Business Organizations Grade 8

Business organisation is a person or a group of people organized to produce goods and services to accomplish a specific goal or some specific goals (It can be profit motive or welfare motive). In addition to the entrepreneur, the production of goods and services requires the factors of production land, labour and capital. These resources need to be organized for production to satisfy our wants. It is the responsibility of the entrepreneur to organize resources in a business or a firm. Business organizations are classified into public sector and private sector.

Private sector
The private sector consists of business activities and organizations owned, financed and run by private individuals. The main objective of private sector is to maximize profit.

Public sector
The public sector consists of business activities and organizations owned, financed and run by government. The main objective of public sector is to maximize public welfare.
Sole trade

Partnership Limited Companies Private sector Co-operatives

Private Limited Companies Public Limited Companies Worker Coopratives Consumer Co-operativies

Business organizations

Multinational Companies

Public Corporation Public sector Municipal Enterprises

Government may own shares of some public limited companies.

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Firm
A firm is a unit of management. It is an organization which trades under a particular name, and which controls the way in which land, labour and capital are employed.

Industry
An industry consists of a group of firms producing similar goods and services.

Sole Trade
Sole trade is defined as a business organization which is owned and controlled by only one person. A sole trader may employ more than one employee. It is the oldest and the simplest form of business organisation. Sole trade is common in retailing, farming, personal services (like hair dressing), craft works and repair worksetc.

Features of sole trade

1) Formation It is relatively easy and inexpensive to establish a sole trade business. There are few legal formalities required to set up a sole trade business. 2) Capital The capital of a sole trade business is contributed by the sole trader himself. Hence, sole trader can enjoy small capital. He may raise capital by borrowing from his family members, friends or from the banketc. 3) Ownership A sole proprietorship is owned by the sole proprietor as he is the single owner. 4) Management and control The sole trade business is managed and controlled by the sole trader himself. 5) Liability for debts A sole trader has unlimited liability. If the business goes bankrupt, the owner is personally liable for the debts of the firm. 6) Profit or loss The profit of a sole trade business is gained by the sole trader himself. Similarly the loss of the business is also borne by the sole trader.

Advantages of sole trade

1. Easy formation A sole trade business can be established easily as there are no or few legal formalities to undergo. 2. Personal contact The owner of the business has personal contact with customers and staffs. The employees and the consumers can complain directly regarding their problems and negotiate to get a quick solution. 3. Prompt decisions The sole trader does not have to ask any ones permission before finalizing the decisions regarding the business matters. Hence, he can go for quick decisions. 4. A single profit gainer The sole trader himself enjoys all the profits as there is nobody to share the profit with. 5. Easy to maintain business secrets The secrets of the business can be kept within the business as there is a single owner. Moreover, sole trade can maintain its privacy and secrecy. 6. Flexibility As sole trade operates in a narrow scale and it is easy for a sole trader to bring changes to his business. If the present business activity is not successful, he can shift to a different business activity. 2|LH.A.S/ Econ/ Gr8/2011

Disadvantages of sole trade

1) Sole trader lacks capital It is very difficult to raise capital as bank loans are expensive and banks are reluctant to lend money to small scale businesses. In addition to that, there is a single person to arrange the necessary finance. 2) Disadvantage of unlimited liability It means that the sole trader is liable to lose everything in his personal possessions in order to pay off the debts at any event of bankruptcy. 3) Greater risk The sole trader must bear the losses of the business. He is directly responsible for the losses and risks of the business. There is a single owner to bear all risks and losses. 4) Lack of continuity Anything happens to the sole proprietor may interrupt or cease the functioning of the business. Death, physical injury, retirement or bankruptcyetc of the sole trader may bring the business to an end.

Partnership
Partnership is defined as a business organization owned and controlled by two to twenty partners with a view to make profit. But, the number of partners can exceed in professional partnership. The business relationship between the partners, details of the business and terms & conditions of running the business are stated in the partnership deed. Partnership deed is a written agreement between partners. The two types of partnership are ordinary partnership and limited partnership.

