Business Organisations

Business Organisations

Unit 6

 

Watch this short clip for an introduction to the various types of business organisations

Types of business organisations

 

Main types of Business Organisations include:

• Sole Trader
• Partnership
• Private Limited Company
• Public Limited Company
• Co-operative
• Franchise
• Alliance
• State Owned Business

I will examine each type of organisation under the following headings:

1. Name
2. Formation
3. Liability
4. Continuity of existence
5. Finance
6. Accounts
7. Profits
8. Control
9. Termination

Examples

I will also look at:

• Advantages
• Disadvantages

 

Other important Business Organisations / terms include:

• Privitisation
• Transnational / Multinational Companies
• Indigenous Firms

Sole Trader

Definition

A business that is set up and run by an individual entrepreneur on their own.  This is a popular type of organisation for a first business.

• Name

The entrepreneur will need to register the name of the business with the registrar of business names if the name of their business is different from their own name.  For example if Joe Smyth calls his business 'Joe Smyth Plumbing' he would not have to register but if he called it 'ABC Plumbing' he would need to register.

• Formation

The business must register with the revenue for taxes such as VAT, SAIT (Self Assessment Income Tax) and PAYE.

• Liability

Unlimited Liability, this means if the business goes bankrupt and owes a lot of money, the sole trader is responsible for the debt.  The sole traders personal assets are at risk.  This is a huge risk for the entrepreneur.

• Continuity of existence

If the sole trader decides they are for some reason no longer able to run the business, there may not be anyone else to take over.

• Finance

It can be difficult for one person alone to raise the money required to set up a business.   They will need their own savings and to apply to the government for a grant and the bank for a loan.  Banks may resist as sole traders are the most likely business organisation to go bankrupt.

• Accounts

It is a confidential business and the financial accounts do not need to be published.  Only the sole trader has access to the accounts.

• Profits

The sole trader owns the business alone and all profits go to them.  This provides motivation to do well.  This can also result in stress and burn out.

• Control

The sole trader has complete control

• Termination

The sole trader does not need permission from anybody else to end the business.  It is an easy, straight forward process.

• Examples

Hairdressers

Builders

 

 

Shop owners

Consultants

Advantages

• Easy to form
• Maintain the profits
• Financial confidentiality
• Easy to terminate

Disadvantages

• Unlimited liability
• No continuity of existence
• Difficult to raise finance
• Stress and pressure

1. Learn the 9 headings to analyse a Business Organisation under.

2. Illustrate the advantages and disadvantages of Sole Trader as a type of business organisation.

3. Case Study 2007 (c)

Notes on case study:

• Name the type of organisation, define and apply parts of case that indicates this.
• Pick 4 relevant headings to write about sole trader under, pick headings that apply to the case (see example below)
• Offer 2 or 3 recommendations to McG Computers

Example:

• Finance

It can be difficult for one person alone to raise the money required to set up a business. They will need their own savings and to apply to the government for a grant and the bank for a loan. Banks may resist as sole traders are the most likely business organisation to go bankrupt.

At the start McGComputers had   ‘ limited financial resources’ today they have support from ‘limited number of reward seeking investors’.

In my opinion this finance is important because he won’t need to get into debt with banks or seek a loan, as that could be difficult in this economic climate.

Possible recommendations: (you must expand on each one)

• Change Business Organisation
• Ensure continuity of existence
• Expand skill range
• Attract further investors

Partnership

 

 Definition

A business set up and managed by between 2 and 20 owners.

 

• Name

The name should end with '& Co.' and must be registered with the 'registrar of business names'.

• Formation

Before they begin trading the partners draw up a contract called a 'deed of partnership'.  It sets out how profits are shared, what each partners role is, how the partnership should be run, salaries and so on.  The partnership must register with the revenue for relevant taxes.

• Liability

Unlimited Liability, this means if the business goes bankrupt and owes a lot of money, the partners are responsible for the debt. The partners personal assets are at risk. This is a huge risk for the entrepreneurs.

