UNIT 1

TYPES OF ORGANIZATION

UNIT 1.2

TO OPEN A BUSINESS IS VERY EASY;

TO KEEP IT OPEN IS VERY DIFFICULT.

-CHINESE PROVERB

Private Sector

There are two sectors of the economy: -Private Sector- run and owned by private individuals and businesses. -Public Sector- a business owned and control by the government.

• Most, not all, private sectors aim to earn a profit while public sectors are controlled and owned by the government.

• They can range in size of ownership from one person to multinational companies.

• Three types of Private Sector businesses.– Sole Traders– Partnerships– Companies (Corporations)

Public Sector Org

• Owned and operated by the government (Hint: public).• Traditionally they are created to provide essential

services that the private sector would provide ineffectively.

• Organizations owned by the government are called public corporations (i.e. BBC, KCRC, USPS).

Public sectors-

Are created because:

-ensure that everyone has access to basic services (i.e. healthcare, education, etc.)

-avoids wasteful competition (i.e. national defense)

-protects citizens and businesses from institutions (i.e. police and judicial system)

-reduce unemployment

Public sectors are less common today because of the benefits of becoming a private sector (i.e. privatized assets)

With benefits comes regulations…

Regulatory bodies monitor the conduct and performance of privatized companies…

(Big Brother is watching! lol)

But they also control business activity in the public sector. (i.e teaching standards)

Benefits of going privatized:

-efficiency gains: exposed to competitor markets and forces them to improve their business efficiency.

-lower costs of production: with pressure from competitors, private companies aim to reduce their costs. Customers benefit from these competitive prices.

-increased choice: moving to a private sector gives customers more choices in products.

-incentives to innovate: competition encourages firms to stay competitive and to keep on improving.

-less financial burden: government does not have to fund public corporations so taxpayers save more money.

-sources of government revenue: has raised money for the public sectors that have sold their businesses to private investors.

Starting a Businessthe Pursuit of “Profit”

• Most new businesses FAIL due to mismanagement.

Examples of set-up of business:-premises: purchase costs, utilities-building: fixtures -capital equipment: furniture, machinery-marketing costs: advertising

The Decision Maker

• Entrepeneur – The risk taker that manages, plans and

organizes, the other three factors of production (i.e. land, labour, capital).

Factors to consider when setting up a business

Supplies

Marketing

FixedAsset

EnterpriseHuman

Resource

Finance

Business Idea

Legal

Issues

Customers

Business Start-up

Diagram Explained

1. Business idea: will it sell?

2. Finance: funding!

3. Human Resources: hiring, training, retaining, and motivating.

4. Entrepreneurial skills: plan, organize, manage.

5. Fixed Assets: Land, capital, premises.

6. Suppliers: Delivery and production of raw materials.

7. Customers: marketing and research. You need desirable products.

8. Marekting: convince customers that they need your product.

9. Legalities: Copyright, consumer rights, patent laws..etc.

Reason for Setting Up a Business

Remember: GET CASH-Growth-Earnings-Transference and inheritance-Challenge-Autonomy-Security-Hobbies

Identifying market opportunities

In a niche market small firms thrive because larger businesses are put off from entering these markets.

But… they don’t stay small forever (i.e flat screen tv, laptops, cellphones)

Innovations and creations: come up with a new idea!-Google-iPod-eBay All these entrepreneurs had unique selling points with legal

protection to prevent others from copying their ideas and introducing them to the market.

Reasons why businesses fail(i.e. Circuit city)

- lack of finance capital: NO MONEY- Budgetary problems- Marketing problems- Unestablished customer base- People management problems- Legalities- Production problems- High costs of production- Poor location- External influences

Profit-Based Organizations

Sole trader (sole proprietor)Impotant to note: they are unincorporated (i.e Owner=business) Advantages:

-few legal formalities-being your own boss (i.e personalized service)-privacy (do not have to make financial records publicly

available) Disadvantages:

- unlimited liability - limited sources of finance

- high risks (both financially and emotionally) - workload and stress - lack of continuity - higher costs of production

Partnerships-investors have a financial stake in the firm but do not have to actively take part in the running of the business.

These are called silent partners or sleeping partners.A Partnership Deed or Deed of Partnership must be drawn up and

must include:

-amount of finance contributed by each investor-roles, obligations, and responsibilities of each partner-how profits and losses will be shared amongst the partners-conditions for introducing new partners to the business-clauses for the withdrawal from the business-procedures for ending the partnership

Advantages: -investors can pool their money to increase their finance

(financial strength)

- division of labor and specializationDisadvantages:

- ‘wholly or severally’ unlimited liability (the exception is limited partners) This means that in the case of profits and losses the business can choose to disperse them among all partners (severally) or to repay the debt by one partner.

