Types of Enterprises and ownership structure

Module 2:
Types of Enterprises and Ownership Structure: small scale, medium scale and large
scale enterprises, role of small enterprises in economic development;
proprietorship, partnership, limited companies and co-operatives: their formation,
capital structure and source of finance.
Enterprise:
An enterprise refers to a business organization or
company that is typically engaged in commercial,
industrial, or professional activities with the aim of
generating profit.
An enterprise can be any size, ranging from a small
sole proprietorship to a large multinational
corporation.
The success of an enterprise often depends on factors
such as its management, strategy, market conditions,
and the skills and expertise of its employees
Classification of Enterprise:
Small Scale Enterprises

Medium Scale Enterprises

Large Scale Enterprises

Small scale enterprises
Small enterprises are typically characterized by having
fewer than 50 employees and generating less than
$10 million in annual revenue.
They are usually privately owned and operated by
an individual or a small group of people.
Small enterprises tend to be more nimble and able to
adapt quickly to changes in the market.
Examples of small enterprises include local mom-and-
pop shops, small-scale manufacturers, and freelance
professionals. Beauty salons, garment boutiques, shoe
stores, non-precious stones jewellery
Annual revenue is the total amount of money a company receives from
normal business operations during a fiscal year or 12-month period.
Medium scale
Medium enterprises are typically characterized by
having between 50 and 250 employees and
generating between $10 million and $1 billion in
annual revenue.
They may be privately or publicly owned and
operated, and may have a more complex
organizational structure than small enterprises.
Medium enterprises may have more resources and
market access than small enterprises.
Examples of medium enterprises include regional
retail chains, mid-size manufacturers, and specialized
service providers.
Large scale
Large enterprises are typically characterized by having
more than 250 employees and generating more than $1
billion in annual revenue.
They may be publicly traded and have shareholders,
and typically have a complex organizational
structure with multiple departments and divisions.
Large enterprises may have significant resources and
market power, but may face challenges in terms of agility
and innovation.
Examples of large enterprises include multinational
corporations in industries such as technology, finance,
and energy. Energy, petrol and natural gas industry
Role of Small and medium enterprises
in economic development
Small and medium enterprises (SMEs) play a significant
role in the economy, both at the local and national
levels.
Here are some of the key roles and importance of SMEs:
Employment Generation: SMEs are an important
source of employment, particularly in developing
countries where formal employment opportunities are
limited.
• SMEs typically provide jobs for local people,
including those with limited formal education
and training.
Role of Small and medium enterprises
in economic development
Innovation and Flexibility: SMEs are often more
flexible and innovative than larger companies,
allowing them to quickly adapt to changes in the
market and develop new products and services.
• They can also often offer more personalized and
specialized services than larger companies.
Role of Small and medium enterprises
in economic development
Local Economic Development: SMEs are typically
locally owned and operated, which means that they
can contribute significantly to the economic
development of the local area.
• They can help to create a sense of community, and
can also stimulate the growth of other businesses and
industries in the area
Role of Small and medium enterprises
in economic development
Diversity: SMEs can contribute to the diversity of
the economy, providing a range of goods and
services that may not be available from larger
companies.
• They can also offer opportunities for entrepreneurs
and small business owners from diverse backgrounds
to start and grow their businesses.
Role of Small and medium enterprises
in economic development
Export Potential: SMEs can also contribute to
export growth, particularly in developing
countries.
• They can help to diversify the export base, and can
also be a source of high-quality products that are in
demand in global markets
Role of Small and medium enterprises
in economic development
Resilience: SMEs tend to be more resilient than
larger companies during economic downturns, as
they can often adapt more quickly to changes in
the market and have a lower cost structure.
• This can help to stabilize the economy and
prevent large-scale job losses.
Prominent sectors in Kerala are information
technology, tourism, agro-based business including
food processing, ready-made garments, ayurvedic
medicines, mining, marine products, light
engineering, biotechnology & rubber based
industries.
The key sectors in Kerala according to their
contribution to the state GDP are: rubber, coir,
tourism, food processing (sea), and chemicals &
fertilizers.
The traditional industries include handloom, coir,
cashew and handicrafts.
https://whatfix.com/blog/organizational-structure/
Types of Organisational structure
of enterprises:
Functional Organizational Structure: In this type
of structure, employees are grouped according to
their functions or areas of expertise, such as
marketing, finance, or operations.
• Example: A large pharmaceutical company that has
different departments for research and development,
sales and marketing, finance and administration,
human resources, and legal.
Divisional Organizational Structure:
 In a divisional structure, the organization is divided into self-contained
divisions based on products, services, or geographic regions.
• Each division operates as a separate business unit with its own
functional departments.
• Example: A consumer goods company that has different divisions for
different product lines, such as food, personal care, and household
products
Matrix Organizational Structure:
A matrix structure combines elements of functional and divisional
structures.
Employees are organized into functional departments, but also
work on cross-functional projects or teams based on their
expertise.
Example: A large construction company that has functional departments
for engineering, project management, and finance, but also has project
teams that bring together employees from different departments to work
on specific construction projects
Team-Based Organizational Structure: This
structure is built around self-managed teams that are
responsible for completing specific projects or tasks.
• Example: An advertising agency that has teams of
creative directors, copywriters, designers, and account
managers who work together on different
advertising campaigns.
Flat Organizational Structure: In a flat structure,
there are few levels of hierarchy and employees
have more autonomy and decision-making power.
Example: A software startup that has a small team of
developers, designers, and marketers who work
together in a collaborative and agile environment.
Hierarchical
chief operating officer (COO)
Organizational chief financial officer (CFO)
Structure: This Chief Executive Officer (CEO)
structure has a clear
chain of command,
with each employee
reporting to a
supervisor or
manager. Example: A
large multinational
corporation that has a
hierarchical structure
with multiple layers of
management, such as
CEO, COO, CFO, and
various vice presidents.
 Network structure
A network structure goes far beyond your internal company
structure.
It’s an act of joining the efforts of two or more organizations
with the goal of delivering one product or service.
Typically, a network organization outsources independent
contractors or vendors to complete the work.
General structure of Small and
Medium enterprise
OWNER

