Chapter 3 Forms of Business Organization

Transcription

1 Chapter 3 Forms of Business Organization

2 1. The most important thing about your business to you is that: a. It s socially and environmentally responsible b. It s always growing bigger and better c. It s honest and hard working 2. You are most against: a. Animal testing and unfair trade b. Giving up if something doesn t work out c. Wasting time with people who are trying to take advantage of you

3 3. You would proudly work with: a. Romanian orphanages b. World leaders to solve global conflicts c. Children s hospitals 4. You believe in: a. Making sure your products and practices are ethical and fair b. Taking a risk and trying something new c. Working hard to succeed

4 5. On a free weekend you like to: a. Campaign for a social cause b. Break a world record c. Share your business skills Done?? Let s check out what type of entrepreneur you are!

5 Mostly As You re most like the late Dame Anita Roddick, the founder of The Body Shop. You re passionate about the environment, homelessness you re an activist at heart. It s important that your business reflects your beliefs, and you won t cheat or take shortcuts to achieve your goals. Little things can make a big difference.

6 Mostly Bs You re most like Sir Richard Branson, owner of The Virgin Group. You ll try anything once, you love taking risks and you have a smart business brain which helps you invest. You like to think of the big picture and trust other people to manage the details. You learn from your mistakes and you try again. There s no such thing as failure.

7 Mostly Cs You re most like Sir Alan Sugar, founder of Amstrad and star of The Apprentice. You re proof that hard work and honesty pays off. You don t mind working your way up the ladder, and you have faith in your team. You understand the importance of learning from others. You re not afraid to say what you think. Dedication is the key to success.

8 When starting their own business the routes are varied and entrepreneurs always need to weigh their options to choose the best road to travel on, no matter how less traveled it is.

9

10 The most common form of business organization. It is a business owned and operated by one person (even if others are working for the owner). The owner is called the sole proprietor. One of the essential reasons it s very common is the ease of setting up the business due to the few legal requirements it needs.

11

12 Mike decided to run his own taxi business. Initially he set up as a sole trader. Here s what he thought of Advantages 1. Few legal regulations 2. He was his own boss, having complete control. 3. He had freedom to make decisions. 4. Close contact with customers 5. Incentive to work as he kept all his profits. 6. Enjoy complete secrecy in business matters. Disadvantages 1. No one to discuss business matters with. 2. Do NOT have the benefit of limited liability. The business accounts are the owners personal accounts, therefore they are responsible for any debt the business may have. Unlimited liability means that if the business can not pay its debts, the owner has to pay them from the personal belongings. 3. The sources of finance are limited. 4. The owner is forced to do many jobs at the same time and some of them he is not skilled at. 5. Since the business is small and the owner can not afford to expand, the business remains small and so is unable to hire specialist or highly paid workers. 6. No continuity of the business after the death of the owner.

13 A group or association of between two and twenty people who agree to own and run a business together. The partners will 1. Contribute to the business 2. Have a say in the running of the business 3. Share the business profits Can be set up very easily Agreements need to be stated between partners. They could be: 1. Verbal agreement: partners agree verbally 2. Written agreement: a Partnership Agreement or Deed of Partnership. The written agreement documents the amount of capital, terms of the businesses and sets guidelines to avoid disagreements.

14 Mike offered his friend, Gita, the chance to become a partner in his taxi business. They prepared a written Partnership Agreement which contained the following points 1. The amount of capital invested by both partners 2. The tasks to be undertaken by each partner 3. The way in which the profits would be shared out 4. How long the partnership would last 5. Arrangements for absence, retirement and how new partners could be admitted. After the signing of the agreement and the partnership had been operating for some time, it was obvious to the partners that there were some advantages over sole proprietorship, but there were also disadvantages

15 Advantages 1. More capital invested leads to a greater expansion of the business. 2. The responsibilities of running the business were now shared. 3. Both partners were motivated to work hard because they would both benefit from the profits. 4. Any losses made were now shared by the partners. Disadvantages 1. The partners did not have limited liability. 2. The business did not have a separate legal identity. If one of the partners died, then the partnership would end. 3. Disagreements on important decisions can take place and consulting all partners takes time. 4. If one of the partners is inefficient or dishonest, the other partners will suffer. 5. Most countries limit the number of partners to twenty which means that business growth is limited to the maximum amount of capital that twenty people can invest.

16 Sole traders and partnerships are unincorporated businesses. This means that they do not have a separate legal identity from their owners. In general speaking terms, the owner is the business.

17 Mike and Gita discussed these advantages and disadvantages together with their lawyer who told them that partnerships are very suitable in certain situations 1. People wished to form a business with others but wanted to avoid legal complications. 2. Where the professional body only allowed people to create partnerships, not companies, such as medicine and law. 3. The partners are well-known to each other and want to run a business together (possibly in the same family).

