1.2 Types of organization

1.2 Types of organization

Business and management

TYPE OF BUSINESS ORGANIZATIONPrivate Sector: Public & Private Limited companies

Public Companies • The word `public` means that the shares are traded on the

stock market and available to any members of the public to buy and sell.

• Annual reports and adequate disclosure of financial information must be provided to shareholders and the general public.

Private Companies• Owned by individuals or organizations.• The public cannot buy shares in the company.• There is no obligation to produce annual reports that are

available to the general public.

TYPE OF BUSINESS ORGANIZATIONPrivate Sector

• Private sector organizations are those owned by individuals and not run by the state.

• They generally operate with the main objective of making a profit, although charities and independent schools would not.

TYPE OF BUSINESS ORGANIZATIONPublic Sector

• The public sector covers activities that are within the control of direction of the government.

• These organizations do not have outside shareholders and are solely accountable to the government for their performance

• Often they do not publish financial information, although in many democratic countries there are independent accountants and advisors who monitor their efficiency.

• In many countries public sector organizations cover activities such as the state health, education, police and prison services.

Benefits of Privatization• Efficiency gains –Inefficient monopolies are exposed to

competitive markets when privatized.• Lower costs of production-Customers will benefit from

competitive prices.• Increased choice-Introducing competition to former

public sector monopolists gives customers more choice.

• Incentives to innovate- to stay competitive in market.• Less financial burden-government can save money

leading to less financial burden on taxpayers.• Source of government revenue-by selling public sector

units to private investors.

STARTING A BUSINESS• The reasons can be remembered by the

mnemonic GETCASH• Growth• Earnings• Transference and inheritance• Challenge• Autonomy• Security• Hobbies

POSSIBLE PROBLEMS FACED BY START-UPS

New companies face a range of problems: • Lack of finance capital• Marketing problems• Poor Location • Developing a customer base• Poor Cash Flow• People management problems. • HR management skills

POSSIBLE PROBLEMS FACED BY START UPSLack of finance capital

• New businesses find it hard to raise capital.• In the first instance, they may not be able to

provide any security for loans such as personal guarantees or property.

• This is often true for young people who may have little savings.

• Secondly, a new business obviously has no track record for a bank to assess and therefore the risks are greater for the banks.

POSSIBLE PROBLEMS FACED BY START UPS

Location• Anyone involved in a new start-up wants to

minimize costs and so it may be desirable to work from home to begin with.

• This is not always ideal from an image viewpoint, but a good location may be very costly and a drain on cashflow at the very time when sales are negligible.

POSSIBLE PROBLEMS FACED BY START UPSDeveloping a Customer Base

• It is imperative to build long-term relationships with customers so that they return time and time again. However, this takes time and money.

• Investing in after sales service or offering bespoke advice can be at odds with the short term need to get money into the business almost without worrying about the quality of goods or services.

POSSIBLE PROBLEMS FACED BY START UPSPoor Cash Flow

• Many new starts ups fail, not because their product is poor or that their can’t make a profit, but because they don’t manage their cash flow in the early years.

• It is imperative that entrepreneurs and small business owners manage cash as their first priority when establishing their business.

• This might mean chasing new customers for payment and slowing down payment to suppliers

POSSIBLE PROBLEMS FACED BY START UPSHR Management Skills

•Are the entrepreneurs able to manage and motivate a workforce?

TYPES OF BUSINESSES:PROFIT BASED ORGANIZATIONS

There are three main types of businesses:

• Sole Traders or Sole Proprietors• Partnerships • Companies or Corporations

Sole Traders or Sole Proprietors

Who are sole traders?• Sole traders can include trades people, such as

plumbers and carpenters, some shopkeepers, individual accountants and lawyers, and many consultants in IT and other fields.

Sole Traders or Sole Proprietors

• This is when the business is set up by an individual and where that persons is the owner, the sole trader (known as a sole proprietor in some countries).

• It is not a company and in a legal sense has not shareholders.

• In fact the “person is the business” and the two are the same.

Sole Traders or Sole ProprietorsAdvantages of being a Sole Trader• Ownership and control of the business is with the sole

trader, as the firms doesn’t have to directors and separate shareholders.

• Sole traders do not have to file financial accounts with public registrars and competitors, customers and suppliers cannot easily discover the sales and profits they make.

• Sole traders only need to submit accounts to the tax authorities.

