LECTURE 4

FORMS OF BUSINESS ORGANIZATIONS

Functions of a business:

1. To produce goods and services2. Creating jobs and training employees3. Purchase goods and services for resale4. Raise money by borrowing

Objectives of a business:

1. To produce a stream of income2. To create employment3. Security of employment4. Corporate social responsibility

Reasons Businesses are established

Starting a business is a lot of hard work. Therefore persons who decide to start a business must be ready to dedicate a lot of time and energy to its start-up. It is also very costly and therefore capital will have to be identified to inject into a new business.

Reasons for starting a Business:

1. Financial Independence

Some persons feel restricted financially with the income received from their job. Starting a business would give them the opportunity to be a successful business person and achieve financial independence.

2. Being your own boss

You are able to make decisions about the direction and operation of the business.

3. To use your skills and knowledge for yourself

The skills, knowledge and experience that you have acquired can be put to work for you.

4. Self-actualization/fulfilment

Owning and operating a successful business will give a feeling of accomplishment.

5. To create employment for relatives, friends and community members

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Business can assist in providing jobs for persons in communities with high levels of unemployment.

Forms of Business Organizations

An organization is a system that groups people together towards establishing a common goal. Business organizations are centered on creating goods and services for profit. There are several types of business organizations that one can start.

Forms of Business Organizations:

1. Sole Trader2. Partnership3. Private Limited Liability companies4. Public limited Liability Companies5. Multinationals6. Franchise7. Conglomerates8. Cooperatives9. Nationalized Industries10. Local and Municipal Authorities11. Government Departments

All forms of business organizations can either be characterized as a part of the private sector or the public sector.

The Private and Public Sector

Public Sector

Government control of factors of production on behalf of citizens Motive to provide services to citizens Consists of nationalized industries, executive agencies, local and municipal

authorities, government departments, public corporations.

Advantages

Government provides public goods that the private sector will not provide. Government provides welfare services to poorer members of society. Government sets the control mechanisms on place for the conduct of business.

Disadvantages

Government can increase taxes to finance expenditure Inefficient use of state resources Political interference in private sector

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Private Sector

Private individuals or businesses own the factors of production Motive to maximise profits Consists of sole traders, partnerships, public and private companies multinationals,

conglomerates, franchises

Advantages

Brings more competition and product variety to the market Increased use of technology Provides investment and employment

Disadvantages

Will only provide products that citizens can pay for Engages in the production of demerit goods once there is demand

FEATURES PRIVATE SECTOR PUBLIC SECTOR

Ownership and Control Private citizens/individuals and firms. Only persons who purchased shares in the company are owners

The state, national/local government, municipalities. The enterprise is owned by tax payers in general.

Objective To earn/make profits To provide essential goods and services to the country.

Source of capital Private individuals and persons who choose to buy shares in the enterprise. Loans from banks, credit unions, friends, family members, personal savings.

Taxes, rates, levies and statutory deductions.

Loans from governments/institutions

Funding from donor agencies.

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Terms and concepts:

Insolvent – unable to repay debts or bankrupt

Liquidate – This occurs when a business sells off its assets to repay debts

Limited liability- it means that he or she is not personally responsible for business debts and obligations of the corporation.

Unlimited liability - refers to the legal obligations general partners and sole proprietors because they are liable for all business debts if the business can't pay its liabilities.

The Sole Trader

The sole trader is a single business owner. This person may employ several other persons to work in the organization, but he has to make all decisions, acquire all the capital required and other resources needed for the business on his own.

Characteristics

He or she manages the business and may have the help of family and friends. He or she enjoys all the profit and bears all the risks Capital is limited since the savings of the owner fund the business Personal contact with clients Performs a large variety of tasks related to the operations of the business This type of business is not incorporated (not given a separate identity) and therefore

easy to set up.

Examples: Electrician, Plumber, small farmers, doctors and lawyers.

Formation

There are no legal formalities in the setting up of a business as a sole trader except for the registration of a trade name or the acquisition of a license. For example a license is required for the sale of alcohol or for the sale of food items.

Management and Advantages

1. Enjoys all profits2. Ease of formation – no legal requirements3. Independence – find personal satisfaction in working for themselves4. Simple organisational structure5. Personal Control – decision making is quick6. Personal Service 7. Secrecy – No need to disclose info. Except to tax authorities or to creditors8. Personal Commitment to succeed

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Disadvantages

1. Limited source of finance2. Lack of specialised staff3. Over reliance upon one’s personal health and vigour4. Unlimited Liability5. Lack of leisure time6. Lack of technology7. He bears all the risks

Partnership

A partnership business is formed legally by a minimum of two (2) and a maximum of (20) twenty persons in a business. There are two types of partnership forms:

Limited Liability Partnership – at least one partner must have unlimited liability

Unlimited liability Partnership- All partners have unlimited liability.