18 Limited partnerships In some countries, the concept of Limited Liability Partnerships (LLP) has been introduced recently where partners have limited liability, shares cannot be bought and sold and is a separate legal entity with continuity after death of a partner.

19 Mike and Gita made it clear that they want to continue working together and expanding their business but also wanted to protect their own possessions from business creditors in the event of failure. Saying this, he realized that another form of business would be more suitable now

20

21 Pepsi is one of the most widely known brands in the world. Pepsico is the actual name of the brand. Pepsico features a wide array of brands such as Mirinda, 7- Up, Lay s, Dorito s, Quaker, Aquafina and many more

22 Community Government Banks Customers Managers Competitors Owners Employees

23 Owners of a company are called shareholders Companies are jointly owned together by the people who have invested in it. They all have SHARES in the company.. Hence the name: shareholders.

24 There are two types of companies with shareholders: 1. Private Limited Companies and 2. Public limited companies

25 Mike and Gita made it clear that they want to continue working together and expanding their business but also wanted to protect their own possessions from business creditors in the event of failure. Saying this, they realized that another form of business would be more suitable now and they decided on a private limited company.

26 These types of companies tend to be owned by either family or friends and are quite often not that much larger in size than a sole trader or partnership. Name of the business ends in Limited or Ltd The owners are called shareholders, each holding a share of the business. 1. They invest capital into the business 2. Have a say in the running of the business 3. Share the business profits 4. Shares cannot be sold or transferred to anyone else without the agreement of the other shareholders. 5. Shares are therefore not offered to the public.

27 All shareholders have limited liability. They are only liable for the limited amount that they have invested. Even if my debtors are chasing me for payment, they are not allowed to sell my car or house to get their money back. I am only losing what I initially invested in the business!

28 1. The Articles of Association 2. The Memorandum of Association Contains the rules under which the company will be managed It states The rights and duties of all the directors The rules concerning the election of directors The holding of official meetings Procedure to be followed for the issuing of shares Contains extremely important information about the company and the directors. The official name of the company The address of the registered offices of the company The objectives of the company Amount of share capital that the directors intend to raise The number of shares to be bought by each of the directors must also be clear

29 Articles of Association Memorandum of Association Registrar of Companies Certificate of Incorporation Hooray! We are in business!

30 Mike and Gita asked their solicitor to explain the advantages and disadvantages of a private limited company for their taxi firm. Advantages Disadvantages 1. Selling shares to a large number of people will raise large amounts of capital. 2. All shareholders have limited liability. 3. The company is a separate legal identity from its shareholders. 4. The people who started the business can still maintain control of the business as long as they do not sell shares to many other people. 1. Significantly larger amount of legal paperwork to be filed before the company can be formed. 2. Shares cannot be transferred or sold to anyone else without the agreement of all other shareholders, hence causing investors to be reluctant before spending capital. 3. Secrecy decreases as the accounts of the business are now privy to more people. Each year, they must be sent to the Registrar of Companies for inspection. 4. The company cannot offer its shares to the general public, so less funds will be generated.

31 Master Foods (MARS Ltd)

32 Mike and Gita discussed these advantages and disadvantages together with their lawyer who told them that private limited companies are very suitable in certain situations 1. Family businesses 2. Partnerships who wished to expand but still maintain some control over the business 3. Firms who find that the amount of capital that they can raise is sufficient amongst family and friends.

33 Mike and Gita were impressed by the benefits of a private limited company form of organization. The solicitor helped fill out the paperwork and they named their business Express Taxis Ltd. The business has been operating for many years. The two directors, Mike and Gita, still owned most of the shares. The company now owned 150 taxis and had diversified into the bus services. It owned 35 buses. The government had recently announced the privatisation of all bus services in the country. Both Mike and Gita were determined to expand the business further by buying many bus routes from the government. Many new buses would be needed. A huge investment of $90 million would be needed. Although profitable, the private limited company Express Taxis Ltd could not afford this. Mike and Gita went to see a specialist that advised them to convert their company into a public limited company.

34 These types of companies tend to be owned by anyone buying a share in the company. They buy shares from the Stock Exchange. Name of the business ends in plc Profits given to shareholders are called dividends.

35 1. A statement must be made to the Memorandum of Association that the company is now a public limited company. 2. A certain minimum value of shares must be issued (GBP 50,000 in the UK) 3. Accounts must be laid out in a certain way and shared with the public. 4. The company will apply to the Stock Exchange for a listing, which means that it is now accessible for shareholders to buy and sell shares. The Stock Exchange determines whether or not it will permit the listing depending upon the performance of the business.

