Business Organisations

6th Year Business Ms. Marshall

BUSINESS ORGANISATIONS

Unit 6 Chapter 19Unit 6 comes up in Part 1 of the

long questions.


Types of Organisat

ions

Sole Trader

Indigenous Firm

Partnership

Private Limited Co.

Public Ltd. Co.

Cooperative

Franchise

Alliance

Transnational Co.

Semi-State


Structures used to start up a company

Sole TraderCooperativ

e

Private Limited Co. Partnershi

p

Semi-State


DEFINITIONS Sole Trader: a business set up, owned and run

by one person, e.g. a local hairdressers or chemist.

Partnership: a business set up, owned and run by between two and twenty people with the intention of making a profit. E.g. KPMG, PWC accountants.

Private Limited Company: a business which may have between 1 and 99 shareholders, who operate the business with the benefit of limited liability e.g. Eason Ltd.

Cooperative: businesses set up by at least seven members who democratically control the enterprise for their own benefit. E.g. Credit Unions, Producer Co-ops such as Kerry Co-op, and Worker Co-ops such as Greencaps in Dublin Airport.


Sole Trader

Partner LTD. Co Co-op

Formation & Dissolution

Easy to set up.Register with Revenue for tax.Register name if different.No continuity

Easy to set up.Register with Revenue for tax.Register name if different.Deed of Partnership – contract drawn up before setting up.

Register with Revenue.Register with CRO.Continuity.LTD after name.

Register with Revenue.Register with CRO.Continuity.

Ownership & Control

Owned & controlled by one ownerConfidential business

Owned & controlled by partners.Confidential business.

Owned by shareholders.Controlled by BOD.Not confidential.One share=one vote.

Owned by shareholders.Controlled by management committee. One member = one vote.Not confidential.

Management & Finance

Decisions made by one owner.Raising finance can be difficult.Often long hours & a lot of stress.

Decisions made by partners.More partners = more finance but dilution of ownership.Stress & hours shared.

Decisions made by BOD with shareholder approval.Finance can be raised by selling shares, but NOT on stock exchange.

Decisions made by management committee with members approval.Finance raised by getting new members – can be low due to democratic structure.

Profits & Risk Keeps all profits.Pays income tax.Unlimited liability.

Share profits. Pay income tax.Unlimited liability.

Profits shared.Corporation tax paid.Limited liability.

Profits shared.Corporation tax.Limited liability.


SOLE TRADER Sole Trader A person who runs a business enterprise under his/her own name, e.g.

Marian Kelly, or under a business name, eg MK Electronics is regarded as a sole trader. Examples of sole traders are retail outlets of many kinds such as local shops, garages, restaurants, electrical retailers, etc. and also tradespeople such as plumbers, electricians, carpenters and hairdressers.

Advantages There is a greater self-interest on the part of the owner. The proprietor or

owner will either make a profit or a loss and is therefore encouraged to make greater efforts to succeed in the enterprise.

The owner has more in-depth knowledge of the business. The business owner can make quick decisions. There is no need for

regular meetings with other people. When business is small, the sole trader maintains very close contact with

employees and customers. Better relationships with these important groups result. Because a sole trader is very easy to establish formation of the enterprise

is both quicker and cheaper than other forms.


SOLE TRADER Disadvantages The control and management of the business enterprise

may fall on the shoulders of one person. There is less capital available for expansion in the future. The owner must bear all the risk of possible business

losses and is personally liable for all debts of the enterprise in the event of it having to close down.

Long illnesses and the taking of holidays cause problems for sole traders.

The retirement or death of the sole trader may mean that there is nobody to take over the enterprise – no continuity of existence of the business.

There is a taxation disadvantage for the sole trader - income tax at the personal rate is higher than the Corporation tax rate.


PARTNERSHIP Opportunities Partnerships have access to greater amounts of

capital as up to twenty partners can bring financial resources to the business.

Partnerships have access to different skill sets as new partners may bring new skill sets and expertise to the business e.g. IT or marketing skills.

Partnership can lead to more effective decision making as the decision making process is shared eliciting different points of view and opinions from a range of talented people.