• Sole traders pay different tax rates to companies and have more opportunities to reduce their taxable profits through the large number of extra allowances.

Sole Traders or Sole ProprietorsThe Problem of Unlimited Liability• There is no legal distinction between the business and person:

the assets and liabilities of the two are not separated.• This leads to a very important weakness of being a sole trader

– “unlimited liability”. • If the individual is sued, for example for giving bad advice or

supplying a faulty product, there is no limit on his or her liability.

• This means that if the business cannot pay the debt or court fine, the person’s private assets can be seized to pay it off.

• The person’s private wealth is not protected from shareholders.

Case study:

Flowers by Cam: Cam Tran is self employed florist who operates a small florist Hill,

London. She is married with three school-aged children. Her husband’s commitments mean that he only comes home at the weekends. Cam arranges and delivers flowers to local hospitals and schools mainly in Southeast London. From time to time, she also receives large orders for weddings.

1.Analyse the costs and benefits to Cam in operating as a sole trader.2.Examine whether sole traders, like florists, benefit from a high

degree of specialization.

Reference:1.2.2 Case study Business and Management By Paul Hoang

Partnerships

• These are organizations where two or more individuals choose to work together as co-owners

• These organizations are not companies. • As with sole traders, there are no shareholders

and the owners all have unlimited liability. • There private wealth is at risk if the business

fails.

Partnerships

The problem of liability for each other’s debts• There is one further disadvantage from

unlimited liability – the partners are liable for each other’s debts.

Partnerships

The problem of liability for each other’s debts

Case Study• A two person law firms owes a customer $5

million for giving bad advice.• When the business is closed down, it cash reserves

show that it can only pay $2 million.• Partner A has private wealth of $1 million and

Partner B has wealth of $20 million.

Partnerships

The problem of liability for each other’s debts

Case Study (continued)• As the partners jointly owe another $3 million to clear their

debt to client you might think that it should be divided equally and that they now owe $1.5 million each, but you would be wrong.

• The partners are liable for each other’s debts, and as the customer knows that partner B has more wealth the customer will chase partner B for the remaining $3 million and will probably ignore parter A>

Partnerships

The problem of liability for each other’s debtsThe need for INSURANCE • If you go into partnership with other people get a

very good insurance policy to cover giving bad advice or else you could end up paying for more than you bargaining for.

• Most partnerships will take out extensive insurance policies to cover bad advice and faulty goods affecting customers and the public more generally.

Partnerships

Advantages of Partnerships• The advantages of a partnership is that you can

share the risks a little more than when a sole trader. • You can also specialize in certain tasks.• Many accountants and law practices are

partnerships. • Accountants PwC have thousands of partners

around the world as does Freshfields, a large international law firm.

PartnershipsTax Issues & Financial Disclosure• As with sole traders, partnerships do not need to file

financial accounts with public registrars, but they do file accounts for the tax authorities.

• Another advantages is that they pay different tax rates from companies and have more opportunities to reduce their taxable profits through a large number of extra allowances or deductions.

• Partnerships also make no distinction between the owners and managers of the business – they are usually the sample people.

Partnerships

A Rule Book or Partnership Agreement• Partnerships usually establish a rule book to

avoid arguments or confusion arising later on.• However, in some countries, if not partnership

agreement exists, it will be assumed that profits and losses are shared equally.

• Arguments over strategic development for the business often a serious issue, something a sole trader would never face.

Partnerships

Customer Impressions of Partnerships• Partnerships look more substantial to

potential customers than sole traders, as their letterhead will list all the partners’ names, or for very large organizations it may indicate that the names can be viewed at one of the organizations offices.

Companies or Corporations

• A company has shareholders and directors and they often not the same people.

• This means there is separation in ownership and control (management of the business).


Limited Liability • The shareholders are limited in their ability to

the amount of their investment. • If they have invested $100,000, then that is

the limit to the amount the can lose.• Their private wealth is untouchable and

equally they cannot be held liable for other shareholder debts.


Legal Structure & Obligations• To establish a limited company the owners must

complete registration documents and pay a small fee.• Companies also have to file annual financial

information to public registrars. • This means various external stakeholders can analyse

how well the business is performing and that may impact on whether a supplier will continue giving credit, whether a customer will place an order, or whether a bank will lend more money.


Public Perceptions• It is often considered that a company presents

a more solid and trusting image than a sole trader.