36 Mike and Gita asked their solicitor to explain the advantages and disadvantages of a public limited company for their taxi firm. Advantages 1. Selling shares to a huge number of people will raise a large amounts of capital. 2. All shareholders have limited liability. Disadvantages 1. Significantly larger amount of legal paperwork to be filed before the company can be formed. 2. There are more regulations and control to protect the rights of shareholders. 3. The company is an incorporated business and a separate legal identity from its shareholders. There is continuity. 3. Secrecy decreases as the accounts of the business are now privy to more people. Anyone can see them, anytime. They also must be published every year. 4. There is no restriction on selling, buying or transfer of shares. 5. These business have high status in the market, causing attraction to suppliers and to the banks. 4. Can grow to be so large and so difficult to control and manage. 5. Selling shares to the public is expensive. 6. There is a very real danger that the original owners might lose control over the business when it goes public

37 We ve agreed on the following: Unincorporated Business Unlimited Liability No continuity Sole traders and Partnerships The owners take all the decisions and they will try to make the business achieve all of its aims. Not a Separate Legal Identity Control is very high!

38 We ve also agreed on the following: Continuity Incorporated Business Public Limited Companies & Private Limited Companies Limited Liability A Separate Legal Identity

39 Private Limited Companies have relatively few shareholders. The directors are often the majority shareholders, which means that they can ensure that their decisions are passed at all meetings. Public Limited Companies can have thousands, even millions, of shareholders. It would be impossible for all the shareholders to be involved in taking decisions. They are all invited to the Annual General Meeting (AGM). In this meeting, the only decision that is really effective is the election of the company directors. These professional managers are shareholders but not necessarily major shareholders. They are given the responsibility of running the business and taking decisions. They will only meet with the other shareholders once a year at the AGM.

40 Shareholders may attend AGM (few do) Vote for Board of Directors who take all important decisions Appoint managers for day-to-day business decisions This is called the divorce between ownership and control.

41 Mike and Gita decided to convert the company into a public one and named it Express Taxi and Bus plc. By selling shares in their company they had not only raised the capital they needed but they had also become very rich. They were elected as directors at the first AGM for the new plc. The expansion into buying the privatised buses was successful at first. Profits rose and management salaries did too. However, new bus competitors were forcing bus fares down. Profits started to fall. The accounts published last year showed the lowest profits for three years. Mike and Gita were voted off the Board of Directors. They no longer had a majority of the shares. They therefore lost control of what had been their business. The new directors owned a few shares. They cut dividends to shareholders and announced a new expansion programme to increase profits. Mike and Gita were rich but they no longer controlled the business that had once belonged to them.

42 Nike plc. Pepsico plc..

43 shareholders Strategic decision makers Annual General Meeting voting managers Dividends Public limited companies Board of Directors Ownership Control

44 Everything is shared; decisions, profits, costs, resources Producer Co-ops: Owned and controlled by employees Smallholder farmers working together to share costs of fertilizer and transport Groups of people who agree to work together and pool their resources Cooperatives Retailer Co-ops: Small village shops which aim at providing their members with good quality consumer goods

45

46 A joint venture is when two or more businesses agree to start a new project together, sharing the capital, the risks and the profits. Many European companies have set up joint ventures in China with Chinese businesses, as the local managers will have good knowledge of market needs and consumer tastes.

47 Advantages Disadvantages Sharing of costs Profits have to be shared Local knowledge Risks are shared Disagreements different cultures.

48 The franchisor is a business with a product or a service idea that it does not want to sell to consumers directly. Instead, it appoints franchisees to use the idea or product and to sell it to consumers.

49

50 Advantages Disadvantages 1. The franchisee buys a licence from the franchisor to use the brand name. 2. Expansion of the franchised business is much faster than if the franchisor had to finance all new outlets 3. The management of the outlets is the responsibility of the franchisee. 4. All products sold must be obtained from the franchisor. 1. Poor management of one franchised outlet could lead to a bad reputation for the whole business. 2. The franchisee keeps profit from the outlet.

51 Advantages Disadvantages 1. The chances of business failure are much reduced because a well-known product is being sold. 2. The franchisor pays for advertising. 3. All supplies are obtained from a central source the franchisor. 4. There are fewer decisions to make than with an independent business prices, store layout and range of products will have been decided by the franchisor. 5. Training for staff and management is provided by the franchisor. 6. Banks are often willing to lend to franchisees due to relatively low risk. 1. Less independence than with operating a non-franchised business. 2. May be unable to make decisions that would suit the local area e.g. new products that are not part of the range offered by the franchisor. 3. Licence fee must be paid to the franchisor and possibly a percentage of the annual turnover.

52

53 So far.. All organizations discussed were in the private sector. This means that they are owned by private individuals in the economy. These include 1. Sole traders 2. Partnerships 3. Private Limited Companies 4. Public Limited Companies 5. Co-operatives 6. Joint ventures 7. Franchising However, there is still a very important part of the economy that we haven t tackled.. The public sector, businesses owned by the government.