Information box Partnership deed (partnership deed)

An agreement made between the partners in writing is called as partnership deed. It contains the rights and duties of partners. Contents of a partnership deed Name of the firm Name and address of all the partners in the business Place and nature of the business along with the duration of the partnership Amount of capital contributed by each partner The distribution of profit and losses The provision of interest on capital and drawing of partnership Method of admission and retirement of partners and dissolution of partners Salaries of partners Procedure of maintaining accounts Methods of settlement of disputes among the partners.

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Features of partnership
1) Formation It is easy and inexpensive to establish a partnership. There are few legal formalities to undergo. A partnership is formed by a mutual agreement between partners. But, limited partnership should be registered with the registrar of companies. 2) Capital The capital of partnership is contributed by Partners. Capital contribution is done according to the partnership deed. 3) Ownership Partnership is owned by partners. There is a fixed limit of owners from 2 to 20 partners except in professional partnership. In professional partnership, the maximum number of partners can exceed. 4) Management and control A Partnership business is managed and controlled by the active partners. In ordinary partnership all partners are active partners. These partners may be awarded with salaries in addition to the profit share. The salaries paid should be stated in partnership agreement. 5) Liability for debts Ordinary partnership has unlimited liability while the limited partnership has limited liability. But in limited partnership also there must be at least one partner with unlimited liability. 6) Profit or loss The profit or loss of the partnership is shared between partners equally or according to an agreed ratio.

Advantages of partnership
1) Easy formation Partnership is generally easy to establish since, there are fewer legal formalities compare to limited companies. 2) Larger capital than sole trade Partnership enjoys a larger capital than the sole trade. There are more owners to contribute capital. Financial institutions are also more willing to lend money to partnership compare to sole trade. The advantage of Limited liability of limited partnership can even attract more capital. 3) Easy to manage As there are more partners to manage the business, management of partnership is easier and more efficient compare to sole trade. 4) Minimum risk for individual partners Risks and losses of the business are shared among the partners. Hence, this minimizes the risk for individual partners. 5) Better decisions Discussion and negotiation between partners regarding the business matters lead for better decisions.

Disadvantages of partnership
1) Disadvantage of unlimited liability In ordinary partnership, partners are liable for the debts of the firm. In limited partnership also, at least one partner should be personally liable for the business debts. 2) Lack of continuity Anything happens to a partners or partners will affect the business. Death, insolvency or retirementetc of a partner or partners could affect the continuity of the business. 3) Lack of harmony Disputes and disagreements between partners may create conflicts between partners and affect the success of the business. 4) No separate Legal entity Since, both ordinary partnership and limited partnership have no separate legal existence, any acts of a partner or partners will affect the business. 5) Difficult to maintain business secrets The discussions and negotiations between more owners may lead for the exposure of business secrets. 4|LH.A.S/ Econ/ Gr8/2011

Information box Differences between ordinary partnership (general partnership) and limited partnership
Although both ordinary partnership and limited partnership have got many similarities in common there are few differences as well. Ordinary Partnership Formation Formation requires a partnership deed and should be registered with relevant government department or authority. All partners have unlimited liability and all of them are liable for the debts of the business personally. Limited Partnership Formation requires a partnership deed and partnership should be registered with registrar of companies. There should be at least one partner (general partner) with unlimited liability and there should be at least one partner (limited partner) with limited liability. General partners are personally liable for the debts of the business while limited partners are not personally liable for the debts of the business. The business is managed by general partners.

Liability for debts

Management

All partners should take an active role in the management of the business.

Do you know? Active partners are the partners who contribute the capital and take part in the management of partnership business. Sleeping partners are the partners who contribute the capital but, do not take part in the management of partnership business.

