Business formsTypes 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.

Context

If you walk down any high street, you will notice that many of the shops display their names for all to see. It may be Robinson the butcher, Brown, Macy and Brown solicitors, as well as known chain stores such as Marks and Spencer plc or Hodson's Limited. All are businesses, but each with a different status in terms of how is operated, who the owner is and how any profit is shared.

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 ECONOMY

Private Sector Public Sector

The Private Sector Legal Structure

Private SectorBusinesses

SoleTrader Partnership

LimitedCompanies

Cooperatives

PrivateLTD

PublicLTD

Limited Liability – What does it mean?

It all comes down to the responsibility for the debts of the business:

Owners can be held responsible for all the debts of the firm

The owners of the business can only be held responsible up to the value of their investment in the business

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

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.

Disadvantages

Unlimited liability – all of the owner’s 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.

Additional capital injected by each partner.

Business losses shared between the partners.

Greater privacy and fewer legal formalities that corporate Organisations (companies)

Disadvantages

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.

How Private Limited Companies are Formed

Memorandum of Association + Article of Association

Registrar of Companies

Certificate of Incorporation

Trading Begins

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.

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

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.

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.

Formation of Public Limited Companies

Memorandum of Association + Article of Association + Statutory Declaration

Registrar of Companies

Certificate of Incorporation

Publish of Prospectus

FLOTATION

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.

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.

Questions: What are the limitations of being a limited company in a highly competitive market?

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

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.

Disadvantages

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.

Which Goods and Services Does the Public Sector Provide?

Public Goods

Non- Rivalry Non- Excludable

Consumption of the good/Serviceby one individual does not reduce the

Amount available for others

It is impossible to exclude othersFrom benefiting from their use

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.