Topic 1.

Types of Organizations
 PROFIT-BASED
ORGANIZATIONS
 Focus Questions:
1. What are private & public sectors?
2. What are profit based organizations?
3. What are advantages of each private sector
organization?
4. What are disadvantages of each private sector
organization?
Public Sector and Private Sector
Organizations
Public Sector
Organizations that operate in the public sector are under the ownership and control of the
government. Organizations that are wholly owned and controlled by the government are called
Public Corporations such as UK’s BBC, America’s United States Postal Service.

Main Aim = Welfare of the Community as a whole.


PUBLIC SECTOR ORGANISATIONS

1. LOCAL AUTHORITIES

Local government organizations include the decision making bodies and administrative offices of
district councils or regional councils.


SOME EXAMPLES OF LOCAL GOVERNMENT SERVICES

Local authorities provide public services to local businesses and communities such a education,
leisure facilities, refuse collection, housing benefits, street lighting, libraries, parks, cutting grass
verges, fire service, the building and maintenance of local roads and parking enforcement.
 2. CENTRAL GOVERNMENT

The Central Government is the elected body responsible for

macroeconomic policy and taking decisions on other national issues. The
administrative offices of Central Government are government departments e.g.
the Department for Education and Employment


SOME EXAMPLES OF CENTRAL GOVERNMENT SERVICES

Major Road Building and Maintenance, Tax Assessment and Collection,

National Health Service, Armed Services, Social Security Payments, Consumer
Protection, Immigration Services, Air Traffic Control, Law and Order, Post
Office etc.
PRIVATIZATION
Privatization is selling public sector industries to the private sector. This means that the public corporations
which ran these industries are converted into limited companies and shares are sold to the general public.

ADVANTAGES
1. Efficiency Gains
2. Lower Costs of Production
3. Increased Choice
4. Incentives to innovate
5. Less Financial Burden
6. Source of Government Revenue
Private Sector
• Main Aim = Profit (Mostly)

• Revenue - Costs = Profit

 Private Sector Business Organizations

Un-incorporated Businesses Incorporated Businesses

(An incorporated Business is one which has

(No legal difference Between the owner and
a separate legal identity from its owners.
the business. Everything is carried out in
The business can be sued, taken over
the name of the owner or owners)
and can be liquidated)

Private Limited Public Limited

Sole Trader Partnership Company Company

(One Owner) (Owned By Partners) (Owned by a few (Owned by many

Shareholders) Shareholders)
 Introduction
A person wanting to set up a business has to
consider what legal form organisation should take.
Factors influencing this decision are:
• How many owners the business is going to have?
• What is the tax position of the business?
• Does the owner want all the business profits?
• In the case of the owners illness or death what will
happen to the business?
 Basic Definitions
1) A FIRM
A firm is a 'unit of management'. It controls factors
of production, land, labour & capital. It takes
decisions for production, designing & marketing
of its products.

2) INDUSTRY
Firms producing the same product or in the same
production line are collectively termed as an
industry. An industry can include many firms
producing a particular product.
3) UNLIMITED LIABILITY

If the business fails and closes down, owners

are being held responsible by the law, legally
obliged to pay debts of the business, even from
their own personal wealth. (Unlimited liability
means the owner may have to sell some or all of
his personal possessions to help pay off the
company's debts).
4) LIMITED LIABILITY

A shareholder's liability for the debts of a limited

company (joint stock) is strictly limited to the
value of the share he or she has agreed to buy.
Once shareholders have fully paid their shares,
they have no liability for company's debts (i.e.
they are responsible only for the amount of shares
they have bought).
5) CAPITAL - INTENSIVE FIRM

A firm is Capital – Intensive if it requires

expensive equipment and a small labour force.
Mainly developed countries have capital intensive
firms because they can afford to buy heavy
specialized machineries and equipments and in
turn reduce their labour costs.
6) LABOUR – INTENSIVE FIRM

A firm is Labour – Intensive if it requires more

labour force and less expensive equipment.
Developing countries’ economy mainly depends
on labour intensive firms because lack the
sufficient resources and finance to have technical
progress. Their major exports are agricultural
goods.
1. Sole Trader

What is a sole trader?