Formation

A deed of partnership must be drafted which set out the terms and conditions of the partnership. This written agreement helps to settle disputes and in the absence of the deed the partnership will be governed by the Partnership Act.

A deed will entail:

Number of partners Amount of capital contributed by each partner Type of trade engaged in Share profits and losses accruing to each partner Name of partnership Salary of each partner mechanism for dissolution.

Types of Partners  

Ordinary/General Partners: take an active part in the running of the business.

Unlimited liability of partners Change of members ends partnership Assets and liabilities are owned and shared equally Each partner plays a part in the management of the firm Partnerships cannot exist without an agreement

Sleeping Partners: invest in the business but do not take an active part in the business.

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Limited Liability Partners: assets will not be lost if the business goes bankrupt.

limited liability of partners but one must have unlimited liability Change of members does not end partnership Does not play a part in the management of the firm

Advantages

1. More capital2. Specialisation – partners use their different skills and knowledge3. Simple Organisation – easy to form4. Continuity – more continuity than sole trader5. Limited Liability6. Workload Shared7. Decision making – shares knowledge and expertise

Disadvantages

1. Unlimited liability2. Binding – all partners lose if mistake is made3. Limited Capital4. Disagreement5. Concentrated risk – risk not spread enough6. Decision-making7. Continuity – broken partnership upon death8. Profits are shared, irrespective of effort in the absence of a partnership agreement.

Limited Liability Companies

A company is a business entity that has been incorporated, that is, the company has a separate legal identity from that of the owner.

Limited Liability Companies are companies in which shareholders/investors are protected as they will not lose their personal assets if the business goes bankrupt. They are not liable for the debts of the company beyond their level of investment. Therefore if a shareholder buys shares in a company valuing $5000 then he will only lose that $5000 invested and his personal assets.

There are two types of limited liability companies.

1. Private Limited Liability Company

2. Public Limited Liability Company

The Private Limited Company only allows friends, relatives and co-workers to purchase shares and to be a part of the company. Its privacy is also protected by the fact that unlike the

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public limited liability company, it does not have to publish its balance sheet in the newspaper.  Legally the private limited company can only have a minimum of two and a maximum of fifty persons to join.

The Public limited company allows members of the public to purchase shares. The shares/stocks of public limited companies are traded on the stock market. The public limited liability company has a minimum of (7) seven members and there is no limit to the number of shareholders that can join.

The legal procedures for both these types of companies are lengthy as they must submit the several documents.

The Companies Act contains the laws relating to companies. To comply with certain requirements which were laid down by the Companies Act, the promoters of the company must present the following documents:

The Memorandum of Association

Company name , which must contain the word limited Address of the company’s registered office Objectives of the company Statement that the liability of the shareholders is limited Authorized share capital and the types of shares to be issued.

The Articles of Association

Procedures for calling an Annual General meeting. Rights and obligations of the directors Procedures governing the election of Directors Statement concerning the borrowing power of the company Procedures dealing with the payment of dividends

Statements of authorised, Registered or Nominal Capital

This is the amount stated in the MOA, which is the maximum amount which the company is authorized to raise.

Prospectus

This is an invitation to the public to buy shares in a public company. It contains detailed information to enable investors to estimate its prospects. It is important that the public should not be misled.

Statutory Declaration

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Statutory declarations are commonly used to allow a person to declare something to be true for the purposes of satisfying some legal requirement or regulation.

Certificate of Incorporation

This is a legal document relating to the formation of a company or corporation. It is a license to form a corporation issued by state government. Its precise meaning depends upon the legal system in which it is used.

Certificate of Trading

It is the certificate issued by the registrar of companies to the public limited company to grant permission to commence its business.

The private limited company may begin trading after receiving the certificate of incorporation, but the public limited company must issue a prospectus inviting the public to subscribe for shares before a certificate of trading is issued.

Advantages of Private Limited Companies

1. A larger capital base than sole trader or partnership.2. The company has continuity and thus can obtain loans easily.3. The company has a separate legal identity from ownership.4. Shareholders have limited liability

Disadvantages

1. Capital is limited since the membership is limited to fifty person.2. Must file reports with the registrar of companies3. Selling of shares is restricted to the private grouping.

Advantages of a Public Limited Company

1. It is easier to obtain financing2. Shareholders have limited liability3. Share can be quoted on the stock exchange and sold to the public4. Company able to grow and obtain economies of scale5. It has a separate legal existence. Changes in shareholders and directors do not affect

continuity of the company.