- disagreements and conflicts may occur and decision making might take longer since there are more partners who will have a say in the motion.

-drafting a new Partnership Deed can cost a lot of money and take up time

-investors may have a hard time in raising their capital, consequently having to take out bank loans or other types of borrowing.

Companies

• Businesses owned by shareholders.– Also called joint-stock companies because of shares.

• Normally called corporations.

• Have limited liability.– Shareholders bare no responsibility for the company’s debts.– Setting up a limited corporation can be expensive. – Regulations have to be followed.

• Board of Directors has to run (usually for their expertise)

• Two types of Limited companies:– Private limited companies

• Cannot raise general share capital from the general public (will have Ltd. After the name).

• Can only be traded with the agreement of the board of directors.

– Public Limited Company• Can sell to general public via the stock exchange (carries

letters PLC).• Problem: Dilution of Control. In other words the more owners

the less control of the business an individual has.

• Before trading both types of companies have to turn in the– Memorandum of Association

• Name, main purpose, address, orig amount of share capital invested.

– Articles of Association• Internal regulations, rights, roles, of board of directors and shareholders.

Administrative issues, and how profits will be distributed.

• Once the authorities find the information suitable they issue a Certificate of Incorporation.– This identifies the company as a separate entity.

– Floatation occurs when the company first sells parts of itself to external investors. Allows it to be listed in the stock exchange and helps generate additional sources.

Reasons to Buy Shares form Limited Companies

• Dividends– Share of the annual profits.

• Capital Growth– The shares may increase in value, and the

shareholder can sell it. The gain is known as capital growth.

• Voting Power– Shareholders with a significant amount of shares can

sway decisions with their influence.

Advantages/Disadvantages of Companies

• Advantages– Permanent Capital (i.e. does not have to be repaid).– Lower risk (limited liability)– Continuity (not dependent on the owner)– Directors generally own large shares therefore it is in

their best interest to act to the best of their ability in order to achieve capital grow and dividends.

– Economies of Scale (can borrow more money for a cheaper price due to size).

– Can hire professionals to run the business, owners do not have to be involved.

• Disadvantages– There is no financial privacy.– More bureaucratic processes in order to make

the company.– Dividends can only be paid if the company

makes a profit. NO profit no dividend.– Bad communication.

Non-Profit and Non-Governmental

• Non-Profit– Profit is not the main goal. Aimed at providing a

service. – Any profit achieved is returned back into the business

for the benefits of the members.

• Non-governmental organizations– Operates in private sector.– Not aimed at profit. – Set-up and run for the benefit of others in society.

• Two types of NGOS– Operational

» Given objective or purpose

– Advocacy

» Promote or defend a cause.

– QUANGOS• Are semi-NGOs. • Funded by government but run by independent people.

• Charities– Key function of collecting donations from individuals and organizations

in order to support a cause.

– Some charities are very large organizations and will have organized bodies like limited companies.

• Will have a board of directors to run the charity– Will get paid for their services.

• Pressure Groups – Made to address a special interest.

– Aim to win media support.

Charities

• Advantages– Provide financial support for the welfare of society.

– Exempt from paying income tax or corporation tax.

– Donors can get income tax allowances.

– Can be registered as limited liability in order to protect the employees and management.

• Disadvantages– Lack of profit could cause staff demotivation.

– Trustees at the top of the charity’s organization cannot receive any financial benefits.

– Must be registered before commencing.

– Financial activities have to recorded and reported to governing body.

– The limited liability could cause charity fraud or inefficiency.

– Based on donations, and donations can be scarce.

Relationship Between the Private and Public Sectors

• Private Goods– Generally goods that are excludable, or the goods which id

cannot be afforded will not be received.

• Public Goods– Enjoyed by the general public, but would not be enjoyed if it was

not for the government (e.g. National Defense, public roads, street lighting).

• Merit Goods– Yield higher social benefits of consumption than private benefits

to an individual (e.g. education, training, public libraries).

Public-Private Enterprises

• Take place when the government creates partnerships with the private sector.– Referred to as public-private partnerships.– Benefits from the dynamics and efficiency of

the private sector and the great benefits and funding of the public sector.