• The company’s letter head will have a registration number and most large businesses are companies.


LIMITED LIABILITY COMPANIES

Privately Owned• Could be controlled by family, a group of

individuals or be a subsidiary of a larger company.Public Corporations• Shares can be purchased and a traded on the

stock exchange.

OWNERSHIP STRUCTURES CHANGE OVER TIME

• As businesses develop and become more established the changes are that the organizational type will change – often from being unlimited liability to limited liability companies.

• The need for future finance to support expansion may encourage the owners to change the status of the business, such as changing from a private to a public limited company.

• How much control they want will also dictate the type of organizational structure.

OWNERSHIP STRUCTURES CHANGE OVER TIME

Example• A number of well known entrepreneurs have taken

their companies off the stock market and have become privately listed companies.

• In this way they are free from the media spotlight and do not need to meet short term profit objectives, which may hinder long term development plans.

• Company specific examples include Richard Branson with his Virgin Empire.

NON PROFIT ORGANIZATIONS

• Some organizations are not run for profit, for example charities and pressure groups.

• Charities include well-known international organizations like the Red Crescent, Medicins san Frontieres, and Oxfam.

• Charities also include local fundraising groups, religious groups and private schools.


Pressure Groups• Pressure groups include political parties, trade

unionists, commercial lobby groups (such as the hand gun association in the UK) and local protest action groups, perhaps trying to stop new airport or motorway from being built in a rural area.


Legal Issues• All non profit organizations need to be

established carefully and comply with legal requirements for charities and the like.

• If they don’t they may loose their charitable status and this may mean their funding or tax benefits are lost.

Group Discussion

• Partners are “jointly and severally liable” for each others debts; but shareholders in companies have limited liability to the amount they invested. • Discuss whether you think this is fair

for all stakeholders.


Operational Issues• Charities tend to run along business lines, they

aim to minimize costs in order to maximize net revenue and therefore charitable donations.

• They also seek to educate and inform the public about their area of expertise or concern.

• Charities focus their objectives on money raising, education and lobbying.

NON GOVERNMENT ORGANIZATONS(NGOs)

• This covers a diverse range of organizations, but they all tend to be involved economic development and humanitarian issues.

• Many charities can also be considered to be NGOs, or not for profit organizations.

• NGOs plan and implement specific projects in developing countries such as earthquake relief in Pakistan in 2007.

NON GOVERNMENT ORGANIZATONS(NGOs)

• NGOs also try to influence government policies on areas such as poverty and human rights.

• They work in the field where a disaster happens and often in places that official government aid does not reach.

The Business Impact of non-profit organizations & NGOs

• Non profits organizations and NGOs have both a direct and indirect impact on business.

• Pressure groups trying to stop low wages or child factory in Africa may have an impact by persuading European or US consumers to stop buying cheap clothes from shops that sell these products.

• Charities with retail outlets (eg: Amnesty International) may have an impact on the sales of other shops in the high street.

• Equally, there is an opportunity for manufacturers to devise life-saving products or vaccines.

The Business Impact of non-profit organizations & NGOs

Example• A UK company recently invented a special bottle

that can clean the worst river or pond water and make it drinkable for humans.

• The likely sales of this device will no doubt make the inventors very rich indeed.

• Organizations can also offer sponsorship to NGOs and thereby improve their corporate image.

PUBLIC & PRIVATE SECTOR PARTNERSHIPS

• PPP occur when the government creates commercial partnerships with the private sector to provide certain goods or services.

• Sometimes they work together on one-off projects like building a new road and renting it out to motorists to use (by paying a toll).

• In the UK & Australia there has been two specific initiatives between the two sectors.

public private partnerships (PPPs) private finance initiative. (PFI)

Hong Kong Disneyland• Hong Kong Disneyland (HKDL) is a theme park with two on-site

hotels owned jointly by the Hong Kong government (the majority shareholder) and the Walt Disney Company. The project was announced in November 1999 with the media reports suggesting that up to 36,000 jobs would be created. HKDL was finally opened on 12th September 2005. The government estimated that the first phase of the theme park would generate HK$148 billion($19 billion) in net benefits to the economy over a 40-year-period.

• Examine two benefits of the HKDL public-private enterprise to Hong Kong.

• To what extent should a government use tax revenues to fund public-private-enterprise?

Thank you

1.2 Types of organization

Documents

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