Advantage of being a sole trader
Disadvantages of being a sole trad
er
 What is a sole trader?

• A sole trader is owned by and controlled by one

person. 
• Sole trader is a person who owns and operates
their own business. They may or may not employ
other people.
• Sole traders are common businesses. Example of
a sole trader business is a hairdresser.
 Advantages
• Profits - they are kept by the owner. There are no
other shareholders so the profits don't have to be
split.

• Easy to run - every business is difficult to run

successfully but sole trader is the easiest form of
business
• Easy to establish (Few Legal Formalities)- hardly
any complicated forms or procedures. Some of the
other legal forms have to have legal forms
completed before the business can start.

• Total control (Being Your Own Boss) - the owner is

in charge of the business. He/she does not need to
discuss their decisions with any other owners.
They have total control of the business.
• Privacy - As there are no shareholders in the
business you only need to inform Inland Revenue
and Customs and Excise in order for them to see
how well the sole proprietor is doing

• Flexibility - very flexible working hours as sole

trader is its own boss e.g. Rather than working on
Friday he/she decides to work on Sunday instead.

• Personalised Service - They provide a personal

service for customers .
 Disadvantages
• Illness - If ill the business might be forced to
shut down stopping the income and profits
• Unlimited liability - if the things don’t work
out as planned the sole proprietor could lose
all its investment.
• Difficulty in raising capital - small
businesses find it hard to find a start up
capital and usually the owner might have to
put his/her house as an insurance for capital
borrowed
• Lack of continuity - because the owner is the
business there is no guarantee that the business
will carry on running once the owner decided to
stop.

• Limited specialisation - as the owner has to be a

purchaser, lorry driver and accountant there is no
time for this person to specialise in all fields
• Limited economies of scale (Higher Costs of
Production)- are the factors that cause average
costs to be lower in large scale operations than in
small scale ones. e.g. a small construction business
would have to hire a lorry to do the required task
as this would be cheaper but larger business would
buy its own as this would prove to be cheaper due
to the fact that lorry is in continuous use.

• Workload & Stress (Long hours) - long hours may

be required of the owner to keep the business
afloat.
 2. Partnership
What is Partnership?
Decisions regarding partnership
Advantages of partnership
Disadvantages of partnership
 What is partnership?
Partnerships are owned by at least 2 
partners. You can have up to…20

people as partners.

Partnership is a type of business where 2 or more

people agree to own, run and trade. Partnerships exist
mainly in professions like accountants, doctors,
barristers & dentists etc, where personal service is
still required.
• When setting up a business a person has to decide
whether to set up a business on their own or with
others.
• There is also a risk factor. Is this person prepared
to accept the risk of unlimited ability?

This will depend on:

• how much control they want over the business
• are they prepared to share the profit
• can they raise necessary capital to start up the
business by themselves
• Deed of Partnership - is the legal contract, which
sets out following:

– Who the partners are, and their roles & responsibilities

– Capital brought into business by each partner
– How profits or losses will be shared
– Conditions for introducing new partners
– What happens if there is a withdrawal of a partner
from the business
– Procedure for ending a partnership
 SILENT OR SLEEPING PARTNERS

• Partnerships can raise finance from partners who

do not actively take part in the running of the
business but have a share in profit.
• These investors are known as Silent or Sleeping
partners; whereas, the partners that take full
responsibility of the business are termed as
Ordinary Partners.
• Sleeping partners have limited liability; whereas,
ordinary partner has unlimited liability.
Advantages of Partnership
• Easy to set up
• Financial Strength
• Division of Labour & Specialization
• Profits belong to the partners
• Privacy. Only tax authorities need to be told how
much partners are earning and profit of the
business
 Disadvantages of Partnership
• Unlimited liability for Ordinary Partners
• Lack of continuity of existence is there i.e. death
of a partner brings partnership to an end.
• Profits have to be shared among all of the partners
equally even if one is lazy and inefficient and
another is hardworking and responsible.
• They tend to be quite small & thus can not enjoy
economies of large scale production. Cannot raise
a lot of capital.
 Disadvantages of Partnership

• Disagreements and conflicts may exist between

partners, which can be bad for business. All
partners should be consulted when decisions are
made, thus slowing decision making process.

