Forms of Business Organizations PDF

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

Forms of Business Organizations An organization is a system that groups people together towards establishing a common goal. Business organizations are centred on creating goods and services for profit. There are several types of business organizations that one can start. Forms of Business Organizations: Sole Trader Partnership Private Limited Liability companies Public limited Liability Companies Multinationals Franchise Conglomerates Cooperatives Nationalized Industries Local and Municipal Authorities 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 All privately owned industries, services and other business activities are a part of the Private Sector. All industries, services and any other business activities that are owned by the state are a part of the Public Sector. For example, the commercial banks are a part of the Private Sector, and public schools and hospital are a part of the Public Sector. The sole trader The sole trader as the title suggest 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. Advantages  Benefits of operating alone  All profits are taken by the owner.  Consultations are not necessary for decision making  The legal requirements for start-up are very simple as the proprietor only needs to submit the registration documents for the business. Disadvantages  He does not have limited liability and therefore if the business goes bankrupt he may lose his personal assets e.g. house and car.  The sole proprietor must work for long hours resulting in little time for family  There is also limited capital to inject into the business  He alone bears all the risk of the business.  There is a lack of expertise in areas of business where he is not knowledgeable which may limit success.  Lack of continuity Partnership A partnership business is formed legally by a minimum of two and a maximum of 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. A deed of partnership must be drafted which set out the terms and conditions of the partnership. Types of Partners  Ordinary/General Partners: take an active part in the running of the business.  Sleeping Partners: invest in the business but do not take an active part in the business.  Limited Liability Partners: assets will not be lost if the business goes bankrupt. Advantages  Since more than one person is involved, more capital can be raised to inject into the business.  There is more expertise and work load is shared.  The risk of the business operation is also shared. Disadvantages  All partners will be affected by the action of each partner since each person represents the business.  Decision making may be very slow if partners are not in agreement.  There are high risks for partners who do not have limited liability. Limited Liability Companies 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 not his personal assets. There are two types of limited liability companies.  Private Limited Liability Company  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 public limited liability company, it does not have to publish its balance sheet in the newspaper. 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. Legally the private limited company can only have a minimum of two and a maximum of fifty persons to join. Whereas the public limited liability company has a minimum of 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  The Articles of Association  Statutory Declaration  Certificate of Incorporation  Prospectus  Certificate of Trading 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. A main advantage of limited liability companies is that their shareholders enjoy limited liability. This type of business is assured continuity of existence as it has several members. Unlike the sole trading business that comes to an end if the owner dies or is very ill. These firms can access capital for expansion by selling shares. The disadvantages however, are that they are not easy to start due to the number of legal procedures required. For the private limited liability company, shares are not easily transferable as other members must agree to have persons join the company. However, shareholders in public liability companies are not restricted to sell their shares to whomever they wish to. Multinationals A multinational company is a global organization directed from a main centre or office. Examples of Multinational companies in the Caribbean are Shell, Kentucky Fried chicken and Digicel. Advantages  They provide employment  Introduce advanced technology  Provide well needed goods and services Disadvantages  Profits earned are sent back 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 Some businesses start out by the owner acquiring a franchise to operate under an already existing business name. 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. 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. 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. Nationalized Industries Nationalized industries are government owned and controlled businesses. A chairman and board of directors are appointed by the government to run them. Businesses run by the government in most countries tend to be those that provide essential services such as water, electricity, and transportation. Nationalized industries are beneficial to a country as they provide essential goods and services at very affordable cost or free. For example, a water company providing standpipes to rural communities. Although beneficial, they operate at high costs to the society as their operations tend to be inefficient. They are supported by taxpayers’ money and do not operate on the basis of making profits. Cooperatives They 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. 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. Producercooperatives 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. Government Departments These include the government ministries e.g. The Ministry 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 These 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. Economic Systems Every economy is faced with a fundamental economic problem. In every economy, whether rich or poor, there are limited resources and unlimited wants i.e., the resources of a country are not enough to satisfy the wants of all its citizens. Since the resources of a country is limited and wants unlimited, choices will have to be made. For example, the government may have to decide whether to spend more money on schools, hospitals, transportation or on road work. The process of choice begins with a scale of preference. This is a list of all options in order of preference. For example Scale of Preference:  hospitals  transportation  schools  road work The option to build hospitals being placed at the top of the scale of preference indicates that this choice is most preferred as it yields the greatest satisfaction from the resources to be spent. Transportation is the opportunity cost of this choice as it is the second most preferred option that had to be given up accommodating the building of hospitals. Opportunity cost is defined as the next best alternative foregone because of making a choice.