Ability to achieve economies of scale. Financial information can remain confidential.


PARTNERSHIP Challenges Partners in the main have unlimited liability. This means that they

are responsible for the debts of the business if it goes bankrupt and may have to forfeit their personal assets in order to pay business debts

The partners are jointly and severally liable for the debts of the business which means that they have a collective responsibility for each other’s debts and their personal assets can be used to clear the debts of their partners.

Shared decision making could lead to differences of opinion, disagreements, arguments between the partners, and lost opportunities. This could at best lead to delayed decision making or at worse lead to the dissolution of the partnership.

The profits of the business have to be shared according to the ratio set out in the deed of partnership.

Not a separate legal entity therefore partners and not the business can be sued in law.

If one partner dies or resigns the partnership must be dissolved


PRIVATE LIMITED COMPANIES The steps involved in the formation of a Private Limited Company Private limited company is a business which may have between 1 and 99

shareholders, who provide finance in return for shares. The Companies Act 1963 outlines the procedures for setting up a Private Limited

Company as follows: 1. The following documents must be prepared:Memorandum of Association: This outlines the relationship of the company with the

public. It contains the name and address of the company, its objectives, details of share capital, shareholder information and their signatures. It also states that the shareholders have limited liability. A company is not allowed to do anything that is not written in its objectives.

Articles of Association: this contains the internal rules for running the company such as how to appoint the director or conduct the meetings. It also outlines the share structure of the company and how additional shares can be issued.

Form A1: This includes a list of all directors and a signed statement that the company will apply with the provision of the Companies Acts 1963- 2009.

2. The above documents are sent to the Registrar of Companies.3. If all documents are in order, the Registrar issues a Certificate of Incorporation. This

is the Birth Certificate of a company. Once the Certificate is received they can now begin trading.

4. The company must hold its very first meeting, the statutory meeting. Shareholders receive a share certificate and have the Memorandum and Articles explained to them.


PRIVATE LIMITED COMPANY The shareholders of a private limited

company have limited liability. This means that the shareholders are not personally liable and can only loose the amount of their original investment, if the business fails.

One of the main attractions of the private limited company structure is the ability to raise capital by selling shares up to a maximum of 99 shareholders. The maximum share capital that can be raised is stated in the Memorandum of Association. Profits are distributed to shareholders in the form of dividends.


PRIVATE LIMITED COMPANY A private limited company is controlled by

the shareholders based on the rule “one share one vote”. The shareholders elect a board of directors who are responsible for the running of the company. The board of directors elect a Managing Director (MD) or a Chief Executive Officer (CEO) who is responsible for managing the company on a day-to-day basis. The original shareholders can maintain control of the company as long as they continue to hold 51% of the ordinary share capital.


COOPERATIVE


COOPERATIVES The members of co-ops have the protection of limited

liability. This means their liability is limited to the amount invested in the co-op.

Co-operatives in Ireland may find it difficult to access funding. This is because there is only a limited amount of finance that can be raised from its members. The amount the member subscribes depends on the type of co-operative. Members receive a share of the profits in proportion to their turnover with the co-operative (producer co-operative) or as a percentage of the savings (credit union).

Co-operatives have a democratic structure, where each member has one vote, “one member one vote”, with majority decision making and an elected management committee accountable to its members. This management committee run the business and make the important decisions. Members have an equal say in the running of the co-op regardless of the number of shares held.


STATE OWNED ENTERPRISES Also known as Semi- States These are businesses owned, financed and controlled by

the State on behalf of the taxpayer. E.g. RTE, VHI, CIE. Formation & Dissolution: Can be set up using

specially written laws or can be registered with the Companies Registration Office.

Ownership & Control: The responsibility of the relevant government department.

Management & Finance: the government provides the start-up finance for the business and may subsidise any losses. They may guarantee the repayment of any loans.

Profits & Risk: Profits may be reinvested in the enterprise or paid out in dividends to the government. Losses mean the taxpayer is losing money.

In 2009 the ESB made €580 million and paid

€280 million in dividends.


ADVANTAGES & DISADVANTAGES Creates employment Provides essential

services to all people in all parts.

