Grade 10

Principles of Business

Unit: The Nature of Business

Notes - Forms of Business Organisations

Private and Public Sector

A country’s economy is divided into two (2) sector:

1. The Private Sector – within this sector businesses are solely owned by private
individuals/organisations

2. The Public Sector – within this sector enterprises are owned and operated by the
government.

The aim of the private sector is to earn profit, cater to the target audience, provide
consumer goods and encourage strong competition among businesses.

The aim of the public sector is to provide goods and services, cater to the needs of the
entire population, provide essential services (healthcare, security and education) with
limited or no competition.

Forms of Business Organisations

A business/enterprise /firm/ organisation can be described according to how they are financed,
owned and controlled.

Unlimited Liability – this is when personal assets may have to be sold to repay debt

Limited liability - one is not liable to debt exceeding that of which he/she has invested/
only indebted to the amount invested

Form of Business
Sole Trader/Sole Proprietorship

This form of business is owned, financed and controlled by one person. It is the most popular
type of business globally.

Characteristics of Sole Trader

1. He or she manages the business but may have the services of family and friends.
2. He or she enjoys all the profit and bears all the risks.
3. Capital is limited since the savings of the owner fund the business
4. He or she has personal contact with the client
5. He /She performs a large variety of tasks related to the operations of the business
6. This type of business is not incorporated (not given a separate identity) and, therefore,
easy to set up
Examples: barbers, hairdressers, dressmakers, tailors, shopkeepers

Formation

There are no legal formalities involved in setting up business as a sole trader except that a trade
name must be registered and some traders must acquire special licenses. For example, the sale of
alcohol requires a license from the local magistrate, or the sale of food items requires prior
approval from the local health authority.

Legally, the business and its sole proprietor are inseparable and therefore, the owner is
responsible for all debts including taxes (income tax) and National Insurance Contribution as a
self-employed person.

Management

The sole trader manages the business personally, and this has advantages and disadvantages, as
follows:

Advantages/Benefits Disadvantages/Limitations/Drawbacks

Easy to set up Owner has unlimited liability

Limited capital is needed Difficulty raising capital

Decision making is easy Prices are sometimes higher than that of

large businesses

Personal attention is given to customers Limited business knowledge and skills

Special services can be offered to Long working hours

customers
 Profits are not shared The business sometimes die with the owner

Simple organisation chart Lack of technology

Partnership

This form of business consists of two (2) to twenty (20) persons, who pool their resources to
operate the business. The owners share the responsibility for the running of the business and any
subsequent profit or losses that may be generated. Partnerships are not legal entities in their own
right. A partnership cannot sue or be sued in its own name but instead each of the partners has to
be named.

Types of partners

Sleeping/Limited partner –do not take part in the daily operation of the business

Active partner- assist with daily operations of the business

Characteristics of Partnerships

1. The minimum number of members is two and the maximum is 20 members except in
the case of banking in which the minimum number is 10. Among professions such as
stockbrokers, stockjobbers, lawyers and accountants, membership is unlimited since
the Partnership Act prevents professionals from forming companies.

2. In the Ordinary Partnership, each partner may take an active role in the management
of the business. Each partner acts as an agent of the partnership and, therefore, the
action of one partner is binding on all partners.

3. There must be at least one ordinary partner in the limited partnership. The ordinary
partner is limited to the debts of the partnership up to his capital invested.

4. The limited partner cannot take part in the management. He or she has no power to
bind the firm.

5. Profits are shared equally or as stated in the Partnership Deed.

6. Capital is provided by the partners as agreed.

 7. The retirement or death of one partner may require the re-organization or dissolution
of the partnership.

Formation

When a number of persons want to form a partnership, a written agreement should be drawn up.
This is called – the Partnership Deed. The written agreement, although not necessary, helps to
settle disputes. In the absence of such agreements, the partnership will be governed by the
Partnership Acts.

The Partnership Deed or Articles of the Partnership sets out in writing the terms of the
partnership. The agreement entails:

● The name of the partners

● Address of partners separate from the location of the place of business
● the nature of the business and the date of its commencement
● the amount of capital put in to the business by each partner
● the arrangements for division of profits or losses/ profit sharing ratio
● the role of each partner
● the salaries, if any, to be paid to certain partners for the performance of special duties’

In the absence of a deed, the Act is enforced. It states the following

● profits and losses are shared equally;

● no salaries are paid to partners;
● no interest is paid on capital;

Management

The ordinary/active partners manage partnerships. Payment for specialised skills must be
included in the Partnership Deed.