ADVISORY
MANAGER
BOARD

EMPLOYEE EMPLOYEE
Organizational structure of SME
The organizational structure of a small or medium-sized
enterprise (SME) can vary depending on factors such as
the size of the company, the nature of its business, and
the preferences of its owners.
Owner/Founder:
• The owner/founder of the SME is typically the person
who started the business and holds the ultimate
responsibility for its success or failure.
• The owner/founder is usually involved in all major
decisions and may also be responsible for day-to-day
operations.
Management Team:
• In larger SMEs, there may be a management team
consisting of a few key individuals who are responsible
for specific areas of the business, such as finance,
operations, sales, and marketing.
• These individuals may report directly to the
owner/founder.
Advisory Board:
• Some SMEs may have an advisory board, which is a
group of experienced individuals who provide advice
and guidance to the owner/founder.
• The advisory board may meet periodically to discuss
major decisions or issues facing the business.
Overall, the organizational structure of an SME is
typically flatter and less hierarchical than that of larger
companies.
• This can make it easier for the business to be agile and
adapt quickly to changes in the market, but may also
require employees to take on multiple roles and
responsibilities.
Organizational structure of
large scale enterprises:
Large scale enterprises typically have a hierarchical
organizational structure with several levels of
management and employees.
• The exact structure may vary depending on the
industry, size, and complexity of the organization.
Board of Directors: This is a group of individuals
elected by the shareholders to oversee the
company's operations and make major decisions..
Executive Management: This includes the CEO,
COO, CFO, and other top executives who are
responsible for overseeing the day-to-day
operations of the company, implementing the
strategic goals set by the Board, and ensuring the
company's financial health.
Business Units or Divisions: Large enterprises may
be organized into business units or divisions based
on product lines, geographic regions, or other
factors. Each unit or division may have its own
management structure and be responsible for its own
profit and loss.
Departments: Within each business unit or division,
there may be several departments such as finance,
marketing, human resources, and operations.
Each department may have its own managers and
employees who are responsible for specific
functions.
Organizational structure of
large scale enterprises:
Teams: Large enterprises often have cross-
functional teams that work on specific projects or
initiatives. These teams may be composed of
employees from different departments and business
units.
Forms of Business Ownership
There are four major types of business entities based on
ownership
1. Sole Proprietorship
2. Partnership
3. Co-orperatives
4. Limited Liability Company (LLC)

https://www.startingbusiness.com/blog/business-ownership-forms
Sources of Finance
For carrying out various activities, business
requires money.

