1. Module-1 TYPES OF BUSINESS ORGANISATION

2. CHAPTER TOPICS 1.WHAT ARE THE DIFFERENT TYPES OF BUSINESS ORGANISATIONS? 2.WHAT ARE SOLE TRADERS? 3.WHAT ARE PARTNERSHIPS? 4.WHAT IS A LIMITED COMPANY? 5.WHAT IS A CO-OPERATIVE? 6.WHAT ARE STATE OWNED ENTERPRISES? 7.WHAT ARE THE CHANGING TRENDS IN BUSINESS OWNERSHIP AND STRUCTURE? 8.WHY DO BUSINESSES CHANGE THEIR LEGAL STRUCTURE OVER TIME?

3. Business organisations A business (also called a company, enterprise or firm) is a legally recognized organization designed to provide goods and/or services to consumers. Businesses are predominant in capitalist economies, most being privately owned and formed to earn profit that will increase the wealth of its owners and grow the business itself.

4. The owners and operators of a business have as one of their main objectives the receipt or generation of a financial return in exchange for work and acceptance of risk. Notable exceptions include cooperative enterprises and state-owned enterprises. Businesses can also be formed not-for-profit or be state-owned.

5. Factors Affecting the choice of Organisations Age: Many businesses change their legal status as they become older. The Need for finance: A change in legal status may be forced on the business. Size: The size of a business operation is likely to affect its legal status. Limited Liability: Owners can protect their own personal financial position if the business is a Limited Liability company. Degree of control: Owners may consider retaining control of the business as important. The Nature of the Business: The type of business activity may influence the choice of legal status.

6. 1. WHAT ARE THE DIFFERENT TYPES OF BUSINESS ORGANISATIONS? Sole Proprietorship PARTNERSHIP Corporations/ Company CO-OPERATIVE Non profit organizations These business structures are going to be compared under the following headings: 1.Formation 2.Dissolution 3.Ownership 4.Management & finance 5.Profits & risk

7. 2. What are Sole Traders? AdvantagesDisadvantages 1. Formation & Dissolutio n Very easy to form/dissolve. It can be easily changed into partnership, ltd company etc. If he/she dies then so does the business 2. Management & finance Sole traders have full control of how business is run. Decision making is quick. Financial records do not have to be revealed to the public. Long working hours are common and holidays are difficult to arrange due to the commitment needed to be a successful sole trader. Can be difficult to raise all start up finance and as a result loans are required. They can be expensive on the business start ups 3. Profit & risk Keeps all profit. Takes all the risk. Takes all risk. They have unlimited liability. They may lose assets in the event of a debt needing to be paid. This is a one person business run by the owner with his/her own money.

8. 3. What are partnerships? AdvantagesDisadvantages 1.Formation & Dissolution Easy to form. You can start immediately, however if business name is different to that of partners you must register the company name. If a partner leaves or a partnership ends a new partnership must be agreed. 2. Managemen t & finance Decision making is shared. Responsibility is shared. Financial details not open to be viewed by public Disagreements can easily occur. If someone dies the business is discontinued. 3. Profit & risk Extra capital available to finance the business Unlimited liability, each partner is responsible for the debts of the business Profits must be shared between partners Is an agreement between 2 or more people to go into business with a view to making a profit? There can be no less than 2 members and no more than 20.

9. 4. What is a limited company? Ltd companies are regarded as separate legal entities from the people who own and run them. The owners are called shareholders and only gain/lose on the amount they put into the business. There are two main types of company: Private limited company (Ltd) – HEITON BUCKLEY Public limited companies (PLC’s) – LIVERPOOL FC The main difference is that shares of PLC’s can be freely bought and sold on the stock exchange

10. Limited Company Features Dissolution AdvantagesDisadvantages 1.Formation & Dissolution Companies can continue to exist even if a shareholder or director dies The legal formalities of forming a company are more complex, time consuming & expensive than forming other business structures 2. Ownership Owned by its shareholders 3. Management & finance Can raise finance for business start ups or expansion through selling of shares. A lot of paperwork including financial audits, reports etc 4. Profit & risk Shareholders have limited liability. If company has a lot of shareholders risk is minimal Profits must be shared

11. How is a private limited company formed To form a private limited company you must 1.Have at least two shareholders and one director. 2Prepare a Memorandum of Association. This is a document for public use. It details name of company, company objective, the number of shares of each shareholder. This document is kept in the Companies Office. 3.Prepare an Articles of Association. This is a document for shareholders. It details the internal rules of the company, types of shares issued, how meetings are run, the procedure for electing/replacing directors. 4.Register with REGISTRAR of COMPANIES in the COMPANIES OFFICE 5.The companies office issues a “birth certificate” called a CERTIFICATE of INCORPORATION 6.If you register as a public limited company you must obtain a TRADING CERTIFICATE 7. TRADING CAN NOW COMMENCE

12. The Memorandum of Association Name of the company Name and address of the company’s registered office The objectives of the company and scope of its activities The liability of members The amount of capital to be raised and the number of shares to be issued Note: A limited company must have a minimum of two members.

