FOUNDATION IN BUSINESS

BUSINESS ESSENTIALS
BUSINESS AND ITS
ENVIRONMENT
MR. KIRANPAL SINGH

Content
Types of Organisations

Profit non-profit and non-governmental

Sole Trader/Proprietors

Partnerships

Companies/Corporations

Charities

Cooperatives

Franchises
Private Sector and Public Sector

Learning Outcome

Analyse local organisations of different types and identify

their main features.
Explain the advantages and disadvantages of each type of
organisation identified.
Relate each type of ownership to the degree of control.
Distinguish between organisations in the Private and Public
Sectors.

The Private and Public Sectors of the Economy

The Private Sector comprises businesses owned and controlled by

individuals or groups of individuals. In every country, most
business activity is in the private sector.
The Public Sector comprises Organisations accountable to and
controlled by central or local government. These usually include:
Health and education services
Defense
Law and order
Some strategic industries.

The Private Sector Legal Structure

Private Sector
Businesses

Sole
Trader

Partnership

Private
LTD

Limited
Companies

Cooperatives

Public
LTD

The Sole Trader/Proprietor

This is the most common form of business organisation. One person
provides the finances and in return, has full control of the
business and is able to keep all the profits.

The Sole Trader/Proprietor

Advantages

Disadvantages

Easy to set up-no legal formalities.

Owner has complete control not answerable

to anybody else.
Owner keeps all profits.

Able to choose times and patterns of

working.
Able to establish close personal relationships
with staff (if any are employed) and
customers.

The business can be based on the interest

and skills of the owner rather than working
as an employee for a larger business.

Unlimited liability all of the owners a

assets are potentially at risk.
Often faces intense competition from bigger
firms, for example, food retailing.
Owner is unable to specialise in areas of the
business that are most interesting it is
responsible for all aspects of management.
Difficult to raise additional capital.
Long hours often necessary to make business
pay.
Lack of continuity- as the business does not
have separate legal status, when the owner
dies, the business ends too.

Partnership

Partnerships are agreements between two or more people carry on a

business together, usually with a view of making a profit.
The Deed Of partnership establishes the rights and privileges of the
partners. This document includes issues such as voting rights,
distribution of profits, The management role of each partner and
who has the authority to sign contracts.

Partnership
Advantages

Partners may specialise in

different areas of business
management.
Shared decision making.

Disadvantages

Additional capital injected by each

partner.

Business losses shared between

the partners.

Greater privacy and fewer legal

formalities that corporate
Organisations (companies)

Unlimited Liability for all partners.

Profits are shared.
There is, as with sole traders, no
continuity and the partnership will
have to be reformed in the event
of the death of one partner.
Al partners are bound by the
decision of any one of them.
Not possible to raise capital from
selling shares.
A sole trader, taking on partners
will loose independence of
decision making.

Limited Companies
Characteristics of Limited Companies

Limited Liability
Legal personality
Continuity
Capital is divided into shares
Companies are run by directors

Question: Discuss the characteristics of a limited company and how

these differ from the Sole Trader and Partnership forms of
businesses.
Distinguish between the ownership and control of a Limited
Company.

The Memorandum of Association

Name of the company

Name and address of the companys 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.

Article of Association

The
The
The
The
The

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

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
List the names of five (5) Private Limited Companies in your
community?

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.

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.

The business will continue even if

one of the owners dies

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.

Going Public is Expensive

The company needs lawyers to ensure that the prospectus is

legally correct.
A large number of publications have to be made available.
The company must use financial institutions to process share
application.
The share has to be underwritten. A fee is paid to an
underwriter who must buy any unsold shares.

The company will have advertising and administrative expenses.

The company must have a minimum of $50,000 share capital.

Exiting the Stock Market

Sometimes a business operating as a Public Limited Company
is taken back into private ownership. Why does this
happen?

Exiting the Stock Market

Sometimes the business lose favour with the stock market.

The business may be bought outright by a private individual.

The people running the business might no longer be willing to

tolerate interference from the external shareholders.

Question: Suggest why Richard Branson decided he

wanted to buy back all the shares of his company after
going public.

Public Limited Companies

Disadvantages
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.

Questions: What are the

limitations of being a
limited company in a highly
competitive market?

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.

Cooperatives

This is a common form of business organisation in some countries,

especially in agriculture and retailing.
Features

All members can contribute to the running of the business,

sharing the work load, responsibilities and decision making.

All members have one vote at important meetings.

Profits are shared equally among members.

Cooperatives
Disadvantages

Advantages

Buying in bulk.
Working together to solve
problems and make decisions.
Good motivation of all
members to work hard as
they will benefit from shared
profits.

Poor management skills unless

professionals are employed.
Capital shortages because no sale
of shares to the non-member
general public is allowed.
Slow decision making if all
members are to be consulted

Franchises
This is a contract between two firms. The contract allows one of
them, the franchisee, to use the name, logo and marketing
methods of the other, the franchiser.
The franchisee can separately, then decide which form of legal
structure to adopt.

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.

Public Sector Organisations

The Public Sector is made up or organisations which are owned and

controlled by central or local government or public corporations.
They are funded by government and in some cases from their own
trading surplus or profit.
Public Sector businesses still have important roles to play in certain
areas of business activity.

Merit Goods

These are services which people thing should be provided in greater

quantities

Examples of merit goods are:

Education, Health Services, Public Libraries

If the individual is left to decide whether or not to pay for these

goods, some may choose not to, or may not be able to.