• Continuity of existence

As there are between 2-20 partners, if 1 leaves the business will still continue

• Finance

As there are more people there is more capital available.  They are more partners to invest their own savings and bank are more likely to provide loans as they are more people to pay the loan back.

• Accounts

It is a confidential business and the financial accounts do not need to be published. Only the sole trader has access to the accounts.

• Profits

The profits will be shared in accordance with the 'deeds of partnership'.

• Control

Partners share control in accordance with the deeds of partnership

• Termination

Decisions must be shared in a partnership, any decisions take time and discussion.  There should be a clause for ending the business in the 'deeds of partnership'.

• Examples

Solicitors

 

Doctors

 

Accountants

 

 

Advantages

• Confidential accounts
• Easy to form (not as easy as sole trader)
• More finance available than sole trader
• More ideas than sole trader

Disadvantages

• Unlimited liability
• Profits are shared
• Decisions take longer
• There may be disputes

 

Exam Papers

1. 2013 Q2 a

2. 'Contrast' a Sole Trader and a Partnership as types of Business Organisations.  20 marks

 Private Limited Company (LTD)

 

Definition

A company owned by between 1 and 50 shareholders.

• Name

The name must end with LTD

• Formation

The rules for forming a LTD are set out in the Companies Act, 1990.
Step 1 Prepare the following documentation, memorandum of association, the articles of association, form A1. (see book page 363 -365 for more on each document)
Step 2 Send all documents to the Registrar of Companies at the Companies Registration Office.
Step 3 Receive a Certificate of Incorporation from the Companies Registration Office.  This is the birth certificate of the company
Step 4 Register with the revenue for Corporation tax,VAT, PAYE
Step 5 Hold the first meeting, called its Statutory Meeting.  At this meeting the Board of Directors are appointed. (see book page 367 for more on the board)

The company is now a corporate body and can begin trading

• Liability

Limited Liability, shareholders are not personally liable for paying back the company loans.  In the event of financial difficulties all the shareholders lose is the amount invested

• Continuity of existence

As there are between 1-50 shareholders, there must be a minimum of 2 directors,  if 1 leaves the business will still continue.

• Finance

A company can raise equity finance by selling shares.  They sell the shares to private shareholders.

• Accounts

The accounts must be audited (verified by an accountant) every year.  The company must publish its financial accounts each year.  Customers, competitors, employees and the general public can see the financial position of a company.

• Profits

The profits will be shared between the shareholders.  At the AGM each year it's decided what the shareholders dividend will be.  This is in a ratio of money invested not effort put into the company.  LTD pay less tax on their profits as corporation tax is a low rate of tax

• Control

The company is controlled by the shareholders.  The more shares they own the more control they have. 

• Termination

There are numerous people involved in a company, including, Shareholders, Board of Directors, CEO.  Decision to terminate would be discussed at an AGM or an EGM and would require a majority vote.

 

 Examples

 

Advantages

• Limited Liability
• Easier to raise finance
• Continuity of existence
• Lower tax rates for corporation tax
• Decisions discussed and shared at AGM

Disadvantages

• Publish accounts
• Difficult to form
• Profits shared
• Lots of legal requirements

Exam Questions

1. 2013 SQ1
2. 2004 Q2 b
3. 2011 Q2 b
4. 2011 Q2b (notes and book p362 - 363)
5. Read book p364 -365 and answer the following question:

Explain and name 5 items in each of the following documents:
i. Memorandum of Association
ii.Articles of Association
iii.Form A1

 

 Public Limited Company (PLC)

 

Definition

A company owned by at least 7 shareholders with no maximum amount of shareholders.

• Name

The name must end with PLC

• Formation

The rules for forming a LTD are set out in the Companies Act, 1990.
Step 1 Prepare the following documentation, memorandum of association, the articles of association, form A1. (see book page 363 -365 for more on each document)
Step 2 Send all documents to the Registrar of Companies at the Companies Registration Office.
Step 3 Receive a Certificate of Incorporation from the Companies Registration Office. This is the birth certificate of the company
Step 4 Register with the revenue for Corporation tax,VAT, PAYE
Step 5 Hold the first meeting, called its Statutory Meeting. At this meeting the Board of Directors are appointed. (see book page 367 for more on the board)

The company is now a corporate body and can begin trading.