Disadvantages

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1. The legal requirements may be costly and time consuming2. The accounts have to be made public3. Because of large size, decision making can be long4. Differences in opinion may develop owners and directors.5. Loss of control of company if sufficient shares are obtained.6. These companies lack a personal element.

Multinationals

A multinational company is a company that has headquarters in a home country and operates businesses in various host countries.  Examples of Multinational companies in the Caribbean are Shell, Kentucky Fried chicken and Digicel.

Advantages

They provide employment. They introduce advanced technology. Provide well needed goods and services.

Disadvantages

Profits earned are repatriated to the main centre in their home country. They may exploit the workers by paying low wages and having them work long hours.   They cause unemployment when they close down to take advantage of cheaper labour

and lower operational cost in another country.

Franchise

A franchise is an agreement between a franchisee (the person requesting permission to set up business) and the parent company to allow the franchisee to sell its products or services. Some businesses begin by the owner acquiring a franchise to operate under an already existing business name.  Many multinational companies expand into new regions through franchises.

The franchisee bears the name of the parent company. They must abide by all the rules and guidelines outlined by the parent company to sell its products. It pays royalties (a fee) to the parent company to operate under its business name.

Advantages

Access to new markets for the franchisor Source of revenue for the franchisor The franchisee bears some of the risks Franchisee benefits form the support provided by the franchisor eg. Training

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The franchisee’s risk is reduced because it is selling a recognised brand.

Disadvantages

The Franchisee must pay the royalties regardless of business size The franchisee has to operate under supervision of the franchisor The franchisee is legally bound to sell only the products of the franchisor

Conglomerates

This is a group of unrelated companies (e.g. a restaurant, shoe store a travel agency etc,) under one umbrella. A parent company owns a controlling stake in each company which conducts business separately.

Advantages

The risk is spread over multiple businesses Economies of scale Easier to access financing due to asset base

Disadvantages

Management can be difficult Some businesses may increase the risk of the conglomerate

Cooperatives

These are business entities owned by their members who purchase shares to join them. They are usually established because of a need existing among a number of persons who wish to acquire particular goods and services at a reasonable cost.

Principles of Cooperatives

1. Open membership- All persons over the age of 16 may join for a fee2. Democratic Controls- Governed by its own members who attend a general meeting

where members elect a committee to run the cooperative3. Limited interest on capital invested – low interest rates for members4. Distribution of Surpluses- surpluses are distributed amongst members fairly-

ploughed back into business to expand and to sometimes for health care or education.

Types of Cooperatives

1. Consumer

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2. Producer3. Financial4. Services 5. Worker

For example, members of a credit union purchase shares in these entities in order to obtain loans at low interest rates.

There are several types of cooperative, for example, Retail/Consumer cooperatives and Producer cooperatives. Shares invested in a retail cooperative are used to buy goods in bulk at a very low cost and then resold to members. Producer cooperatives may include a group of farmers who will obtain raw material at a low cost.

Profits are distributed to members based on the amount of goods that they buy and not on the amount of investment that they make in the business. At the annual general meeting, shareholders elect their management committees from among their members and vote on proposals put forward. Benefits of being a part of a cooperative are therefore obtaining goods and services at low costs and a guaranteed market as members are also customers. A disadvantage is that its management may be inexperienced as they are chosen from their membership.

Advantages

Creates employment for members Democratic Management Benefit from economies of scale Support services such as purchasing and marketing for members Profit shared among the members

Disadvantages

Limited capital input depending on the size of the cooperative or the credit union May lack managerial expertise in membership

Nationalized Industries

Definition

Nationalized industries are firms which were once privately owned, but have been taken over by the government. Government seek to nationalize the key industries that is the industries on which the government depends for the country’s economic survival for example Trinidad’s oil industry or bauxite in Jamaica.

Formation

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A company becomes nationalised when the government purchases all or the majority of shares in the company

Management

Like State corporations, a Board of Governors is appointed. The board reports to the line Minister. The Executive Director heads the company. The audited accounting reports of these companies must be laid with the Audit General or Government accounting firm.

Characteristics

They are legal entities The state is the only shareholder They are managed by Boards of Directors that are appointed by the state

Advantages

State has Ownership and control, hence profits remain in the country. The company is in a better position to service the needs of the community, for

example the funding of community projects in education, sporting and cultural projects.

Nationalization prevents private monopolies from being formed.

Disadvantages

Relatively low salaries paid to Executive Directors may not attract the best expertise. The industries may be a drain on the Governments revenues.

State Corporations

These are independent organisations set up by the government to carry out a service. The Government does not control their daily operations but can fix the overall strategy and nominate their board of directors. These are usually non-profit making, but in the long term, they have to be self-financing. State Corporations are usually in the broadcasting field, transportation, power and telecommunications industries.