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Limited companies (Joint stock companies)

Limited companies are often described as joint stock companies, and they are far more important than any other form of business organization. The term joint stock refers to the fact that a number of people have contributed to a common stock of capital which is to be used for setting up and running of the company. This stock of capital is divided into small units called shares, and people who buy these shares are shareholders. Shareholders are the owners of the company. According to United Kingdoms companies Act, the minimum number of shareholders of limited company is two and there is no maximum limit. Profits are divided among the shareholders according to the number and types of shares they hold. The profits paid to shareholders are known as dividends. The word limited is included with names of limited companies because the liability of the owners is strictly limited to the value of the shares he or she has agreed to buy. Once the share holders have fully paid for their shares, they have no further liability for the companys debt. The two types of limited companies are private limited companies (private companies) and public limited companies (public companies).

Formation of limited companies

All limited companies must be registered with the registrar of companies. The promoters or founders with the help of a solicitor must complete and submit three documents to the registrar with required registration fees. The registrar is a government official responsible for the registration of companies. The three documents are memorandum of association, articles of association and statutory declaration. If the various documents submitted by the promoters of the company are acceptable to the registrar, he will issue certificate of incorporation which gives the company a separate legal identity. It is also known as the birth certificate of the company. Private limited company can start its business as soon as they get this document. But, public limited companies need to submit a copy of prospectus and should guarantee the minimum share capital of 50000. Prospectus is an invitation to the general public to buy the shares of the company and which should be published. If the registrar approves the prospectus, certificate of trading will be issued. A public limited company can only commence its business activities after receiving this certificate.

Information box
Memorandum of Association It is a document which regulates a firm's external activities. This contains companys name, the address of registered office, objectives of company, amount of capital company wishes to raise, names of the people who have agreed to buy shares and number of shares by each shareholderetc. 6|LH.A.S/ Econ/ Gr8/2011 Articles of Association The internal rule book which contains, rights of share holders, procedure for electing board of directors, rights and duties of board of directors, borrowing power of company, procedure for calling annual general meeting, employer employee relationshipetc. Statutory declaration It is a signed statement from each director of limited companies, signifying willingness to serve.

Private Limited Company

Private limited company is defined as a business organization with limited liability and its shares are not freely transferable. Most of the private limited companies are relatively small and many of them being owned by families or a group of friends.

Features of private limited company

1) The name of these companies must end with the word limited (ltd) and it is optional to add private (pvt or pte) before the term limited. 2) Private limited companies have limited liability. Hence, the owners (shareholders) are not personally liable for the debts of the business. 3) A private company is a separate legal entity as the business is considered a separate legal artificial person by law. 4) These companies cannot invite general public to buy their shares. 5) Shares in private companies are not freely transferable. The shares can only be sold with the consent of existing shareholders or sometimes with the approval of board of directors (BODs). 6) These companies are managed and controlled by board of directors elected by shareholders. 7) Profits of the business are shared between shareholders.

Advantages of private limited company

1) Formation of private limited company is easier and cheaper than Public Limited Company as they can start the business from the date they receive Certificate of Incorporation. 2) These companies can enjoy more capital than sole trade and partnership as there can be more owners. 3) The owners (share holders) have limited liability. The shareholders are only liable for debts to the amount they invested. 4) These companies have a separate legal identity. It gives grater continuity to the business. The business carries on even if a major shareholder dies or sells her or his shares. 5) Unlike public limited companies, a minimum share capital is not required to setup the business.

Disadvantages of private limited company

1) Difficult to raise capital as the company cannot issue shares to general public. This hinders the efforts of the business to expand and diversify. 2) The shares of these companies are not freely transferable. The share ownership can only be transferred with the consent of existing shareholders. 3) It is difficult to maintain privacy and secrecy as they have to file the copy of their accounts annually. 4) These companies must be registered and formation is more expensive and more difficult compare to sole trade and partnership.

Do you know? Transferability of shares explains the possibility of transferring the ownership of a business possessed by a person. It can be sold, transferred or given away to another person. The shares of private limited companies are transferrable but not freely transferrable. The shares of public limited companies are freely transferrable.

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Public Limited Companies

A public limited company is defined as a business organization with limited liability and which can sell shares to the general public. Public Limited Companies are the largest and one of the most important types of business organizations in private sector.