Finance – life blood of any business.

Initial capital is not always sufficient to take care

of all financial requirements of the business.
Some funds are required for day-to-day
operations, eg. Purchase of raw materials, pay
salaries to employees, etc.
Also, when business expands, it needs funds.
Capital Structure
Even though money itself can be called capital, the
word Capital is usually used to describe money used
to make things or invest.
Capital structure refers to the combination of
borrowed funds and owners' fund that a firm uses for
financing its fund requirements.
Herein, borrowed funds comprise of loans, public
deposits, debentures, etc.
 1. Sole Proprietorship
Going purely by numbers (not size), the vast majority of
businesses in the world today are small and medium
enterprises.
A sole proprietorship is one of the most popular forms of
ownership for companies such as these.
 Arguably, the popularity of sole proprietorship stems
from its incredible simplicity - setting one up is a breeze
when compared to some of the more complex forms of
business organisations.
All you need are the necessary licenses and permits
(depending on your business sector), and the requisite
funds, with minimal paperwork required.
 If you want to be your own boss, then this is the ideal
place to start, since you are in total control.
You don't have to worry about internal politics or
conflicts as you are the sole owner.
Taxation is also minimal, as you only have to file it
once, instead of twice as is required in companies.
However, the single biggest weakness of this structure
is, by far, the level of personal liability involved.
Since there is no legal distinction between the business and
your finances, your personal assets will end up in jeopardy
if the business struggles.
 While independence is good, it also means that you don't
have anybody to help you make crucial decisions. If
you mess up, your business could quickly go belly up.
Unlimited liability
A proprietorship can be explained as a kind of business or
an organization that is ; owned, controlled and operated by a
single individual who is the sole beneficiary of all profits or
loss, and responsible for all risks.
Formation
• This type of business organization is formed by the owner
himself.
• No legal conventions are obliged to start the sole
proprietorship form of organization.
• In some instances, the legal formalities are required or the
owner should have a particular license or a certificate to
run the business.
• The owner can close the business at his own discretion.
Capital Structure
• Sole proprietors often rely on gifts and loans from
family and friends to capitalize a business. Although
you can’t formally offer a share of the business in
exchange for these funds, you can pay the money back
under favorable terms
Debt Capital
• A sole proprietor can raise capital by taking out loans
to support the business. Any business loan will be
processed under your own name and affects your
personal credit history.
Sources of finance
• Bootstrapped (personal finance)
• Grants (from govt. or other organization) for Sole
Proprietors
• Conventional Bank Loans
• Credit Card Financing
• Trade Credit Financing (customer is allowed to
purchase and payment at a later scheduled date)
• Reinvesting Retained Profits (net income)
Merits
 Easy formation
Better Control
Sole beneficiary of profits
Inexpensive Management

Demerits
1. Unlimited liability
2. Limitation of Resources
3. Limitation of management skills
4. Lack of continuity
2. Partnership
Partnerships are also a very common form of ownership
in the SME segment of the market.
If you have two or more people interested in starting a
business enterprise together, then a partnership is the
simplest option.
 Although the paperwork and tax liabilities are more
complex than in the case of a sole proprietorship, you do
have other people to assist you.
This is one of the main strengths of this form of
organization - you are not on your own.
A partnership is not restricted to individuals, either; it can
be between two or more organizations, or even between
multiple organizations and individuals.
They can also be quite flexible.
If you want to share responsibilities and powers equally, opt
for a general partnership.
If you want others to put up the money (for a share in
profits) while you control the business, go for a limited
partnership.
 With more owners, your personal liability in the business
is also reduced.
The volume of resources available to you could also be
higher for obvious reasons, while you don't have to worry
about double taxation either.
Unfortunately, their disadvantages also stem from the
source of this strength - having more people can be a
liability when conflict inevitably rears its head.
Plus, if any partner makes a mistake, everyone else can
end up paying the price.
A partnership is a form of business where two or
more people share ownership, as well as the
responsibility for managing the company and the
income or losses the business generates.
TYPES OF PARTNERSHIP:
• General partnership: In a general partnership, all
partners have equal rights to manage the business
and share profits and losses. Each partner is personally
liable for the debts and obligations of the partnership.