State owned enterprises play a major role in developing Ireland’s economy e.g. IDA Ireland attracts FDI.

Government receives dividends from profitable businesses.

Subsidies are paid to loss making Semi-states.

Less incentive to keep costs to a minimum, resulting in inefficiencies and a waste of taxpayers’ money.

Some appointments may be politically motivated.

Many enterprises have to take out large loans as money for expansion is not available from the government.

The ESB employs over 6,800 people


Expanding your

organisation

Public Limited

Companies

Indigenous-TNC’s

Alliances Franchises


PUBLIC LIMITED COMPANIES Owned by at least seven shareholders who

benefit from limited liability. The company can raise funds by selling shares on the Stock Exchange. There is no limit to how many owners they can have. E.g. Glanbia PLC.

Formation & Dissolution: A PLC must start off as a Private Limited Company or a Co-op before applying to a stock exchange for a listing/quotation. This process is time consuming and complex. Stock market listings are only available to firms with established track records.


PUBLIC LIMITED COMPANIES Ownership & Control: It is easy to transfer the legal

ownership of shares from one person to another. However, because the PLC is on the Stock Exchange it can become a target for a hostile takeover.

Management & Finance: Selling shares on the stock market means PLCs have access to large sources of finance. Share options are often a good motivator for staff. However, they have to comply with detailed regulations. This is not a confidential type of business.

Profits & Risks: Limited liability. There is prestige associated with having a stock market listing however, many shareholders are speculators with a very short term view of the business. High dividends may be expected.


FRANCHISE OR ALLIANCE? Franchising means the renting of a

complete business idea, including name, logo and product to someone else. E.g. McDonalds.

An alliance occurs when two or more firms agree to cooperate in the establishment of a project or business together. They remain separate companies but share skills and resources to maximise possibility of success, e.g. Glanbia and Yoplait. Swatch and Mercedes made the SMART car.


FRANCHISE OR ALLIANCE?Franchise Alliance

Formation & Dissolution Renting an idea with a proven track record. Dissolved by ending contract.

Formed by contract negotiated by the two companies. Can be time consuming.

Ownership & Control Ownership of the idea remains with the franchisor.

Shared resources, expertise, ownership & control. May be a clash of company cultures.

Management & Finance Training, advice & support provided by franchisor. Little independence for the franchisee despite having to put up most of the finance.

Both firms can invest funds and share the costs and financial risks. However, greater communication is needed and disagreements can occur.

Profits & Risk Low cost method of expansion for the franchisor. Low risk because contract can be cancelled if conditions are broken. Percentage of profits sent to franchisor. Biggest risk is that an unsuitable franchisee can damage the reputation of the brand.

Any profits must be shared.Risk is reduced due to shared costs, staff, technology etc.


INDIGENOUS & TNC’S FIRMS Indigenous firms are businesses set up, owned

and managed by Irish people. Their main place of business is Ireland yet they may export to other countries. e.g. Stira Stairs, Supermacs, Easons, Smyths Toys, Irish Times.

A Transnational Company Transnational Company –has its controlling head quarters in one country and branches in many other countries/ operate on a world-wide scale. A transnational produces or markets goods in more than one country. It treats the world as a single marketplace and may move operations from one country to another in response to changing market conditions.

E.g. Intel.


INDIGENOUS - ADVANTAGES Loyalty: they are loyal and are more likely to remain

in Ireland, even in times of recession. They have a loyalty to the local economy. (They are not footloose)

Profit Distribution: They re-invest their profits in Ireland, and spend within the economy.

Local benefits: They help other businesses in their locality and nationally, by buying raw materials and services from them. This creates ‘spin off’ business/improved infrastructure.

Entrepreneurship: If they prove to be successful, indigenous firms may stimulate other entrepreneurs to set up business and this generates a culture of local industrial/service development.


INDIGENOUS FIRMS Less dependence on foreign transnational

companies: By encouraging “internationally traded indigenous industry” Ireland lessens its dependence on foreign transnational companies to create work and wealth in the economy.

Foreign Trade: Many indigenous firms are involved in the export services sector and thereby improve Ireland’s Balance of Payments.

