of the sales. It is a licence to sell another firms product or service. Examples of franchises include McDonald’s, Eddie Rockets, Subway, Pizza Hut, O’Briens Sandwich Bars, Spar,

17. Formation 1. The franchiser is an expanding business and wants to open new branches but does not want to manage these branches. 2. She seeks out an interested party (franchisee). 3. The franchiser charges the franchisee a large once off fee for permission to open up the franchise business. 4. They sign an agreement setting out how the business should be run. 5. Every year the franchisee pays the franchiser a percentage of the profits.

18. Characteristics The franchisee pays a fee to the franchiser and then a percentage of the sales revenue each year. The franchiser provides the following in return: 1. Building specifications and designs that lay down the type of structure in which the business can operate 2. Management and accounting support 3. Site recommendations for the location of the new business 4. Product specifications to ensure the product being sold is the same as in every other outlet 5. Raw materials to ensure standardised products and continuity of supply 6. Each branch contains the same standard décor, logo, method of operation product range, pricing strategy, etc.

19. Advantages Advertising The franchisee (individual branch) benefits from national advertising and promotions. eg.: Domino’s Pizza sponsors The Simpsons on Sky One.. Risk Due to established name, the risk of failure is small. Economies of Scale – lower costs Head office buys all stock for the individual franchisee. Expansion and Capital The franchiser can open new branches without major expense, as the franchisee pays an initial fee. The individual franchisee provides the capital and labour. Training and Ongoing Support The management team receives valuable professional training and advice from the franchiser. Disadvantages Image at Risk The franchiser is taking the risk of the franchisee not running the business properly Costs The costs to the franchisee are high. An initial fee must be paid and an annual percentage of sales. Restrictions There is not much room for the individual franchisee to be creative, as a standard formula must be followed.

20. 4. Co-operative A co-operative is a business set up by a group of people with a common need. Each member has an equal say in the running of the business. Eg: Wexford Farmers Co-op, Formation The members (a minimum of 7) who purchase one share of €1 and choose a name and registers office for the co-op and draw up rules (similar to the memorandum and articles of association) of the co- op. They send these, with a fee, to the Registrar of Friendly Societies. If these are in order a certificate of registration is issued and the co-op can begin trading.

21. Characteristics Minimum of 7 owners – no maximum Members of a co-op enjoy limited liability Co-ops are democratically run i.e. each member has one vote regardless of the number of shares held. Profits are distributed to the members based on the proportion of business they do with the co-op. The co-op cannot sell shares to the general public. Types of Co-operatives Credit Unions: a financial credit union Producer Co-operatives: A group of producers (eg.: farmers) Worker Co-operatives: owned and controlled by those who work in it.

22. Advantages 1. Democratic Control 2. Limited Liability 3. Share of Profits 4. Contribution to the Economy 5. Credit Rating Disadvantages 1. Formality and Regulations 2. Capital 3. Confidentiality 4. Profits 5. Conflict

23. STAGE 2 – EXPANDING BUSINESSES Organic/Natural Growth As a business grows, profits can be re-invested or ploughed back into the company (it expands). New machinery, equipments, land etc can be purchased. These profits are also known as retained earnings. Other Forms of Growth Businesses can also grow by joining an alliance or if it is a ltd, co-operative or semi state company it can turn itself into a public limited company. Benefits of Growth 1. Economies of scale; -costs fall and profits rise 2. The business will be better able to seek out new markets 3. The business will have the funds to pay better sallies and attract better works 4. Greater profits will allow it to expand further

24. 6. Public Limited Company (PLC) This is a business owned by at least 7 shareholders. There is no limit to the amount of shareholders in a plc. Shares are bought and sold freely on the stock exchange. eg.: Bank of Ireland plc, AIB plc, Aer Lingus plc, Glanbia, Kerry Group and Ryanair

25. Formation A Public Limited Company grows from a private limited company, a co-operative or a semi-state body. It has a memorandum of association, articles of association and a certificate of incorporation. The company must have 7 shareholders willing to buy shares Must get a trading certificate from Registrar of companies They sell shares to the public and must get a quotation on the stock exchange. When a company makes a decision about becoming a PLC it must: i) Decide on the amount of money that it wishes to raise form the public. ii) Produce a prospectus. This is a book that details the history of the company and invites members of the public to buy shares.

26. Characteristics At least 7 shareholders and no maximum The letters PLC must appear after the name Shares are bought and sold freely on the stock exchange by whoever wants to buy them. Accounts must be published each year. It must publish a prospectus.

27. Advantages: 1.Limited Liability 2.Tax: The rate of corporation tax is low. How will this affect a company? 3. Capital : Plc’s can raise a lot of capital as a result of being able to sell shares to the public on the stock exchange. 4.Publicity There is a freely publicity with being quoted on the stock exchange. 5. Separate Legal Entity Disadvantages: 1.Legal Regulations A lot of legislation governs running of a company 2.Confidentiality: full set of accounts must be published 3.Expense: huge expense to set up on stock exchange 4.Takeover’s: small PLC’s become the target of a takeover 5.Ownership and Control: As share numbers increase there is a big turnover and dilution of control

28. People involved in Companies 1.Shareholders They own the company. They put their money into the company. They receive a share of the profits called a dividend They vote in the Board of Directors and can vote at AGM’s. 2.Board of Directors They run the company for the shareholders. They are voted in by the shareholders, are responsible for making the business a success and report back to shareholders. They decide on the dividend.