Features of public limited company

1) The name of a public company must end with Public Limited Companies (plc or PLC). 2) Public limited companies also have limited liability. Hence, the owners (shareholders) are not personally liable for the debts of the business. 3) A public company is also a separate legal entity as the business is considered a separate legal artificial person by law. 4) There is a minimum required share capital for public limited companies. According to United Kingdoms Companies Act, it is 50000. 5) These companies can issue shares to general public. 6) Shares in public companies are freely transferable. 7) These companies are also managed and controlled by board of directors (BODs) elected by shareholders. 8) Profits of the business are shared between shareholders.

Advantages of public limited company

1) These companies can enjoy more capital compare to private companies as shares can be sold to general public. 2) The shares of these companies are freely transferable. 3) The owners (share holders) have limited liability. The shareholders are only liable for debts to the amount they invested. 4) These companies have a separate legal identity. It gives greater continuity. 5) These companies are larger in size and can enjoy the advantages of economies of scale.

Disadvantages of public limited company

1) The formation is more complex and expensive compare to private companies as public companies have to bear some more costs in the formation process as well as they get to wait for certificate of trading. 2) It is difficult to maintain privacy and secrecy as they have to publish their accounts annually. 3) Public limited companies grow too large and make those businesses difficult to manage. This gives the disadvantages of diseconomies of scale. 4) Separation of ownership and control is another disadvantage of public companies. Shareholders are the owners but, the business is managed and controlled by very few shareholders elected as board of directors. Do you know? Economies of scale refer to the cost advantages that a business obtains due to its expansion. There are factors that cause a producers average cost per unit to fall as the scale of output is increased. Diseconomies of scale occur when a business grows so large that the costs per unit increase. Diseconomies of scale occur for several reasons, but mainly as a result of the difficulties of managing a larger workforce. 8|LH.A.S/ Econ/ Gr8/2011

Capital of Limited Companies

The capital of limited companies mainly includes shares and debentures. In addition to shares and debentures, a limited company can enjoy various sources to raise funds for investment. Some of these sources include, Borrowing money from financial institutions. Using retained profit from the previous years.

Shares
Shares of Limited Companies are divided into preference shares and ordinary shares. Ordinary shares They are the risk bearing shareholders as they have no guaranteed income and they are at the end of the queue for a share in the profits. But during a very high profit, they can enjoy high dividend. The percentage of dividend paid varies according to the profit of the business. Ordinary share holders normally have voting rights. They are eligible to become the Board of Directors. Preference shares The holders of these shares get preferential treatment and this type of shares carries a fixed rate of dividend. They dont normally have the voting right and cannot take part in the management. Types of preference shares a) Cumulative preference share: - It carries a right to any arrears of dividend which have accumulated during a year when the company did not earn enough profit to pay the dividend. b) Participating preference share: - It not only carries the right to a fixed rate of dividend but also additional payments out of profits when the company has a particularly good year.

Debentures
It is a loan capital to limited companies. A person who owns a debenture is a debenture holder. A debenture holder is not an owner. They get a fixed rate of interest irrespective of the success of the business. Secured debentures: - If the company defaults on its payments to them, the debenture holders can seize certain assets of the company and sell them in order to obtain the money owed to them. Such debentures are described as secured debentures.

Take-over and holding company

A company is a legal person and can therefore take over the ownership of another company. Since the owners of a company are the shareholders, a company can be purchased by another company by buying more than 50% of the shares. A company may be formed for the sole purpose of holding shares in other companies. Such a company is known as a holding company.

