1.2: Types of organizations • Private and public sector • Starting a business • Profit-making organizations • Non-profit organizations and NGOs • Public-private enterprises/partnerships (HL)
private and public sector • Organizations operate either in the private and the public sector and both sectors include profit making (business) and non-profit making organizations.
Private sector • The private sector is that part of society which includes all organizations which are privately owned by individuals or groups of individuals, (e.g. sole traders, partnerships and companies) • Most business organizations are in the private sector but this sector also includes many non-profit making organizations, (clubs, societies, charities …).
Public sector • The public sector is that part of society which is made up of organizations owned or controlled by central/local government. • Most public sector organizations are non-profit making, providing mainly public/ merit goods, such as education, health, etc., (ministries, municipalities) • This sector includes a few organizations involved in business activities, (public corporations) .
Privatization Public sector profit making organizations are less common today. Many of them are sold to the private sector. Privatization is the process of selling public sector assets to the private sector Benefits Inefficient public corporations are forced to improve There will be less financial burden for the government Privatized companies are forced to reduced their costs of production in order to make profits and in turn offering more competitive prices for customers.
Reasons for Starting a business • Growth: the value of business assets tend to increase over time. • Inheritance: many get into business by inheriting it. • Challenge: some people may see success in business as a challenge. • Independence: one may prefer to make his own decision. • Security: One may find more security starting his own business, than being an employee.
Identifying Market Opportunities • Identify a market opportunity that will create enough demand for the product or service – in order to be profitable • These “enterprises” come from one of several sources: • Own skills or hobbies • Previous employment experience • Exhibitions and conferences • Small budget market research
Problems faced by start-ups Lack of finance capital. Most owners of new businesses underestimate the amount of starting capital needed. They also faced difficulties to borrow from banks. Cash flow problems. Starting capital may be used up in assets such as premises, fixtures, vehicles, stocks and debtors leaving little cash for daily running of the business Marketing problems. New owners may lack the knowledge to supply the right products to the right market. Unestablished customer base. It usually takes time to build a strong customer base. Production. It is difficult for new businesses to forecast levels of demand and can over/under produce. Costs of production can be high (not benefiting from economies of scale)
Legalities.Paper work and legal requirements for setting up new businesses can be time consuming and expensive. External influences. New businesses are more vulnerable to external shocks such as oil crisis, economic recession, competition, etc.
Hall: Unit 5 Q1. (a) Explain • Businesses fail for a number of reasons. • Chris Watkins’ business may have fail because of relying on too _____ a market. He was selling mainly to _______ stores rather than supermarket chains. • Another problem might be the $100 000 loan. He did not get an ________ loan. He had mortgage his house and therefore, may had to pay higher rate of _______. • A third problem was the unexpected ______ of his marketing campaign. He ended up with a large amount of ________ stock.
May 09 H2 Q3c: eXamine? • One common difficulty that start-ups in developing countries may face is the lack of ________. Most owners of new businesses _________ the amount of starting capital needed. They also faced difficulties to _______from banks when they want to expand. • However, lending to small businesses in the world’s poorest countries is ___________ rapidly. It might become easier for small businesses to raise funds through organizations like _____________ and ______.
Planning: Hall P12 Table 2.1 Sources of finance Personal savings Funds from partners or investors (shareholders) Leasing Hire purchase Banks or other financial institutions Venture capitalist Government funds Assignment:Hall Q 4 Page 14
Private sector business organizations Sole trader Partnership Companies: Private limited companies (Ltd) Public limited companies (Plc)
Sole trader • It is a one owner business and also known as sole proprietor but can employ other people . • It is the most common form of business in the private sector. It is easy to set up. There is no legal formalities although in some type of business activity, a license is required. • A sole trader bears all the risk of the business and therefore has unlimited liability.
Advantages It is easy to set up with a small amount of capital and few legal formalities. The owner reaps all profits, i.e. he does not have to share with others. The owner makes his own decisions and therefore in full control of his business A sole trader has flexibility of hours of work They can offer personalized service to customers Enjoy privacy as financial records are not available to public
Disadvantages of sole traders • Sole traders have unlimited liability. This means that if the business is bankrupt, the owner is personally liable to pay all its debts. There is no real difference between the owner’s personal money and the money tied up in the business. • Sole traders often find it difficult to get additional funds from banks because they cannot offer enough security for loans. Banks alsotend to charge them a higher rate of interest.
Sole traders usually have high cost of production. Being small businesses, they do not benefit from economies of large scale. • High risk of failure. They may lack certain expertise/skills and therefore may face difficulties to expand or compete. • High workload and stress. They may have to work long hours.
Unit 7 Q 1 a and b • (a) • One of the main disadvantages of operating as a sole trader for ________ _______ is that she has _________ liability. This means that if her business ______ she is personally _______ for all its _____. If Joanna does not have enough cash, she may be ______ to sell her personal _______ to meet these debts.