• Limited partnership: A limited partnership has both

general partners who manage the business and
limited partners who invest capital but do not
participate in management. Limited partners have
limited liability for the debts and obligations of the
partnership.
Limited liability partnership (LLP): An LLP is a
type of partnership where all partners have limited
liability for the debts and obligations of the
partnership. In an LLP, partners may have different
levels of management responsibility and share profits
and losses according to their partnership agreement.
• Joint venture: A joint venture is a type of
partnership where two or more businesses come
together for a specific project or purpose. The joint
venture partners share the profits and losses of the
project but do not necessarily form a separate legal
entity.

• Silent partnership: A silent partnership is a type of

partnership where one partner provides capital but
does not participate in the management of the
business. The silent partner receives a share of the
profits but has limited liability for the debts and
obligations of the partnership..
Capital structure
Equity Capital
Equity capital is the money owned by the shareholders
or owners. It consists of two different types
• Retained Capital:
Retained earnings part of the profit that has
been kept separately by the organization are and
which will help in strengthening the business.
• Contributed Capital:
Contributed capital is the amount of money
which the company owners have invested at the
time of opening the company or received from
shareholders as a price for ownership of the company.
Debt Capital (Loan)
Debt capital is referred to as the borrowed money
that is utilized in business. There are different forms of
debt capital.
• Long Term Bonds:
These types of bonds are considered the safest of the
debts as they have an extended repayment period,
and only interest needs to be repaid while the
principal needs to be paid at maturity.
• Short Term Commercial Paper:
This is a type of short term debt instrument that is
used by companies to raise capital for a short period of
time
Source of finance
Equity Capital
Debt Capital
Reinvesting Retained Profits
Merits
• Ease in formation
• Pooling of financial resources
• Sharing of risks
• Balanced business decisions
Demerits
Uncertainty of existence
Risks of disharmony
Difficulties of expansion
Lack of institutional confidence
3. Co-operatives
Individuals having a common interest can come
together to form a co-operative society
Minimum membership required to form a co-
operative society is 10 and the maximum number is
unlimited
Primary objective of any co-operative organisation is to
render services to its members, in particular, and to
society in general
Co-operative organisation starts with a fund
contributed by its members in the form of units
called shares.
It can also easily raise loans and secure grants from
the government.
Formation
• Cooperative society is compulsorily required to be
registered under the Cooperative Societies Act
1912.
• Process of setting up a cooperative society is simple
enough and at the most what is required is the
consent of at least ten adult persons to form a
society.
• Capital of a society is raised from its members
through issue of shares.
• The society acquires a distinct legal identity
after its registration.
 Sources of finance
To raise capital, Co-operative Society members may decide
to pull all their personal savings together to use as capital
with which they will start their business operations
To finance their business, a co-operative society can take a loan
from a financial institution or a bank.
Co-operatives can also make purchase on credit from their
suppliers.
Governments can also decide to subsidize the things
cooperatives buy.
A government may decide not to tax the activities of a co-
operative because the government believes that the co-
operative’s operation is considered a social good.
A co-operative can also receive money from both
international and local donors in the form of Aids or grants.
Merits
Easy to form
Democratic management
Open membership
Limited liability
 Stability
Demerits
• Rigid rules and regulations
• Limited capital
• Inefficient management
• Absence of motivation
4. Corporation
The biggest and most influential companies in the world
are mostly corporations.
They have many advantages and are considered the
most flexible and resilient forms of business
organisations.
A corporation is considered a separate legal entity, with
its own rights, liabilities, and obligations.
As an owner, you will only have limited liability in a
corporation, which means that even if the business gets
sued, your personal assets will escape unscathed.
Setting up a corporation is no easy task, though.
You are required to satisfy numerous conditions, such as
appointing a board of directors, maintaining and publishing
numerous records, and complying with a whole array of
complex regulations.
They are also quite expensive to set up.
 Your ownership in a corporation is not absolute, either
- it can get diluted through the sale of stocks, while the
actions you take in your official capacity at the
corporation can be held accountable by the board and
other shareholders.
 Taxation is also an issue, as you can be taxed twice -
once as business revenue, and then again on your
personal income.
5. Limited Liability Company
(LLC)