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Multinational Companies
A Multinational Company or corporation is defined as a firm which operates in more than one country, although its headquarters is located in one particular country. Multinational Company (MNC) is also known as Transnational Corporation (TNC) or Multinational Enterprise (MNE). It is also referred as International Corporation. There are numerous examples of such organizations, like Ford, Toyota, Shell, British Petroleum, Dell, Microsoft, Coca Cola and McDonaldsetc. Advantages of being a multinational company A multinational can enjoy and secure a greater market size as they have branches in different countries. It can reduce transport costs by operating branches in target countries rather than exporting its products to those countries. Exporting goods require a high cost on transport. It can enjoy cheap labour and reduce costs by investing in countries with low wage rates. A multinational company can secure the supply of raw materials and obtain cheap raw materials by investing in countries, rich in the required resources. It can get rid off the restrictions on international trade such as custom duties as they produce in the host countries similar to the domestic firms. A multinational can enjoy economies of scale by expanding and diversifying globally and this enable the firm to spend highly on Research& Development (R&D). Advantages of multinational companies to host country Multinational companies provide employment opportunities to host economies and foster economic growth. These firms bring new technology and efficient management approaches into the host nations. Thus, the domestic firms, labour force and consumers can benefit. The multinationals provide quality products to domestic consumers at convenient prices. The presence of multinationals give wide variety of products to domestic consumers as the domestic population dont have to only depend on domestic producers. These firms help to improve the efficiency of the labour force by providing training, education and valuable experiences to their employees from the host countries. These companies provide revenue to the government as the government impose tax on their profits. These firms assist in the infrastructure development of the host country. Disadvantages of multinational companies to host country Multinationals move their factories to wherever it is profitable to produce. If one country is not profitable, they may shift to another country. Sometimes, the governments of host countries fail to collect the tax revenue from strong established multinational companies. Some large multinationals are efficient enough to drive out the small domestic competitors. Thus, creating so many economic problems like unemployment...etc. These foreign firms may overexploit the resources of the host country and cause environmental problems. Some Multinational Companies may interfere with the government decisions of the host country. These companies take their profits back to their home countries. This leads for outflow of foreign currency and may worsen the exchange rate. 10 | L H . A . S / E c o n / G r 8 / 2 0 1 1

Co-operatives
A co-operative is defined as a firm which exists for the mutual benefits of its members in addition to the profit motive. A co-operative is jointly owned by its members and managed collectively by the members or by the managers elected by the members. Co-operatives can bring a number of benefits to members including the benefit of size and give important decision making power to those who involved. A co-operative is a legal entity and the members have limited liability. There are two main types of co-operative society, worker co-operatives (producer co-operatives) and consumer co-operatives (retail co-operatives).

Worker co-operatives (producer co-operatives)

A worker co-operative is a business owned and controlled by those who work in it. The workers provide, or borrow, the money to set up the business. These co-operatives can enjoy some advantages like securing a market and buying required raw materials at cheaper prices by placing bulk orders. These enterprises also have many disadvantages. The management is inefficient as the workers lack managerial experiences and they elect popular mangers rather than efficient managers. These firms also lack capital and moreover workers distribute all the profit rather than expanding the business. The following are the features of worker co-operatives. The members of the worker co-operatives are usually the workers who work in it. The profits of the business are distributed between the members on an agreed basis. The business is managed either collectively by the members or by the managers elected by the members democratically.

Consumer cooperatives (retail co-operatives)

The consumer co-operatives are established to help lower and middle class people and protect these sections from the clutches of profit-hungry businessman. A consumer co-operative buys goods in bulk quantities to provide goods at convenient prices to its members. The members have an equal voice in the control of the organization. As the firms are purchasing goods in bulk quantities from the producers, they are in a better position to supply goods at competitive prices to its members. The following are the features of consumer co-operatives. The membership is open to everyone. Anyone who wants to become a member can buy a share or shares from the co-operatives. The minimum share a person can hold is 1 and maximum is 5000. The profit of the business is distributed among the members. The dividend is paid in proportion to purchases made by the members. It practices democratic management. It has the principle of one man one vote. It makes bulk purchases directly from the producers and sells these goods to its members on retail basis.

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Public corporations
A public corporation is defined as a business organization owned and controlled by the government which is designed to act in the public interest. These firms also produce and sell goods and services. Public corporations are also known as nationalized industries or state-owned enterprises. The chairman and board of directors of a public corporation are appointed by government. The main aim of public corporations is maximizing public welfare. In most countries, post office, electricity, water supply, rail network, public transport...etc are owned and run by public corporations.

