Unit 4: the firm as a producer

Types of Business Organisations

Introduction

• Ownership • Control • Way finance is raised • Distribution of profits

Main types of business in private sector differ in terms of:Main types of business in private sector differ in terms of:

Sole Trader

• Owned / run by one person.• Rarely employ large no. of people.• Owner complete responsibility.• Main source of finance – personal

savings, bank loans.• Simplest / most common structure.• Common in tertiary sector eg local

butcher.

Sole Trader

• Trading Licence for certain goods eg alcohol.

• Must pay relevant taxes

Legal Requirements on Formation

Sole Trader

• Easy to set up. • Small amount of capital. • Personal control, independence,

freedom.• No formal set of accounts.

Relative Advantages

Sole Trader

• Keep profits (after tax).• Speedy decisions. • Direct contact with customers –

feedback.• Closer working relationship -

management / employees.

Relative Advantages

Sole Trader

• Owner responsible for debts.

• Unlimited liability – personal assets at risk.

• Difficult to raise capital – growth limited.

• Long hours, difficult to cover holidays / illness.

Relative Disadvantages

Sole Trader

Relative Disadvantages

• Business worries not shared.

• Division of labour / specialisation difficult.

• Owner - non specialist – expertise thinly spread.

• Lack of continuity.

Partnership

• Two or more owners.• Ordinary – all partners unlimited

liability.• Some partnerships can have a

partner who has limited liability – but at least one partner must have unlimited liability.

• Professions – dentistry, solicitors, accountants.

Partnership

• Minimum 2, maximum 20. (Exceptions to above can exist dependent on countries etc.)

• Share in capital, profits / losses – “Deed of Partnership”.

• Disputes usually settled by majority.

Legal Requirements on Formation

• Easily formed.

• More finance available – expansion easier.

• Management / risks shared.

• Financial affairs private.

• Greater continuity.

Relative Advantages

Partnership

• Unlimited liability.

• Slower decision making.

• Possible conflict. • Profits shared.

• Membership limited

Relative Disadvantages

Partnership

Limited Companies

• Separate legal identity to owners.

• Incorporated businesses / registered companies.

• Private (Ltd’s) & Public (PLC’s).

• Shareholders elect directors to run the business. Directors appoint: Chairman, MD, Company Secretary.

Limited Companies

• One or more owner / shareholder.

• Directors – family or friends

• Generally smaller – common in UK.

Private Limited Companies

Limited Companies

Private Limited Companies

• Transfer of shares – restricted.

• Owner of family firm can enjoy greater capital, continuity and limited liability without giving up too much control.

Limited Companies

Public Limited Companies

• Two or more owners / shareholders.

• Can sell shares to general public.

• Larger than Ltd’s - greater capital - ease of share transfer.

• Limited Liability.

• Greater capital.

• Greater continuity.

Relative Advantages

Limited Companies

• Opportunities for specialisation / economies of scale.

• Status. • Ltd. – protected from take-overs

(share transfer restricted).

Relative Advantages

Limited Companies

• Expensive to set up / run (particularly PLC).

• Less flexible – restricted to M of A and A of A.

• Accounts audited – costly.

Relative Disadvantages

Limited Companies

• Personal guarantee may still be required for loans.

• Ltd – shares not offered for public sale.

• PLC – lack of privacy.

Relative Disadvantages

Limited Companies

• PLC – threat of take-over.

• PLC – divorce of ownership / control.

• PLC – shareholder interest – short-term profits.

• PLC – many procedures – slower to react to change.

Relative Disadvantages

Limited Companies

Limited Companies Legal Requirements

PRIVATE PUBLIC

Must register as a limited company(at Companies House, Cardiff for UK firms):

Must submit

MEMORANDUM OF ASSOCIATIONAuthorised Share Capital, Objects (activities), Name(s) of original subscriber shareholders.

ARTICLES OF ASSOCIATIONInternal rules eg Directors powers, conduct. Name(s) of original subscriber shareholder(s)

Must register as a limited company(at Companies House, Cardiff for UK firms):

Must submit

MEMORANDUM OF ASSOCIATIONAuthorised Share Capital, Objects (activities), Name(s) of original subscriber shareholders.

ARTICLES OF ASSOCIATIONInternal rules eg Directors powers, conduct. Name(s) of original subscriber shareholder(s)

Issued a CERTIFICATE OF INCOPORATION

Can START TRADING Must produce a PROSPECTUS(history, prospects, invitation to buy shares)

Must issue SHARES to the value of at least £50,000

Must then receive a TRADING CERTIFICATEfrom Registrar of Companies before it can start trading