Advantages Disadvantages

More capital is available The action of one partner will affect others

Risks are responsibilities are spread among Unlimited liability (except for the sleeping
partners partner)
 More informed decision making Decision making may be lengthy, as more
persons are involved

There can be specialization/division of

labour among partners If a partner dies or leave it has to be
reformed based on the legal agreement

Workload is shared so partners can take In the absence of a partnership deed profits
vacation have to be shared equally, even without
input

Co-operatives

This is an organisation that is owned and controlled by its members. They work together as they
have similar interest and a common objective. The co-operative society must be registered.
Shares are sold to its constituents (the community that it is serving). The principles which
govern a co-operative are as follows:

1. There is democratic control, that is, one person, one vote

2. Membership is open to its constituents
3. There is limited interest on capital investments
4. The surpluses of the co-operative societies are distributed according to the
shares/purchases of the members

Characteristics

Co-operatives share the following characteristics

1. They are voluntary non-profit making organizations engaged in retail or other financial
activities
2. They are managed and controlled by their members
3. The members are also the clients
4. Members have a common bond, for example, all are teachers or public servants or belong
to a particular community
5. There is the pooling of capital among the membership.

Types of Co-operatives

1. Financial co-operatives, for example, Credit Unions

2. Agricultural co-operatives- farmers form groups and market their produce and share
profit from sales. A record of what is produced and what is sold is kept. They pool in
 order to buy materials, tools and equipment to aid in their farming venture, this help
individual to benefit from lower prices.

3. Consumer Co-operatives involved in the retail trade;

4. Service Co-operatives
Advantages Disadvantages
The membership may not have the expertise
Members pool their resources necessary to build the organization

Members are the owners Decision-making is slow and, therefore, clients

may lose out on opportunity
There is shared decision making
All profits are shared among the members
Community bond is strengthened
Products are much lower in price since
administrative expenses are lower

Companies

A company is a business entity that has been incorporated, that is, the company has as
separate legal identity from that of the owner(s). This separate identity means that the
company can enter into contracts, make and legal claims and face any legal claims that are
made against it.

There are two types of limited companies:

(a) Private Limited Companies

(b) Public Limited Companies

A private limited company is an incorporated business organization consisting of two (2) to

fifty (50) members whose aim is to make profits. The membership is restricted to family and
friends.

Formation

Certain legal requirements must be met before a company can commence trading. Certain
documents must be submitted to the Registrar of Companies. These documents are outlined
below.

A private limited company must submit to the Registrar of companies:

(a) The Memorandum of Association

 (b) The Articles of Association
(c) Statement of Authorized, Registered or Nominal Capital

A public limited company must submit to the Registrar of companies:

(a) The Memorandum of Association

(b) The Articles of Association
(c) Statement of Authorized, Registered or Nominal Capital ;and
(d) The Prospectus

Limited Liability Companies

Memorandum of Association

This governs the company’s relationship with the outside world. It contains:

(a) the company’s name, which must contain the word LIMITED;
(b) the address of the company’s registered office;
(c) the objectives of the company;
(d) the statement that the liability of the shareholders is limited;
(e) the authorised share capital and the types of shares to be issued.

Articles of Association

These control the internal running of the company. It covers such areas as:

(a) the procedures for calling an Annual General Meeting;

(b) the rights and obligations of the Directors;
(c) the procedures governing the election of directors;
(d) a statement concerning the borrowing power of the company;
(e) the procedures dealing with payments of dividends.

Statements of Authorised, Registered or Nominal Capital

This is the amount stated in the Memorandum of Association, which is the maximum amount
which the company is authorized to issue.

Prospectus

This is an invitation to the public to buy shares in a public company. It contains detailed
information to enable investors to estimate its prospects. It is important that the public should
not be misled.
 Management

The owners manage this type of business or may appoint specialised personnel. The
membership must approve any disposal of shares and usually sales of shares restricted to the
membership.