Formation

State Corporations are formed by legislation i.e passing of laws in Parliament.

Management

The government appoints a Board of Governors or Directors for a stipulated time frame. An Executive Director is also appointed to head each organisation. The Executive Director reports to the board of Directors or Directors.

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Characteristics

Funding is mainly done by the state providing grants, although some legislation allows the organisations to raise their own funds.

The state or state appointed auditors monitor all accounting procedures Annual accounting reports must be sent to the Auditor General. The aim of the state is not to make a profit but it is expected that these corporations may

break even

Government Departments

These include the government ministries e.g.  the Ministries of  Finance and Education. A minister is appointed in charge of each ministry. These departments are very important to the running of government.

Local and Municipal Authorities are government bodies which are run by elected local officials, e.g., the Kingston and St. Andrew Corporation (K.S.A.C.) in Jamaica. These bodies fulfil local needs and allow for more balanced local development. They carry out duties such as cleaning gullies and drains and fixing community roads.

STAKEHOLDERS AND THEIR ROLE IN BUSINESS ACTIVITIES

Stakeholders – are the various groups within and outside an organisation that stand to potentially gain or lose as a result of the organisation’s actions.

List of Stakeholders:

Owners/Employers/Investors Employees Customers/Consumers Suppliers Government Members of society (media, special interest groups, communities) Lenders/Investors and other creditors.

Business owners must be aware of the various groups that they interact with for the successful running of the business.

Owners

A business may be owned by a single individual (a sole trader), partners or by a group of shareholders forming a company.

Role of Owners

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They must provide the resources that are required for the business to operate efficiently. These include the employment of workers, identifying suitable premises and procuring machinery, equipment and raw materials. They must make timely decisions to ensure that the business remains profitable.  They must motivate employees to perform well.

Employees

They are employed to carry out assigned tasks to achieve the company’s objectives.

Role of Employees

Employees must work efficiently to accomplish tasks assigned.  Accomplishing tasks may require teamwork and therefore employees must have good interpersonal skills. Employees must adhere to the rules and regulations of the company.

Customers

They are the supporters of businesses in the economy. They purchase goods and services to satisfy their needs and wants.

Role of Customers

They assist businesses in identifying the goods and services to be produced based on their demands. They also help business to identify changing trends in the market and so prepare business operators for future demands.

Society

Businesses must be aware of the society as a whole, how its activities affect it and not only those who are customers.

Role of Society

The production process may cause air pollution and discharge of harmful waste into rivers and seas.  The society keeps businesses in check by making them aware of their impact on society. They write letters to the company and the media and speak on talk shows.

Government

They are the managers of the economy within which the business operates.

Role of Government

Regulate business activities to protect consumers. Government agencies ensure product standards as well as that various legislations are adhered to ensure the protection of consumers’ rights.

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RESPONSIBILITIES OF A BUSINESS

The functions of a business are:

1. To produce high quality goods and services that will satisfy needs and wants.

Entrepreneurs enter business to make profits. They must be very keen in identifying those goods and services that will create high demand make profits.

2. To create employment

Business will need all categories of workers to carry out the various tasks required to achieve its goals. If the business is profitable and expands then more workers will be needed for its operations.

3. To make a profit

The reason for the establishment of a business is to make profits. If businesses are not profitable, its owners will not be encouraged to continue operating.  Profits are used to reinvest in the business for its expansion.

Role of a Business within a Community

Corporate citizen is the term used to describe the responsibilities that businesses have within their environment. As a good corporate citizen business must strive to have a good relationship with their community.

Good corporate citizenship includes:

Support for the community through community projects, sports and youth clubs.

Being environmentally aware by reducing pollution

Providing job opportunities for community members e.g. a holiday work programme

There are five major responsibilities:

1. Economic- Produce a good or service to satisfy the needs and wants of society- Stimulate economic growth

2. Financial- Pay a fair wage to employees

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- Provide reasonable returns on investments3. Political

- Act as pressure groups to lobby governments for changes that will benefit business activity

- Operate along the democratic principles of equality and fair play- Act in accordance with the laws; for example, paying taxes when they are due.- Assist in setting policies by giving feedback, making suggestions.

4. Ethical- Design ethical guidelines for their behaviour/decisions and follow these guidelines- Encourage good business ethics of their stakeholders by refusing to do business

with unethical firms or persons.5. Social

- Protecting the environment and avoiding social costs (borne society as a result of business operations, for example, pollution.

- Developing the culture of a country- Educate consumers and community members on safety tips and proper use and

disposal of the product.- Use some of the profits to help develop and benefit the community, as well as the

culture of the country.

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