13. Article of Association The rights of shareholders The procedure for appointing directors and scope of their powers The length of time directors should serve before reelection The timing and frequency of company meetings The arrangement for auditing company accounts

14. The Private Limited Companies Characteristics Tend to be relatively small companies. Their business name ends in Limited or Ltd. Shares can only be transferred privately and all shareholders must agree to the transfer. Private Limited Companies are often family businesses owned by members of the family or close friends. The directors of these companies tend to be shareholders and are involved in the running of the business. Many manufacturing firms are Private Limited Companies rather than Sole Traders or Partnerships

15. Private Limited Companies Advantages Shareholders have limited liability. More capital can be raised as there are no limits on the number of shareholders. Control of companies cannot be lost to outsiders. The business will continue even if one of the owners dies. Disadvantages Profits have to be shared out amongst a much larger number of members. There is a legal procedure to set up the business. This takes time and costs money. Firms are not allowed to sell shares to the public This restricts the amount of capital that can be raised. Financial information filed with the Registrar can be inspected by any member of the public. Competitors could use this to their advantage.

16. Formation of Public Limited Companies Memorandum of Association + Article of Association + Statutory Declaration Registrar of Companies Certificate of Incorporation Publish of Prospectus FLOTATION

17. Public Limited Companies A plc cannot begin trading until it has completed these tasks and has received at least 25% payment for the value of shares. It will then receive a Trading Certificate and can begin operating. The shares will be quoted on the Stock Exchange or the Alternative Investment Market (AIM). The Stock Exchange is a market where second hand shares are bought and sold. A full Stock Exchange listing means that the company must comply with the rules and regulations laid down by the Stock Exchange. The Alternative Investment Market (AIM) is designed for companies which want to avoid some of the high costs of a full listing.

18. Public Limited Companies Advantages Huge amounts of money can be raised from the sale of shares to the public. Production costs may be lower as firms gain economies scale. Because of their size, plc can often dominate the market. It becomes easier to raise finance as financial institutions are more willing l to lend to plcs. Disadvantages Setting up costs can be very expensive. Since anyone can buy shares, its possible for an outside interest to take control of the company. All company accounts can be inspected by member of the public. Because of their size they cannot deal with customers at a personal level. The way they operate is controlled by various company acts which aims to protect shareholders. There is divorce of ownership and control which might lead to the interest of owners being ignored to some extent. Plcs inflexible due to their size.

19. How companies are run? AGM- a meeting held once a year involving directors, shareholders of a firm discussing events of the previous 12 months & future plans Board of Directors BOD – this board is responsible for overseeing the running of a company. These directors are the most senior managers of a limited company. Directors can be removed by a majority voting system. The company chairperson – is a director and is elected by the board to chair AGM’s & EGM’s. They speak on behalf of the BOD. The Managing Director MD/Chief Executive Officer CEO Is in charge of overseeing all aspects of company activities. The CEO is answerable to the BOD

20. Cooperative A co-operative is an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly- owned and democratically-controlled enterprise. International Co-operative Alliance, ICA, 1995

21. Features of a Co-operative… A co-operative is a business enterprise with economic interests that is owned and democratically controlled by its members. The starting point is equal cooperation of the members. The purpose is to promote the members’ economy by using the services provided by the co-operative. Profit-making is not the main goal. Power of decision is exercised by the principle: one member, one vote even if the members have different number of shares. The power of decision can, however, be differentiated by rules. Membership and share capital have not been determined in advance. There is no requirement for minimum share capital in a co- operative. To be continued

22. …Features of a Co-operative Voluntarily/ Open membership: A co-operative can admit new members, membership is voluntary and one can resign from a co-operative. One can also be expelled from it. Distribution of Surplus: The surplus generated is normally allocated in proportion to the members’ transactions with the co-operative. Separate legal entity: The members are not personally liable for the obligations of the co-operative, unless extraordinary payments are stipulated in the rules. Registered under cooperative act;The Act applies to all co- operatives.