(b) • One advantage for Joanna to operate as a sole trader is that she will be able to keep all the ______. She does not have to share it with anyone else as she is the _____ owner. • Sole traders like Joanna may also qualify for _____ support. For example, she is in the process of applying for an ……
Partnership • A partnership is a form of business organization owns by two or more persons (usually up to a maximum of 20 in many countries). • Partnerships are usually found among professionals, e.g., accountants, doctors, painters etc. and small businesses. • There is no legal formalities to complete, when forming a partnership. However, partners usually draw a partnership agreement.
What is a partnership agreement? • A partnership Agreement is also known as Deed of partnership. It is a legal document setting out the formal details of the partnership. The deed is signed by all partners and registered. It can be used in the event of disputes and usually covers:
How profits or losses will be shared between the partners Rights and duties of each partner in running the business The name and purpose of the business How often profits can be withdrawn How much capital (finance) each partner will contribute Procedures for withdrawal of a partner or end of the partnership
If there no agreement, then the law assumes that each partner is equal. This means that capital, profits and responsibilities are to be shared equally among the partners. Sleeping or dormant partners do not take part in the running of the business but only contribute to capital. Therefore they have limited liability (very few cases)
Advantages of partnership It is easy to set up as there are no legal formalities to complete. More capital/finance can be raised as there is more than one owner. Division of labour is possible as partners may have different skills. Workload and responsibilities can be shared. Problems of holidays, illness, long working hours can be reduced. It is easier to obtain loans from banks as it is a larger business. Better decision making due to shared knowledge and expertise Enjoy privacy as financial records are not published
Disadvantages of partnership Each individual partner has unlimited liability. This means that each Partner (except dormant partner) is personally and jointly liable for the debts of the business as a whole. Disagreement among partners are more likely to occur There is no continuity of existence. When one partner dies, the partnership ends. Profits have to be shared among more than one owner.
Hall; P 28 Q2 a,b,c • (a) • A deed of partnership outlines, among other things, how ______ should be ______ among the partners. If there is no deed, then the law says that profits will be divided _______ . In this case, each partner will get _______ of profit (i.e. ______ divided by _____).
(b) • One advantage of operating a partnership is that the ______ and ________ for running the business can be ________. For example, Gillian, Sarah and Maria will be able to cover each other during _____, _______, and _______. They can also exchange ______ when making decisions. • Partnerships are able to raise larger amounts of ______. In this case, the partners were able to contribute a total of _______. This amount may have been _________ for one person alone to find.
(c) • One disadvantage of operating a partnership is that partners may disagree about the way to run a business. In this case, ……..
Past exam papers • M08 HL P1 Q1a: Define partnership agreement • M08 HL P1 Q1b: Explain 2 disadv of ….. partnership • N04 HL P2 Q5a: describe 2 adv of …… partnership • M07 HL P2 Q4a: Describe 1 disadv of …… partnership • N07 HL P2 Q5a: Describe 2 adv of partnership • N04 SL P1 Q1: Assess the reason … decided to convert the partnership into a private company
N04 H2 Q5a Explain public limited company • M01 H1 Q2: Explain 3 reasons to change a partnership into a public limited company • M05 H2 Q5a; Explain how the partners could take control of a public company • N04 Hl P1 Q4 Evaluate whether river should become a public company • N05 H2 Q1a: Define a private limited company • N04 S1 Q1?: Assess the reasons River Yacth decided to convert the partnership into a company
Limited companies • A company is a form of business organization with a separate legal entity. It is a legal person (entity) separate from its owners(shareholders). The company can own assets, form contracts sue and be sued on its own name. For example, it can commit crime, such as fraud and be fined. • Shareholders in a limited company have limited liability. The owners or shareholders can only lose money they have invested in the business.
Setting up a limited company : (incorporation) • Every limited company must be incorporated (registered) with the Registrar of companies. To be registered, a company must submit two documents to the Registrar: • Memorandum of Associations • Articles of Association • And pay a small fee.
Memorandum of Associations This sets out the constitution of the company, i.e. the rules concerning its existence. This must include: The name of the company The address of the company’s registered office A statement that the shareholders have limited liability The authorized capital, i.e. the maximum amount each type of shares it can issue The objectives of the company – what activities it intends to carry. It is also known as the Object clause. Any activity not within the objects is said to be ultra vires (beyond the law)
Articles of Association This sets out the rules for running the company. Examples: Voting rights of shareholders When annual general meeting (AGM) will be held Frequency of other meetings How profits are to be distributed The number, the rights and duties of directors The procedures for appointing directors and auditors. Certificate of incorporation This is a document issued by the registrar once it is satisfied that all formalities for registration have been completed. The company is now incorporated, i.e. it has now a separate legal entity.