• There must be a huge amount of mutual trust.

Each partner legally and mutually answerable to
all other partners.
3. Limited Companies
What is a limited company

Advantages of becoming a Limited compan

y

Disadvantages of becoming a Limited comp

any
 What is a limited company?
• Companies are essentially businesses that are
owned by their shareholders.
• Companies are sometimes called joint-stock
companies because the shares of the business are
jointly held by numerous people or institutions.
• Companies are incorporated businesses. This
means that there is a legal difference between the
owners of the company and the business itself.
• Companies benefit from having limited liability.
• Setting up a limited company can be very
complicated and expensive.
 What is a limited company?
• A “Board Of Directors” is elected by shareholders at
the “Annual General Meeting” to run the company
on their behalf.
• The directors arc held responsible for the daily
running of the business and held accountable to their
shareholders.
• Each share held equals one vote, so obviously the
more shares held by an investor the more voting power
they have.
• Individual shareholders tend to have very little say as
it is the large institutional investors and directors
who hold the majority of the shares.
TYPES OF LIMITED COMPANIES

There are two types of limited companies:

1) Private Limited Company
2) Public Limited Company
 Limited companies
PRIVATE LIMITED COMPANIES (Ltd.)
• A Private Limited Company is a company that cannot raise
share capital from the general public. Instead, shares are
sold to private family members and friends.
• The company will usually have the word 'Limited' or the
letters 'Ltd.' after its name.
• Shares in a private company cannot be traded without the
prior agreement from the Board of Directors.
• It is also usually cheaper to set up a private limited
company than a public limited company.
• Private companies do not tend to be able to raise as much
finance as public limited companies.
 Limited companies
PUBLIC LIMITED COMPANIES (PLC)
• A Public Limited Company is able to advertise and sell its
shares to the general public via the stock exchange.
• It must carry the letters ‘PLC’ after its name.
• One disadvantage of allowing the general public to buy
shares in the public company is that there is dilution of
control. This means that by issuing more shares, the
company has more owners, thereby weakening its ability to
control the business.
• Public companies are exposed to takeover bids from other
investors that seek to purchase a majority stake in the
company.
• The affairs of the public company are made public
 Limited companies
Private Limited Companies Public Limited Companies
Chanel - fashion and cosmetics China Mobile - mobile phone services
(France) (China)
Ernst & Young - accounting (USA) Coca-Cola Company - soft drinks (USA)
IKEA - home furnishing (Sweden) HSBC - banking (UK and Hong Kong)
Lego - toys (Denmark) Michelin - tyre manufacturer (France)
Mars Limited - confectionery (USA) Microsoft Corporation - computer software
( USA)
Price Waterhouse Coopers - Nike, Inc. - sportswear and sport\
accounting (USA) equipment (USA)
Rolex - prestigious wristwatches Porsche - automobiles (Germany)
(Switzerland)
Tutor2u Limited - online education Samsung - electronics (South Korea)
(UK)
Virgin Group - global conglomerate Vodafone - telecommunications (UK)
(UK)
 FORMATION OF A PUBLIC
LIMITED COMPANY

Two documents must be produced by both

private and public limited companies and
submitted to the appropriate authorities before they
can commence trading:
 Limited companies
I- MEMORANDUM OF ASSOCIATION

This must contain:

1) Company's name - It must include the word
"limited"
2) Address of its registered office
3) Object (aims) for which the company is being
formed.
4) The amount of capital to be raised.
 Limited companies
II- ARTICLES OF ASSOCIATION