• Liability

Limited Liability, shareholders are not personally liable for paying back the company loans. In the event of financial difficulties all the shareholders lose is the amount invested

• Continuity of existence

As there are a minimum of 7 shareholders the business will continue to existence if 1 shareholder sells their shares.

• Finance

A company can raise equity finance by selling shares. They sell the shares to the public on the stock exchange.  It is expensive to sell shares this way, the company must put together brochures for the shareholders detailing the companies history.  Lawyers and stockbrokers are required to handle share sales.  PLC have good credit ratings and it is also easier for them to borrow from financial institutes.

• Accounts

The accounts must be audited (verified by an accountant) every year. The company must publish its financial accounts each year. Customers, competitors, employees and the general public can see the financial position of a company.

• Profits

The profits will be shared between the shareholders. At the AGM each year it's decided what the shareholders dividend will be. This is in a ratio of money invested not effort put into the company.  PLC pay less tax on their profits as corporation tax is a low rate of tax

• Control

The company is controlled by the shareholders.  The more shares they own the more control they have. 

• Termination

There are numerous people involved in a company, including, Shareholders, Board of Directors, CEO. Decision to terminate would be discussed at an AGM or an EGM and would require a majority vote.

Examples

 

 Advantages

• Easy to raise finance
• Limited liability
• Lower tax rates
• A lot of attention / publicity

Disadvantages

• Difficult to form
• Publish their accounts
• Expensive to sell shares
• No control of ownership with public sales of shares

 

Exam questions

1. Explain the opportunities and challenges as a Public Limited Company as a form of business.  20 marks

 

Co-operatives

Co-op

 

 

 

Definition

Set up by a group of people, who come together and establish an enterprise with the aim of helping (co-operating) with one another

• Name

 The name should end in 'co-op'

• Formation

There must be at least 7 owners to form a co-op and no upper limit.  Forming a co-op is complicated.
The owners apply to the register of friendly societies for permission to set up the co-op by submitting a copy of the rules they intend to use to run the business.  If the registrar is satisfied with the application, she issues a certificate of registration to them.

• Liability

Limited Liability, shareholders are not personally liable for paying back the company loans. In the event of financial difficulties all the shareholders lose is the amount invested

• Continuity of existence

As there are a minimum of 7 founding members, if one member leaves the co-op will continue to exist

• Finance

A co-op can sell shares but not publicly or on the stock exchange.  As each member has equal say in a co-op (irrelevant of shares held) there is less incentive for members to contribute more capital to the co-op.

• Accounts

 The accounts must be audited (verified by an accountant) every year. The co-op must publish its financial accounts each year. Customers, competitors, employees and the general public can see the financial position of a company.

• Profits

All the profits are shared among the members, the better the co-op does the higher the return for the members.

• Control

One member one vote.  A co-op is different to companies, it does not matter how many shares a member has, they only get 1 vote.  No one person can dominate.

• Termination

 This must be agreed by all members at the AGM or at an EGM.

Examples

 Credit unions

 

 Producer Co-op

 

Advantages

• Limited liability
• No one person can dominate control
• Continuity of existence
• Incentive to make profit as all profit is shared to members

Disadvantages

• Difficult to form
• Profits are shared
• Publish accounts
• No incentive to buy shares

1. Exam papers 2012 Q2 a

Franchise

 

Definition

A business where one person (franchiser) sells the right to use their name, idea or business to another entrepreneur (franchisees), who sets up a replica of the business

• Name

 The franchisee pays the franchiser a fee to trade under their name.

Mary Smyth paid Supervalu a fee to set up Supervalu in Raheny.  She must trade under the name Supervalu.

• Formation

Setting up a franchise is costly due to the large fee to open up the franchise.  The franchisee must sign a contract to obey the rules and conditions laid down by the franchiser.  This is to ensure the reputation of the business is safeguarded.