Advantages: • Limited liability • Compared to a sole trader or partners, Shareholders have limited liability. This means that if the company fails and is unable to pay its debts, shareholders have no additional liability to pay for the debts. Their liability is limited to the amount invested in shares. Therefore, more people are willing to risk their money in a company rather than in a partnership.
Increased capital • Compared to a partnership, more capital can be raised as there is no limit in the number of shareholders. In many countries, there is a limit on the number of persons that can form a partnership. (20 in UK) • Continuity of existence • The business will continue even if one of the owners dies; his shares will be transferred to another owner (wife or children) and also a company is a separate entity. This is not the case for a partnership.
Disadvantages of limited companies Compared to a sole trader or partnership, profits have to be shared out amongst a much larger number of members. It takes time and cost money to set a company as there is a legal procedure to follow. For example, documents such as Memorandum of association and Articles of association will have to be prepared and submitted to the Registrar of Associations Financial Statement (Profit and loss account and balance Sheet) and annual report must be filed with the Registrar every year. These can be inspected by any member of the public, including competitors.
Types of limited companies Private limited companies which have the letters ‘Ltd’ at the end of their names. Public limited companies which have the letters ‘Plc’ at the end of Their names Both private and public companies must have at least two members and there is no maximum. However, in some countries, single member Private limited companies can be formed. This must be stated in the register of members
Private limited companies • Their business name ends in ‘limited’. • Shares can only be transferred‘privately’ , i.e. all shareholders must agree on the transfer. • The directors tend to be shareholders. • Control of the company by the original shareholders may not be lost to outsiders, as shares cannot be sold to new members unless all shareholders agree. • Compared to a public limited Company, the amount of capital that can be raised is restricted. This is because shares cannot be sold to the general public.
Hall P30 Q1 (a) From the case, there are various evidences which show that Gigisat is a limited company. These are: The name of the company ends with the word _______ It was ________ as a company on 16.10.200, has a registered address (……) and a registration number (……)
B. (i) The main legal obligation of Gigasat Ltd towards its shareholders is to organise an ________ _______ _______ (AGM). This means that the company must inform the shareholders of the ______ and place of the AGM. The shareholders should also received a copy of annual report and accounts B (ii) A company also has obligations to the Registrar of Companies. Every year Gigasat Ltd has to file a copy of its annual _____ and _______ with the Registrar.
(c). • One advantage of operating as limited company is that shreholders have _________ liability. This means if the Gigasat Ltd goes bankrupt Chris Lay or any shareholder will lose only the amount they have _________ in their shares . • Compared to a ______ ______ or __________, a private limited company can raise ______ capital. As there is no limit to the number of shareholders, Gigasat Ltd could invite more shareholders to contribute to capital if they chose to.
Public limited companies A public limited company is a company whose name ends with “plc” and its shares can be sold to the public on the Stock Exchange. It must have a minimum amount of capital to start trading (in UK – £50 000) • To beregistered as a plc, the following must besubmitted • to the Registrar of Companies: • Memorandum of Association • Articles of Association • 3. StatutoryDeclaration: This is a document which states • that all the requirements of the CompanyActs have been • met.
Once the Registrar is satisfied with all formalities, it will issue a certificate of incorporation which certifies that the company is registered or incorporated. However, a public limited company cannot start operations until the Registrar has issued a Certificate of Trading. The Registrar will issue a certificate of trading when the company has received the legal minimum of capital. Then the company can start operations.
Prospectus When a plc has received its certificate of incorporation, it is common to issue a prospectus to raise capital. This is a document which advertise the company and invites the public to buy shares before a flotation. Issuing a prospectus is very expensive as it involves the use of specialist lawyers or financial institutions, high quality publications, costly advertising and administrative expenses. Flotation Flotation is the process of going public, being listed on the Stock Exchange and shares are available for sale
Advantages of Plcs • Limited liability • Continuity of existence • Huge capital • Large size • Lower cost • Easier finance
Limited liability Shareholders enjoy limited liability. This means that in case the company is bankrupt and cannot pay its debt, a shareholder’s loss is limited to the amount invested in shares and no more. Continuity of existence If one shareholder dies, the company continues to operate as it is a separate legal entity/person. The share is inherited by someone else.
Huge capital Huge amount of capital can be raised by a public limited company. As the shares can be sold on the Stock Exchange, many people are willing to invest in a plc because they can sell their share any time they want their money back. It is more difficult to sell the shares of a private limited company. Large size Public limited companies are usually large enterprises. Because of their size, they can dominate the market and face competition.
Lower cost As they can operate on a large scale, their production cost tend to be lower. This is known as economies of scale Easier finance It is easier to raise finance such as loans, as banks and other financial institutions companies, e.g. insurance companies are more willing to lend to public limited companies. Very often they get finance at a lower rate of interest.