These must give the details of how the company

will be controlled and organized, stating the internal
organization of the company. The articles of
association gives details such as voting rights of the
shareholders, how the profit will be distributed, how
decisions will be reached etc...
 Limited companies
• Once the authorities are satisfied with the submitted
documents and an application fee has been paid, a
Certificate of Incorporation is issued to the firm.
This license recognizes the business as a separate
legal unit from its owners and allows the business to
start trading as a limited company.
• Flotation or initial public offering (IPO) occurs
when a business first sells all or part of its business to
external investors (shareholders). Floating a company
allows it to be listed on a stock exchange and this
helps to generate additional sources of finance.
 Limited companies
There are three reasons why investors tend to buy shares in a
limited company, although only the first two apply to
preference shareholders:
1. Dividends. The dividends represent a share of the profits
that are distributed to its owners.
2. Capital growth. Over time, the value (or market price) of
shares may increase and the shareholder can then sell the
shares at a higher price, thereby making a financial gain.
This gain is known as capital growth or a capital gain.
3. Voting power. Ordinary Shareholders only have voting
rights because they are risk takers and possess high
entrepreneurial spirit, such as the senior directors of a
company.
 Limited companies
The largest shareholders of companies tend to be
institutional and commercial investors. This means
companies have shares in other companies.
For example:
• Cathay Pacific Airways is the largest stakeholder of
Dragonair (Hong Kong)
• Prudential (insurance company) is the majority stakeholder
of Egg, the world's largest pure online bank (UK)
• Renault (France) owns a majority stake in Nissan (Japan)
• Porsche (Germany) own a significant percentage of shares in
Volkswagen (Germany)
 Limited companies
All companies must hold an Annual General Meeting (AGM) to allow the owners
to vote. There are three main processes at a typical AGM:
• Shareholders vote on resolutions (promises or declarations) and
the re-election (or sometimes election) of the Board of Directors.
• Shareholders ask questions to the chief executive officer,
directors and the chairperson about various aspects of the
company.
• Shareholders approve the previous year's financial accounts.
Limited companies must produce an Annual Report and Final Accounts.
The annual report includes details such as the reporting of profits (or
losses), the assets of the business and where cash has been spent during
the last twelve months. These accounts are scrutinized by an external
auditor (usually chartered accountants) before they are distributed to
shareholders.
 Limited companies
ADVANTAGES
• Companies can raise large amounts of capital by selling
shares. Shareholders are paid a dividend (but only if
the company makes a profit).
• As companies have limited liability, it is easier for
them to attract both private and commercial investors.
• Unlike sole proprietorships and partnerships,
companies benefit from continuity. There is a legal
difference between the business and its owners (a
concept known as the divorce of ownership and
control), should anything happen to one owner, the
business does not need to cease trading.
 Limited companies
ADVANTAGES
• Directors of a company generally own a large
amount of shares and have voting power, it also
means they have an incentive to perform well in
order to achieve capital growth and dividends from
the shares.
• Due to their larger scale business, companies can
benefit from economies of scale.
• In addition, limited companies can hire specialist
directors and managers to run the firm as there is no
need for the owners to be directly involved in the
daily running of the business.
 Limited companies
DISADVANTAGES
• Financial information must be provided to all
shareholders. Privacy no longer exists, in comparison
to that enjoyed by sole traders and partners.
• There is far more bureaucracy involved in the setting
up and running of a limited company, such as the need
to produce a memorandum and articles of association.
Lawyers must be hired to ensure that all documentation is legally
accurate.
Advertising and promotion of the company's share flotation also
adds to the costs.
Hosting the Annual General Meeting can be a huge and expensive
task.
 Limited companies
DISADVANTAGES
• For shareholders, dividends are only paid out if the
business makes a profit. Even if profit is made, the
Board of Directors may decide to retain a large
proportion of the profits for financing investment
projects; this then leaves less profit that can be
distributed as dividends to shareholders.
• Very large organizations suffer from communication
problems . As the firm becomes larger, services and
relationships may become more impersonal to both
customers and employees.