Mary Smyth paid Supervalu a fee and signed a contract to obey the rules set out by supervalu

• Liability

Limited Liability, shareholders are not personally liable for paying back the company loans. In the event of financial difficulties all the shareholders lose is the amount invested

Mary Smyth's personal assets are safe if the business got into financial bother.

• Continuity of existence

As there are numerous franchises this ensures the business existence

If Mary Smyth closed down her Supervalu franchise, there would still be many others.

• Finance

A franchise is an established business, this reduces the risk of failure , which in turn makes getting finance easier.  Banks are more likely to lend money to a well known business.

As Supervalu is a well known brand Mary Smyth found it easy to gain a bank loan

• Accounts

The accounts must be audited (verified by an accountant) every year. The co-op must publish its financial accounts each year. Customers, competitors, employees and the general public can see the financial position of a company.

• Profits

The franchisee must pay the franchiser an annual fee from the profits.  However, because of the size of franchises and head office buying stock the franchise will avail of substantial economies of scale.  The franchise also benefit from national advertising, which reduce marketing costs.  Lower costs give the franchise higher profits.

Mary Smyth buys Supervalu branded goods from head office who buy for all stores.  In this way Mary Smyth makes huge savings

• Control

The franchiser imposes restrictions and conditions on the running of the business.  This leave the franchisee with little control in their own business.  The franchisee is under a lot of pressure to meet the very high standards of the franchiser.

Mary Smyth must have Supervalu name at front of the store, she must stock Supervalu branded goods, she must use Supervalu shopping bags etc

• Termination

 The franchisee can not stop trading without permission from the franchiser

Mary Smyth must get permission from Supervalu before selling her shop on

Examples

 

Advantages

• Continuity of existence
• Recognised brand name
• Reduced risk
• Economies of scales
• Major advertising campaigns
• Limited liability

Disadvantages

• Cost to set up
• Pay franchiser from profits
• Control is limited
• Publish accounts

1. 2009 Q2 a

Business / Strategic Alliance

Joint Venture



Definition

An arrangement where two business agree to co-operate with each other on a single project.

• Name

 Both businesses maintain their own names but may come up with a name for the project.

Swatch and Mercedes came together to create the SMART car, both businesses continued trading under their own names.

• Formation

This is a voluntary / temporary arrangement so it is easy to form.  It opens new markets for both firms.

The Independent and the Institute of Education worked together on Exam Brief.  This was a voluntary agreement and gave The Independent access to the student market and The Institute advertising in a national newspaper.

• Liability

Limited Liability, shareholders are not personally liable for paying back the company loans. In the event of financial difficulties all the shareholders lose is the amount invested

• Continuity of existence

As it is short term, when the project ends the alliance ends.

When the Nokia Lumia comes to decline in its life cycle the alliance with Nokia and Microsoft will end.

• Finance

Both established firms provide money for the alliance to work.

Swatch and Mercedes are very successful businesses and when coming together to create the SMART car they both would have invested into it.

• Accounts

The accounts must be audited (verified by an accountant) every year. The co-op must publish its financial accounts each year. Customers, competitors, employees and the general public can see the financial position of a company.

• Profits

All money made is shared between the 2 businesses in the alliance

• Control

Control should be shared, however if one business tries to dominate and takeover, this may result in conflict.

• Termination

 This is a voluntary / temporary arrangement so it is easy to end.

Once the Exam Brief supplement is completed the alliance between The Independent and The Institute of Education ends.

Examples

Smart Car

Swatch and Mercedes

Nokia Lumia
Nokia and Microsoft

Exam Brief
Irish Times and The Institute of Education

 

Advantages

• Easy to form
• Finance from both businesses
• Entry to a new market
• Lots of skills

Disadvantages

• One party may dominate control
• Profits need to shared
• There may be conflict
• Trade secrets may need to be shared

Exam Question

1. 2003 Q2 a

 

State Owned Enterprise / State Sponsored Bodies/ Semi-State Bodies

 

 

Definition

Businesses owned by the government on behalf of the people of Ireland.