Employment: Tend to be more labour intensive than transnationals/employment may be more stable than that provided by transnationals.

Taxation: Source of revenue for the Government through VAT, Corporation Tax etc.


TNC’SEmergence of Irish Transnational

Companies Irish firms such as Fyffes and Kerry

Group have set up operations in many countries due to the growth of free trade, membership of the EU and the small size of the Irish market.


REASONS FOR THE DEVELOPMENT OF TRANSNATIONAL COMPANIES Transport Improvements: The availability of

faster and cheaper methods of air and sea travel has made it easier to supply markets world-wide.

Improved Tele-Communications: Improvements in communications have made it easier for firms to send and receive information.

Larger Markets: Many companies find that their home market does not offer the necessary scope for expansion. By selling to or setting up operations overseas they can maximise sales and can spread business risk/saturated home market.


REASONS FOR THE DEVELOPMENT OF TRANSNATIONAL COMPANIES (IN IRELAND) Economies of Scale: Expanding abroad allows firms to

achieve economies of scale and thereby lower costs per unit. This enables them to compete more effectively with larger competitors.

Removal of Trade Barriers: The removal of trade barriers has opened up international markets. The World Trade Organisation (WTO) has facilitated agreements between countries eliminating or reducing barriers and freeing up international trade. Can locate a division in Ireland and sell products into the EU member states

Financial incentives from government agencies. Some governments offer grants for these companies to set up, e.g. a grant for their premises.

Taxation advantage in Ireland: 12.5% corporation tax rate, this is one of the lowest rates in Europe and attracts companies such as Google and Fecebook.


REASONS WHY TRANSNATIONAL COMPANIES LOCATE IN IRELAND

Skilled labour force. High Productivity. English speaking. European Union access. Government Grants. Low corporation taxation regime. Centralised Partnership

agreements/Social partners. Political and Economic stability.


TRANSNATIONAL ADVANTAGES Create thousands of jobs

e.g. Intel directly employ 5,000 people.

Bring new technologies, products and skills.

Bring competition to the market – good for consumers.

Pay corporation tax to the Irish Govt.

Buy supplies & materials from Irish companies.

Improve infrastructure – Intel built flyover costing €20 million.

DISADVANTAGES Many have closed down to

move to cheap labour countries, despite having received grants and low taxes. E.g. Dell have moved to Poland.

They can put pressure on the Government if they are very important e.g. if Intel threatened to move the Govt. would incentivise them to stay.

Repatriate their profits. Head office decisions may

not reflect Irish interests.


RECENT EXAM QUESTIONS 2009: Evaluate franchising as a form of

business ownership for a new enterprise (20 m). (see ch18 notes for more detail…advantages & disadvantages for franchisee.)

2013: Write true or false after this statement: (2 marks)

A sole trader is an ownership structure that benefits from limited liability.

2013: Discuss the opportunities and challenges of Partnership as a form of business ownership (20 marks).


RECENT EXAM QUESTIONS 2010 Outline the purpose of a

company’s Articles of Association. List three items included in the Articles of Association.

(10 marks). 2013: Outline two characteristics of a

private limited company (10 marks). 2008: Explain the term ‘Transnational

Company’. Discuss the reasons for the

development of TNC’s in Ireland. (20 m).


RECENT EXAM QUESTIONS 2012 Discuss cooperatives and private limited companies as

forms of business ownership, using the following headings:

Formation; Liability; Finance; Control (20 marks). 2011 Describe the steps involved in the formation of a Private

Limited Company. (20 marks) 2010 (a) Illustrate your understanding of the term

‘Indigenous firm’ (b) State two benefits of promoting the development of

‘Indigenous firms’ for the Irish economy. (10 marks).


RECENT EXAM QUESTIONS 2004: Explain why you would recommend a

private limited company as a type of business organisation for a new business venture (20 m).

2005: Distinguish between a Sole Trader and a Partnership as a form of business organisation. Use an example of each in your answer (15 m).

2003: Contrast Business Alliances and Franchising as different types of business organisations. Use examples to illustrate your answer (30 m).(may need to check the ch18 notes again for this).