54 All the previous organisations are in the PRIVATE SECTOR They are owned by individuals

55 Includes businesses owned by the government such as public hospitals, public schools, fire services, police services, the military and government departments. The area of our concern is public corporations.

56 Wholly owned by the state or the government Businesses that have been nationalized. Nationalized means that they were once owned by individuals but have been bought by the government. This is the opposite of privatization. They are owned by the government. The government doesn t necessarily run it, rather, it appoints a Board of Directors to fulfill its objectives and carry out a plan.

57 They used to be given certain social objectives. These may include 1. To keep prices low so that everyone can afford the service 2. To keep people in jobs so that unemployment does not rise 3. To offer a service to the public in all areas of the country

58 However keeping to these objectives often costs a great deal of money. Therefore, this lead to public corporations making losses. These losses were paid for by subsidies from the government out of taxes. Most governments realized that they could not continue to pay for these subsidies!

59 They therefore shifted to other objectives, which are To reduce costs, if necessary, by reducing the number of workers 2. To increase efficiency and operate more like a company in the private sector 3. To close loss-making services, even if it means that some consumers are no longer provided with the service

60

61 This policy of reducing subsidies and operating more like a private sector business is sometimes called corporatization the public corporations are being made ready for full privatization.

62 Advantages 1. Some industries are considered important that government control is thought of as necessary. This can include electricity and water generation. Disadvantages 1. There are no private shareholders to insist on high profits and efficiency. The profit motive is not as high a priority as in the private sector. 2. If industries are controlled by monopolies because it would be wasteful to have competitors then these natural monopolies are often owned by the government. For example, the railway stations. 3. If an important business is failing and likely to collapse, the government steps in and nationalizes it. This will keep the business open and secure jobs. 4. Important public services, such as state-owned TV stations and radio, are often in the public sector. The BBC is an example of a public corporation in this industry. Nonprofitable but important programmes can still be made available to the public. 2. Subsidies can lead to inefficiency as managers will always think that the government will help them if the business makes a loss. It is also considered unfair if the public corporation receives a subsidy but private firms in the same industry do not. 3. Often there is no close competition to the public corporations. There is therefore a lack of incentive to increase consumer choice and increase efficiency 4. Governments can use these businesses for political reasons, for example just before an election they could create more jobs. This prevents the public corporations being operated like other profitmaking business.

63 A number of workers have been made redundant (lost their jobs) following a business failure. They agree to put some of their savings together to buy an old factory. They plan to make bicycles for export. They want everybody to have equal rights in the business.

64 A business with many hotels is planning to expand abroad. A substantial sum of money will be needed to finance this expansion. Expert managers will be needed to run the business.

65 A young student is planning to offer his services to neighbours as a gardener. He will purchase only cheap tools to start with.

66 A TV and radio broadcas

67 Model Answers Chapter 3

68 J.T Enterprises is a large private sector business that owns a number of farms in country A. The business breeds a variety of animals such as cows and sheep as well as growing crops. They employ many workers and the business is successful and profitable. Why is profit important to a business such as J.T. Enterprises? Profit is the main objective for the existence of the business. Without profits, the business would not be operating and continuing in its field of work. It is the reward entrepreneurs gain for investing their money in a business and taking risks. Profits are also important since they are a source of fund for future investment and growth. A firm that doesn t accumulate profits will not be able to survive in the long run. It is therefore an important measure of success of a business. 3 marks

69 Explain the purpose of the Annual General Meetings held by Public Limited Companies (plc). The Annual General meeting has three main functions. The first one is to explain to the shareholders the performance of the business. They also discuss with them the future plans of the company. The second function is to declare the dividends in the meeting. Dividends are payments made to shareholders from the profits of a company after it has paid its corporation tax. They are the return the shareholders are waiting for in return for their investments and risk-taking. The third function is that they vote on who they want to be on the Board of Directors for the coming year. 3 marks

70 The directors of Hussain Ltd. are considering converting the business into a Public Limited Company. a) Explain the term limited liability. 2 marks Limited liability means that the owners of a company, known as the shareholders, cannot be held responsible for the debts of the company they own. Their liability is limited to the investment they made in buying the shares. b) Explain the term limited dividend. 2 marks Dividends are payments made to shareholders from the profits of a company after it has paid its corporation tax. They are the return the shareholders are waiting for in return for their investments and risktaking.

71 The directors of Hussain Ltd. are considering converting the business into a Public Limited Company. c) Identify and explain one feature of private limited companies that makes them different from public limited companies. The shareholders in the private limited companies are limited to family and friends who are invited to participate in raising capital for the business. The shareholders in the public limited companies could be anyone who is eligible to trade on the Stock Exchange. The number of shareholders in public limited companies far exceeds the number of shareholders in public limited companies. 2 marks

72