• Name

 There are no rules governing names

• Formation

State owned business are formed to provide essential services to all people in all parts of Ireland.

• Liability

State Owned business are operated as companies (government being the main shareholder), they have limited liability.

• Continuity of existence

As they are run by the government, who are willing to run at a loss they will continue to exist.

• Finance

Many state owned enterprises have large loan because their owners, the government, wont or cant give them the money they need to expand.

• Accounts

The accounts must be audited (verified by an accountant) every year. The co-op must publish its financial accounts each year. Customers, competitors, employees and the general public can see the financial position of a state owned company.

• Profits

Not all state owned business are commercial.  Non Commercial business such as Failte Ireland dont aim to make profit but to promote our country.
Many commercial state owned companies make a loss (CIE).  The government have to give them subsidies to keep them in operation.  Sate owned business that do make a profit (ESB)pay a dividend to the government every year.  This is a source of income for the government.

• Control

The board of directors control the business. The board are appointed by the government.  The directors may therefore be appointed because of their support for a particular cpolitical party rather than business expetise.  The government often interfere in the running of state owned business.

• Termination

When a state owned business is sold it is known as 'privitisation' (Telecom Eirean became Eircom)

Examples

 

 

 

 

 

Advantages

• Vital services provided
• Create employment
• Promote our country
• Some provide income to government

Disadvantages

• Many state owned business make a loss
• Board of directors may lack business skills
• Require subsidies and loans to survive
• Accounts are published

Privitisation

Definition

• Sale of a state owned business to a private enterprise or comany.

The state owned firm may be sold to the general public on the stock exchange,or, it could be sold to another business.

• Source of Capital income for the state

Selling an aseet can bring in a large amount of money to the government that can be used on capital expenditure, such as schools and hospitals.

 

Example

 

 

In 1999 Telecom Eireann was privitised and became Eircom PLC.  It was floated on the stock exchange and small first time investors were encouraged to buy shares

 

 

Advantages of privitisation

• Source of income for the state
• State no longer has the financial burden of the business
• Encourages enterprise
• The business can grow and expand with experienced management

Disadvantages of privitisation

• Job losses
• Decisions made for the good of the business not the country
• Government lose their dividend
• Higher prices for consumers

Exam Papers

1. 2008 Q2 c

2. 2006 SQ 5

 

Indigenous Firms

• A business that is set up in the home country of the entrepreneur

An Indigenous firm in Ireland is set up by an Irish entrepreneur and their main place of business is Ireland.

 

• The government help indigenous firm

Indigenous firms have a positive effect on the balance of trade and payments and for this reason the government assist them through organisations such as Enterprise Ireland.  Enterprise Ireland provide mentors, advice and grants for expansion for indigenous firms

 

 

Examples

 

Advantages

• Create jobs
• Positive effect on the balance of trade and payments
• Business inspires business
• They are loyal

Exam Papers

1. 2010 SQ1

2.2003 SQ 8

 

 

Transnational / Multinational Companies

A company with headquaters in one country and futher branches around the world

 





 

Name

Transnational Companies are known as the business giants.  They are Public Limited Companies and the name must end with PLC

 

• Liability

Limited Liability, shareholders are not personally liable for paying back the company loans. In the event of financial difficulties all the shareholders lose is the amount invested

• Continuity of existence

As TNC's are all over the world they will continue to exist even if there is a decline in one country they operate

• Finance

TNC's receive grants from the government to locate here.  Some abuse their power to avail of further grants to stay here.

 

• Profits

TNC make huge profits and pay Corporation tax on these profits to the Irish Government.  They often repatriate most of the profits they make back to their country of origin

• Control

The company is controlled by the shareholders. The more shares they own the more control they have.

• Termination

There are numerous people involved in a company, including, Shareholders, Board of Directors, CEO. Decision to terminate would be discussed at an AGM or an EGM and would require a majority vote.