Business and Management: 1.2 Types of Organizations

Lesson 1-3: Companies

1. 1. Focus QuestionFocus Question

1. What are companies?2. What are private limited companies?3. What are public limited companies?

…

2a. 2a. Three Main Types of BusinessesThree Main Types of Businesses

3. Companies (Corporations): Companies are owned by whom?

Shareholders. Who are the shareholders?

Individuals or other businesses. Invested their money to provide capital for a company.

Sometimes called joint-stock companies…why? Because the shares / stocks are jointly held by many people or

organizations. Common term for a company is corporation.

2b. 2b. Three Main Types of BusinessesThree Main Types of Businesses

Companies are incorporated businesses. What does this mean?

Legal difference. The company is acting as a separate entity.

It has its own legal rights and duties. They have limited liability. Shareholders are not responsible for a company’s debts. They will not lose personal belongings. The maximum they can lose is how much they have invested.

Can you imagine if you were to share in a large multinational company’s debt?

2c. 2c. Three Main Types of BusinessesThree Main Types of Businesses

Setting up a limited company: Is complicated and expensive. Lots of rules and regulations to follow.

One reason is to protect the investor. A board of directors is elected by the shareholders.

They will run the company. Usually elected based on their skills and expertise. Each share equals one vote.

What does the term “limited company” mean? To let you know that the companies liability is limited

Two types private limited companies and public limited companies.

3. 3. Three Main Types of BusinessesThree Main Types of Businesses

Private Limited Companies: Can not raise share capital from the general public.

Shares are sold privately to family and friends. Usually these companies have Ltd. After its name.

Eg. ABC Ltd. Shares in these companies can not be traded without the agreement

of the Board of Directors. Why not?

To maintain control of the company. Main advantage of these types of companies is that the owners have

greater control. Also, these companies are cheaper to set up.

4. 4. Three Main Types of BusinessesThree Main Types of Businesses

Pubic Limited Companies: Are able to advertise and sell its shares to the general public via

what? The stock exchange.

One disadvantage is the dilution of control Issuing more shares, company will have more owners, this weakens the

owners ability to control the business. Also they are exposed to takeover bids.

Whereby other companies purchase the majority of the stock in the company.

REMEMBER: All companies are businesses, but not all businesses are companies.

5a. 5a. Open for business…trading…Open for business…trading…

You will need two documents: Both PLC’s will need to produce and submit to the

government… The Memorandum of Association

Details of the company: name, purpose, address, amount of money invested.

Articles of Association Includes the company’s regulations and procedures of the company.

The rights, roles and power of the board of directors and shareholders.

Administration issues. Procedure for appointing directors And most importantly, how profits will be divided

5b. 5b. Open for business…trading…Open for business…trading…

After you… Submit all the documents, pay the application fee you get…

A Certificate of Incorporation This is a license which recognizes the business as a separate legal entity

from its owner and allows you to start trading. Now…you start your limited company…but you need what?

CAPITAL… How do you get it? Well one way is to float your company.

Floatation: When your business first sells all or part of its business to investors. When you float your company, you are listing it on the stock exchange. When you do this it is called Initial Public Offering.

5c. 5c. Open for business…trading…Open for business…trading…

So why list on the stock exchange? Why do investors buy shares in a limited company?

1. $$$$$ ~ DIVIDENDS ~ $$$$$ Companies will usually pay these to the shareholders twice a year. The dividends are a share of the profits distributed to all the

shareholders. So the more shares you hold, the more money you make.

Example, lets say you hold 50,000 shares of XYZ Ltd. and the pay you 0.50 cents per share as a dividend.

How much do you make? $25,000.

5d. 5d. Open for business…trading…Open for business…trading…

2. Capital Growth: Capital growth or gain. You buy in at 5 dollars and a year later it is at 100. SWEET!!! BUT…this doesn’t happen all the time.

3. Voting Power: If you hold enough shares in a limited company, you can have a lot of influence. You can influence the management and operation of the company.

However, the largest shareholders of a company will be other companies or institutes.

6a. 6a. The RisksThe Risks

Sound great so far? So…what are the risks?

Well... Companies are not always successful. Some tend not to give dividends. Shareholders put to much trust in the directors and

management to run the company. Interest of the shareholders and management might

conflict. So how can you minimize your risk?

6b. 6b. The RisksThe Risks

Well… All companies must hold an AGM or Annual General Meeting.

This allows the owners to have a say or vote in the running of the company. A typical AGM will look like this:

1. Shareholder vote on resolutions or re-elections of the BoD.

2. Shareholders ask questions to the CEO and directors.

3. Shareholders approve the previous years’ financial accounts. Limited companies must supply an Annual Report and Final Accounts. These annual reports includes:

Profits or Losses The Assets of the business. Where cash has been spent in the last 12 months.

These reports are prepared by an external auditor. It is very expensive.

7. 7. Advantages and DisadvantagesAdvantages and Disadvantages

Advantages: Can raise permanent

capital Pays dividend if makes a

profit Limited liability Benefits from Continuity

Divorce of ownership and control

Directors hold large amount of shares.

Economies of Scale. Hire specialists

Disadvantages: Must provide expensive

annual reports More paper work and

bureaucracy…can be expensive.

Pay dividend if company makes a profit.

Communication problems.