RECENT EXAM QUESTIONS 2001: Contrast a Private Limited

Company with a Public Limited Company as a form of Business Organisation (20 m).

2002: Contrast the importance of transnational and state owned companies as forms of business organisations in Ireland. (30 m).


Reasons to change

structure

To raise capital

Lower Risk

To Increase Sales & Profits

To acquire new skills

Regain Control


REASONS FOR CHANGING STRUCTURE

Regain control: some owners turn their firms into limited companies and PLCs to raise finance then end up regretting the loss of ownership and control. They may buy back the shares they sold and turn the business back into a private limited company.

E.g. Richard Branson started off business as a sole trader. As the business grew he became a private limited company, Virgin Ltd.

When setting up the airline he changed to a PLC in order to raise large amounts of finance. He became frustrated with shareholders with a short term view and bought back the business with his own money. Going from a Public Limited Company back to a private is known as “going private”


REASONS FOR CHANGING STRUCTURE To Raise Capital:

Changing a structure can lead to more money. For instance, changing from a Ltd company to a PLC allows you to sell on the Stock Exchange. E.g. Kerry Co-op changed to PLC and used the money raised for expansion.

Lower the Risk: Some types of

business benefit from limited liability, where you only lose what you put into a business. A sole trader may change to a Ltd co to benefit from this.


REASONS FOR CHANGING STRUCTURE To Increase Sales

and Profits Changing the

business structure can give the ability to sell more products. E.g. entering into an alliance opens new markets to you, becoming a PLC attracts attention.

To Acquire Skills: Certain skills may

be needed for the business to reach its potential. E.g. a sole trader might join a partnership to benefit from their partners financial background or marketing skills.


Trends

Co-ops becoming

PLCs

Privatisation & Nationalisation

Emergence of Irish TNC’s Increase in

Alliances

Increase in Franchising


TRENDS Co-operatives –>

PLC’s1. Sell shares – raise

more finance2. Attract the best

workers3. Free publicity Alliances1. Economies of scale2. Shared risk, cost

ideas.

Growth of Franchising

1. Common method of expansion for service firms such as McDonalds & Starbucks.

2. Low cost & low risk for franchiser.

Irish Firms becoming TNC’s discussed earlier.


TRENDS- PRIVATISATION & NATIONALISATION

The number of state owned companies was in decline as the government adopted a policy of privatisation e.g. Eircom, Aer Lingus. However, in recent years it was necessary for the Government to fully or partially nationalise some key firms, whose collapse would have had widespread implications for the Irish economy. E.g. Anglo Irish Bank, AIB.

The government are now considering privatisation of state assets as an option to raise funds.

http://per.gov.ie/wp-content/uploads/Document-53a-14-9-10.pdf

P372 txtbook




PRIVATISATION Privatisation is the selling off of state owned enterprises to

the private sector. The arguments in favour of privatisation of commercial

state enterprises Government Revenue: Selling of a state enterprise

provides the government with a large sum of money e.g. Aer Lingus.

Reduced Expenditure: The sale of a loss making enterprise means it will no longer have to be subsidised on a yearly basis by the government/less borrowing required by government/money available for other services.

Efficiency: State owned enterprises are often perceived as being inefficient because they can rely on government funding and have little competition. Private firms are driven by a profit motive and should therefore be more efficiently run.


FOR Access to Finance: Privatised firms are able to

take out loans and shares and generally have greater access to sources of finance than state enterprise. This makes it easier to fund expansion.

Industrial Relations: With greater job security employees in state enterprises are more likely to take part in industrial action in pursuit of pay claims, better working conditions etc. than those in the private sector.

Competition: The elimination of a state monopoly can lead to open market competition and can lead to greater choice and lower prices for consumers e.g. Eircom.


AGAINST Loss of state assets: The state protects industries

of strategic interest to the country e.g. transport network, the country’s energy supplies for industry and domestic purposes, water supply, communications systems, the economic infrastructure of the country etc

Increased Unemployment: There may be a loss of jobs through rationalisation of services, leading to higher social welfare spending.

Social Commitments: Non-profit making essential services may be discontinued by the private business in an effort to reduce costs e.g. the postal and telecommunications service, electricity, gas and water services to remote areas, etc.