23. AdvantagesDisadvantages 1.Formation Must have a minimum of 7members. They register with the REGISTRAR OF FRIENDLY SOCIETIES. Can be quite difficult to form, time consuming and expensive. 2. Ownership Co-ops mainly exist in the agricultural industry. Equal voting system exists regardless of the shares held. They file an annual financial return (report) Conflict may exist between members in the need for business expansion. A co operative is business owned and run by a group of people, AND each has a financial interest in its success. They also have a say on how it is managed Co-ops mainly exist in the agricultural industry.

24. 3. Managemen t & finance Management of co-ops are inspired by a spirit of democracy and mutual co- operation. Slow decision making if all members are to be consulted. In some situations finance can be difficult to raise. This can hinder growth. 4. Profit & risk Profits are shared equally. Members have limited liability. Large membership of co-ops make sure that there is high demand for goods Profits must be shared amongst members. There may be reluctance to share profits with new members. Risk is quite minimal.

25. Types of cooperative Housing Cooperative Retailer cooperative Consumer cooperative Cooperative Banking Cooperative provide over 100 millions jobs around the world, 20% more than multinational enterprises.In India, 239 million cooperative, china 180 million cooperatives. In U.S. 40% people in cooperative.

26. Grey Area of Cooperative Sector Poor Infrastructure Lack of Awareness Lack of Quality management Over dependence on government. Lack of strong H.R. policy. Neglect of professionalism Restricted Coverage.

27. Not For Profit Organisations ACCOUNTANCY Class XII

28. Not For Profit Organisations Organisations which are formed not for earning profits but for a charitable or social purpose are called as not for profit organisations.  They are similar to profit-seeking businesses, but do not issue stock, pay dividends, or pay income taxes.  The profits they produce are used to fuilfil the goals of the group. FEATURES:- 1)Separate legal entity 2)Service motive 3)Form 4)Profit- not a motivator 5)Funding 6)Accounts

29. What are state owned enterprises? AdvantagesDisadvantages 1. Formation The government provides the share capital and subsidies. These companies usually have a good understanding with financial institutions, (banks), railways Lack of funding which in turn leads to borrowing more from government, this is especially true if the business is not making a profit (i.e IARNROD EIREANN). These are enterprises that are set up, financed and controlled by the government.

30. What are state owned enterprises? Management and finance They provide employment They promote industrial development, They provide services of necessity The directors of some firms lack appropriate knowledge in the companies particular area (i.e agriculture), this is because they are appointed through political contacts The lack of profit making, sometimes leads to lack of motivation in workplace Ownership State owned

31. Forms of Ownership – A summary Sole TraderPartnershipLimited Company Co-op Formation Easy No paperwork Easy No paperwork Paperwork Registration fee Paperwork Registration fee Ownership Owned by sole trader Owned by partnersOwned by shareholders Owned by members Management & financ e Speedy decision making Accounts are private Can be difficult to raise finance Shared decision making Disagreements possible Accounts are private Raise finance through new partners Managed by BOD BOD elected by shareholders Accounts submitted to Companies Office Raise finance through grants, loans & issuing of shares Managed by Board elected by members. One member, one vote rule. Accounts submitted to Register of Friendly Societies Raise finance through grants, loans & issuing of shares Profits & risk Keeps all the profit Unlimited liability Profit shared Unlimited liability Profits shared among shareholders Limited liability Profits shares Members have limited liability EXAMPLES SHOPKEEPERS TRADESPEOPLE like carpenters, plumbers SOLICITORS, DOCTORS, DENTISTS. Manchester United Liverpool FC AIB IFFCO, AMUL Cooperative

32. 9. WHY DO BUSINESSES CHANGE THEIR LEGAL STRUCTURE OVER TIME? Unlimited liability Limited liability Sole trader Partnership State owned Comp. Private Ltd Comp / Co-op Private Ltd Comp / Co-op Private Ltd Comp / Co-op PLC Comp.

33. Businesses change their Business Structure from Sole Trader to Partnership to Private Limited Company to a PLC because: 1.It helps them bring in new skills, experience, resources 2.It reduces risk as the sole trader or the partners can now enjoy limited liability 3.Helps to raise finance through investors, stock exchange etc. for future expansion

34. 4.Helps to market the company. Being a limited company enhances the image of the business. This adds to the reputation of the company as advertising and promotions will be more convincing to the intended customers. 5.Business profit prestige- changing a co- op owned company to a PLC offers the management and employees a stronger allegiance to making profit rather than operating for the goodwill of the local area farmers etc.