To put it one way, an LLC is a hybrid between a
partnership and a corporation that tries to combine
the best of both worlds.
Essentially, your business functions like a partnership, but
with the limited liability of a corporation.
 If you can provide enough paperwork, you can also avoid
getting taxed like a corporation.
Like partnerships, you can involve individuals,
businesses, trusts and corporations, as well as other
LLCs.
While they do possess many strengths and benefits, they
are not very easy to set up, though.
To unlock their full potential, you have to satisfy a lot of
bureaucratic conditions, while you also leave yourself
open to scrutiny from governmental agencies.
• A limited company (LC) is a general term for a type of
business organization wherein owners' assets and income
are separate and distinct from the company's assets and
income; known as limited liability.
• Because of this, owners' potential losses are limited to what
they have invested while personal assets and income are off-
limits.
• Several variations of limited companies exist around the
world and are followed by standard abbreviations including
Ltd., PLC, LLC, to name just a few.
Public limited company (PLC), LLC (Limited Liability Company)
A public limited company is a joint stock company,
that is not a private company, and the shares of which
are listed on a stock exchange.
 A private company is a closely held company that
does not have its shares listed on any stock exchange
and cannot be openly traded.
Formation
• Minimum of 3 directors is required to form a public
limited company.
• A minimum share capital of Rs. 5 lakhs is required.
• Digital signature certificate (DSC) of one of the
directors is needed while submitting self-attested
copies of identity and address proof.
Capital Structure
• Capital structure is the particular combination of debt and
equity used by a company to finance its overall operations
and growth.
• Equity financing and debt financing are two primary sources
of financing available to businesses. Equity financing
involves raising funds by selling a portion of ownership
in the company to investors, whereas debt financing
involves borrowing funds from lenders and agreeing to
repay the borrowed amount plus interest.
• In small enterprises, equity financing can be a valuable
source of funds, especially for those that are in the early
stages of development or have limited access to traditional
financing options. Equity financing allows small businesses
to raise funds without incurring any debt, which can be
beneficial for companies that have limited cash flow or are
not yet generating a steady stream of revenue.
Sources of finance
Debt and equity are the two major sources of financing.
 Government grants to finance certain aspects of a
business may be an option.
 Incentives may be available to locate in certain
communities or encourage activities in particular
industries.
Companies use retained earnings from business
operations to expand or distribute dividends to their
shareholders.
Businesses raise funds by borrowing debt privately from
a bank or by going public (issuing debt securities)
Merits
Tax Benefits
Limited liability
 Professional and credible than other ownership
structures
Demerits
• Increased Compliance
• More expensive
• Limited Control
• Less privacy
Factors to Consider When Selecting
an Ownership Structure
When making such a decision, the most crucial factor to
consider is the nature of your business, or, to be more
precise, the level of risk involved. If it is a highly
competitive field, such as hospitality, for instance, it raises
the potential risk to your personal finances. Therefore, in
this particular situation, you may want to consider a form
of ownership that minimises your personal liability.
 Another key consideration is the quantum of resources
and finances at your disposal. Some forms of ownership
come saddled with strict compliance requirements, and
you may not have the resources or know-how to handle all
the bureaucratic hoops you will have to jump through to
get your new firm up and running.
Larger, more complex forms of ownership require a group
of entrepreneurs to flourish and, if you have the contacts
and networks, this can be quite easy.
If you are starting on your own (or with a friend or
relative), however, practical options may be somewhat
limited as far as business ownership is concerned.
 You also need to consider what your plans and
aspirations are for your enterprise. Do you plan to hold its
reins tightly in your own hands indefinitely, or do you
want to expand and bring in more investors?
These considerations should also be taken into account
when deciding the form of business ownership.
Key Takeaways
1. If you are a first-time entrepreneur, alone and with
limited funds, a sole proprietorship is probably the best
form of business ownership for you.
2. If it is a high-risk venture, though, you might want to try
bringing more people on board to start a partnership.
3. If you have more resources, contacts, partner individuals
and firms, a corporation is one of the best options for the
long term growth and stability of your business.
4. For something with a bit more control, less compliance
and tax requirements than a full-fledged corporation, an
LLC is the ideal choice.
The main difference between an LLC and a corporation is
that an llc is owned by one or more individuals, and a
corporation is owned by its shareholders.