AGAINST Loss of Control /Costs to state: The

shares of privatised firms may end up with foreign investors. There may be high costs involved in preparing a company for privatisation.

Profit Motive/increased prices: Privatised companies must maximise returns to the shareholders and this could result in increased prices for consumers.


SOCIALIST PARTY “It would be bad enough to try and force the sale of our State

enterprises but worse the Troika is insisting that a substantial part of the proceeds goes into the black hole of banking debt. In other words it is almost literally like the selling off of the family silver to pay the family creditors except in this case the debts did not originate with the family members.

Semi state companies could play a key role in rescuing the Irish economy from the dire consequences of the policies of austerity being imposed on our people in order to channel their resources to rescuing the big financial gamblers . The savage assault on incomes and living standards has meant a drastic shrinking in the domestic economy and this is what is causing the live register of unemployed and seriously underemployed people to veer toward half a million. These companies now employ over 40,000 workers. However they could be developed in a way that would increase those numbers massively.

The government wants to sell off substantial parts of the ESB. Instead this company should be used to channel major investment infrastructural projects around the country. This could be in the area of alternative energy generation or related activities that could see workers of many different skills taken off the dole.” Joe Higgins, TD


PRIVATISATION:LABOURS VIEW Speaking in relation to Michael Noonan's comments on the RTE

News At One (15.2.2011) and the Fine Gael election manifesto, Henry Upton stated "The Fine Gael privatisation plans for CIE and Dublin Bus in particular will cause chaos. Dublin Bus provides a service for all the communities of the city, not-for-profit but for the good of the people. Any privatisation of bus routes will inevitably lead to private operators "cherry picking" high volume routes such as the 46a, whilst neglecting smaller local communities.""I have been campaigning with local residents across Dublin South Central who are worried about losing their bus services. People in Inchicore, Ballyfermot and Crumlin are worried about losing their local services. It is older people and the less mobile who will suffer most from cutbacks in services. Services such as the 19, the 121 and the 122 are already under threat" said Henry Upton"Henry Upton concluded "We need to prioritise good public transport, available to all. This cannot be sacrificed to meet the privatisation agenda of people in Fine Gael or Fianna Fail."


“WORKING FOR OUR FUTURE” Sales of State Assets

Over time, we also propose to finance the investment programme from the sale of certain State assets. We will only sell State assets, however, if the sale coheres with the following principles:The asset is not a monopoly or of strategic importance to the State. We will not repeat the mistake of Eircom by selling off a strategic asset which is a natural monopoly. As a result, we would retain ESB Networks and Eirgrid (which we will merge) and the national electricity grid in majority state ownership along with Bord Gais Networks, Coillte and Bord na Mona. An Post and RTE will not be considered for privatisation.

The asset is sold for the best price possible which may mean deferring sales until market conditions improve.

If there is no economic and social case for a company remaining in State ownership it should not remain in State ownership.

The staff of any company sold are given a share in the company subject to their co-operation. Applying these principles, Fine Gael sees no impediment to selling: Bord Gais Energy ESB Power Generation (excluding the hydro plants) The ESB Customer Supply Companies RTENL (the mast and towers but not the TV or Radio stations)

Davy Stockbrokers estimate that Ireland could raise €4 billion from a trade sale of Bord Gais Energy, ESB Power Generation and ESB Supply alone.

If it proves necessary to finance the investment programme, we will also consider sales of minority stakes in the electricity, gas and water networks, with the State remaining in majority control.

We will also appoint a committee to examine the accounts and cost base of the semi-States - a 'Bord Snip' for the semi-States - to recommend ways to reduce costs and improve efficiencies in each company with a view to passing on any savings to customers


RECENT EXAM QUESTIONS 2004: Describe two reasons why a

business enterprise might change its organisational structure over time. Use illustrations to support your answer. (20 m)

2010: Outline the reasons why a business may change its organisational structure from a sole trader to a private limited company.

2008: Evaluate, using examples, the arguments in favour OR against the privatisation of commercial state enterprises in Ireland.

Business Organisations

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