29. 3.Managing Director (MD)/Chief Executive Officer (CEO) This person is in overall charge of the company They are answerable to the board of directors. They appoint senior managers and delegate duties to them 4.Chairperson This person is selected by the Board of Directors to run the companies meetings. They act as a figurehead for the company. 5.Secretary This person is in charge of administration in the company. They organise company meetings and send out the notice and agenda for each. They take the minutes of meetings.

30. 7. Alliance An alliance is an arrangement where two firms agree to co-operate with each other on a single business project. An alliance benefits both businesses. The businesses agree to come together to share skills, expertise, costs, etc. Example Postbank is a joint venture between An Post and Fortis (a major international bank).

31. Formation An alliance is formed when two firms decide that it would be beneficial for both of them to join up for some activity on a temporary basis. Characteristics These are not an option for new businesses, but are extensively used by existing firms as a method of entering new markets or acquiring new technology or products Both firms retain their own identities The alliance may be short or long term.

32. Advantages 1. Expertise, Costs and Skills are shared 2. New Markets – increase market share 3. Easy to Form 4. Economies of Scale 5. Brand Name of both creates recognition Disadvantages 1. Profits and Control Shared 2. Lack of Choice for consumers 3. Disagreements among management and employees

33. 8. Transnational Companies A transnational/multinational is a company with its headquarters in one country and branches in many other countries. Some firms become transnational companies as a result of natural growth whilst others set out to conquer the world. eg.: Dell, Intel, Sony, Ford, Toyota, etc Formation Firms become transnationals due to growth and expansion of the business. They increase their profits and market share by supplying world markets.

34. Characteristics They tend to be the largest companies in the world. example Sony, Shell, Coca Cola, Microsoft and McDonald’s They sell standardised products all over the world, sometimes with slight modifications to suit different countries – eg McDonald’s Irish Beef All major decisions are usually made abroad for the good of the company. Good communications and infrastructural networks are important for the success of transnational companies

35. Ireland and Transnationals The Industrial Development Authority (IDA) attracts foreign companies to set up in Ireland. E.g. Intel, Hewlett Packard, Google (European HQ. in Dublin), Amazon and eBay. Reasons why they choose Ireland 1. Tax Concessions 2. Access to the EU Market 3. Educated Workforce 4. Grants 5. Stable Currency

36. Advantages 1. Create Employment 2. Contribute Tax Revenue 3. High level of technologies, Products and Skills 4. Local Suppliers are available and benefit 5. Competition increases choice and lowers prices e.g. supermarkets Disadvantages 1. No loyalty to Ireland – DELL moved to Poland 2. Repatriation of Profits 3. Competition - Irish firms suffer 4. Size and Power can influence government

37. 9. State-owned Enterprises These are companies set-up, owned, financed and controlled by the government. E.G. Bus Eireann semi-state companies are part owned by government E.g. Aer Lingus

38. Formation These companies are usually set up by an Act of the Oireachtas (eg.: CIE, ESB, RTE, etc). These don’t have shareholders but have a board of directors appointed by the relevant minister. They may be set up as limited companies with the government as the major shareholder E.g. Dublin Port Company

39. Characteristics Each state company is under the control of a government minister, who appoints a board of directors to run the company. The annual reports and accounts of these bodies are sent each year to the relevant Government minister State firms are both commercial and non-commercial.

40. Reasons for the Establishment of State-Owned Enterprises 1. Many bodies were set up to develop vital sectors of the economy such as tourism (Bord Failte) 2. The I.D.A. attracts foreign firms into the country 3. Enterprise Ireland encourages the establishment of home-based firms. 4. To provide a particular good or service, eg.: Coillte - Forestry 5. Provides essential services which are needed eg.: buses to rural areas, An Post

41. Advantages 1. Create Employment 2. Provide Essential Services 3. Increase Economic Development 4. Develop Natural Resources 5. Profit made goes to government Disadvantages 1. Not profit motivated 2. Losses are common 3. Capital from taxpayers 4. Government Interference

42. 10. Indigenous Firms Firms which are set up, owned and run by Irish people. Their main place of business is Ireland. eg.: Lily O’Brien’s, Supermacs, Pat the Baker, etc Characteristics The government supports the creation of indigenous firms through Enterprise Ireland. The aim is to lesson our dependence on multinationals Enterprise Ireland gives grants, advice and start up finance to indigenous firms.

43. Advantages 1. Create Employment 2. Loyalty to Irish produce 3. Profits are kept in Ireland 4. Promotes Culture of Enterprise 5. Tax Revenue for government Disadvantages 1. Competition – difficult to compete against multinationals 2. Grants required from taxpayers money – failure brings no return

44. Changing Trends in Ownership and Structure 1. Increase in Franchises – less risk 2. Mergers and Alliances – Economies of scale 3. Privatisation – raise finance for govt 4. Co-operatives becoming Public Limited Companies 5. Irish Businesses becoming Transnationals – increase exports

45. Reasons for the Changing Trend in Ownership and Structure. 1. To raise Capital 2. To increase Growth 3. Reducing Risk 4. Increase Sales and Profits 5. To acquire New Skills and Expertise