Features of public corporations

It is controlled by a government minister. It has board of directors which is responsible for the day to day running of the corporation. It has a separate legal identity from the government. This means that legal actions can be taken against the business, but not against the government. The government contributes the capital of public corporations and arrange necessary finance for the expansion. It must publish annual report and financial accounts. Public corporations may be allowed by central government to retain all or some of the profits made to plough back into improving their services. The main objective is to operate in the public interest.

Municipal enterprises
Local authorities are also involved in running trading enterprises. Probably the most familiar of these are the local bus services operated by local authorities in the larger towns. But facilities such as swimming baths, golf courses, restaurants, seaside piers etc are examples of the services produced and sold by local authorities.

Information box A comparison of a Public Corporation and Public Limited Company

Sector Ownership Capital Management Public Corporation It belongs to public sector. It is owned by government. Capital is contributed by government. The business is managed by board of directors appointed by Government. The main motive the business is maximizing public welfare. Public Limited Company It belongs to private sector. It is owned by the Shareholders. Capital is contributed by shareholders. The business is managed by board of directors elected by shareholders. The main motive of the business is maximizing profit.

Aim

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Nationalization
Nationalization is defined as the process of transferring a private owned asset, enterprise or industry to public ownership. There are so many arguments for and against nationalization.

Arguments for nationalization

To avoid wasteful competition Firms in the private sector compete with each other and they use various techniques and tactics to compete. This leads for the wastage of resources. But the government owned enterprises operate according to public interest. Economies of scale If the market for a good or a service is small, allowing private competition and private firms to operate may not benefit any of the firms. In this case, a nationalized firm can operate as a monopoly and achieve economies of scale. To help to manage the economy The ownership and control of major industries gives the government a powerful instrument for influencing the performance of the economy and regulating the economic fluctuations. Strategic necessities Some industries are essential for the National well-being and security. Production of arms and ammunition, atomic energy, public utility services like railways, electricity, oil and natural gas, waterworks and aviation...etc, are some such industries. In these industries public interest should be preferred before profit. Political arguments Nationalization is seen by many people as an important part of a policy for reducing inequalities of income and wealth. They believe that industries should belong to, and be run for the benefit of all the people.

Arguments against nationalization

It does not encourage efficiency i. Lack of competition Absence of competition will lead for the inefficiency of firms. Lack of competition reduces consumers choice and the quality of the goods and services available. ii. No fear of bankruptcy Nationalized industries have no fear of going bankrupt, because the government is there to cover any losses they may incur. It is difficult to measure the efficiency of nationalized industries A huge profit earned or a large loss incurred by a Nationalised Enterprise may not be a clear indication of its performance. In case of profit, it can be argued that it has the monopoly power and on the occasion of loss, the welfare motive can be used as an excuse. Bureaucratic interferences The pressure and influence from the government officials may affect the performance of the public owned enterprises. Increased corruption It is often argued that government ownership on production of goods and services can lead for corruption in many ways. The strong government officials may misuse their power.

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Privatization
Privatization is defined as the process of transferring a public owned asset, enterprise or industry to private ownership. Privatisation is the opposite of nationalization.

Arguments for privatization

Competition leads for efficiency Privatization increases competition and it improves the quality of the product as well as reduces the prices. This also encourages innovations. Hence, the performance of the whole economy increases. It Increases variety of products The presence of many competitive firms provides variety of products to consumers. It reduces bureaucratic interferences The privatisation of firms and industries leaves less chances for the bureaucrats to influence them. Hence, the performance of firms and industries increases. It Increases revenue to the government The sale of shares to privatize a government owned enterprise increases the revenue for government.

Arguments against privatization

Creation of private monopolies The competition between firms may drive out the less efficient firms and create a private monopoly. The monopolist may abuse the monopoly power by charging higher prices. Lack of provision of public goods and merit goods The public goods and merit goods cannot be provided fairly and equally by the private sector with its profit motive. Hence, the government role is important in the economy to provide these goods. It increases social costs The private firms only work to maximise their profits. They often ignore the socials cost like pollution and congestion...etc. Competition leads for wastage of resources The competitions between firms, both price and non-price competitions lead for wastage of resources. These resources otherwise can be used for some productive purposes.

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