Characteristics of Private Limited Companies

1. Capital is obtained from private individuals, financial institutions, government agencies

or retained profits

2. Limited liability shareholders have limited liability

3. The company must be registered with the Registrar of Companies

4. The word ‘limited’ must be included in the name

5. Membership is between two (2) to fifty (50) persons

6. Accounting statements must be prepared and an audit undertaken with a copy issued to
the Registrar of Companies.

Advantages and Disadvantages of Private Limited Companies

Advantages Disadvantages
A larger capital base than sole trader or Capital is limited since the membership is
partnership because the membership is larger. limited to fifty

The company has continuity and thus can The company must file its financial reports
easily obtain loans from financial institutions with the Registrar of Companies
The company has a separate legal entity from Selling of shares is restricted to the private
the ownership grouping.

Shareholders have limited liability. The

financial commitment of the shareholder does
not extend to his/her personal possessions

Public Limited Company or Joint Stock Company

Definition

A public limited company is an incorporated company, which offers shares to the public.
 Characteristics of Public Limited Company

1. There must be at least seven (7) shareholders with no limit on the maximum number of
shareholders

2. The shares are traded openly in the stock market

3. The public limited company must be incorporated

4. The company can obtain capital from shareholders equity and financial institutions

5. The company is continuous; it does not close down on the death of a shareholder

6. Greater specialisation is possible

Advantages Disadvantages

It is easier to obtain finance, as a public The legal requirements may be costly and
company is able to obtain investment from time-consuming.
many small investors as well as from large
organisations

Shareholders have limited liability, ownership The accounts have to be made public
and control are separated.

Shares can be quoted on the Stock Exchange Its large size makes the decision-making
and sold to the public. process longer

Differences of opinion may develop because

The company is able to grow and obtain the ownership and day to day administration of
economies of scale the company are divided – the shareholders are
the owners and the directors run the company.

It has a separate legal existence, therefore Control of the company may be lost if another
changes in shareholders and directors do not company or other people obtain sufficient
affect the continuity of the company. shares in the company.

Management Structure

The Board of Directors, which is elected by the shareholders at the Annual General Meeting
manages the public limited company. The Board of Directors appoints an Executive Director or
 Chief Executive Officer who heads the company and reports to the board on the operations of the
company.

Multinational Corporations

Multinational Corporations (MNC), also called transnational corporations, are a network of

firms, which operate in multiple countries but owned and controlled by a single group of
shareholders.

Characteristics of Multinational Corporations

The following are characteristics of Multinational Corporations

1. Multinational Corporations are created through Direct Foreign Investment (DFI)

2. Headquarters of Multinational Corporations are usually located in a developed country

are usually located in a developed country while subsidiary companies are located in
developing countries

3. These firms usually use the latest technology and invest heavily in research and
development.

4. These firms are usually capital intensive and, therefore benefit from economies of scale.

Management

Expatriates (a native from the home county will be relocated to the host country) with limited
local inputs manage the subsidiaries of transnational or multinational firms.

Multinational Corporations brings with it advantages and disadvantages to the host country.

Advantages Disadvantages
A large injection of foreign capital stimulates Probable abuse of workers’ rights and poor
the economy working conditions in the factories
Employment is provided for locals Possible destruction of the environment.

Transfer of skills from the foreign counterparts Possible intimidation of trade unions that try to
to the locals improve working conditions and to expose the
poor conditions of works.

Revenue increases since more taxes are paid to Possible abuse of consumers, for example,
the government baby fed breast milk substitute or children
exposed to heavy tobacco marketing gimmicks
Possible destruction of communities,
 especially, when the company moves to
another location

State Corporations

State corporations are independent organisations set up by the government to carry out a service.
The government does not control their daily operations but the government can fix the overall
strategy for them and nominate their board of directors. These are usually non-profit making,
but in the long term, they have to be self financing. A State Corporations in the case of Jamaica’s
transportation system is JUTC.

Formation

State Corporations are formed by legislation, that is, by the passing of laws by Parliament.

Management

The government appoints a Board of Governors or Directors for a stipulated time frame. An
Executive Director is also appointed to head each organization. The Executive Director reports
to the Board of Governors or Directors.

Characteristics of State Corporations

1. Funding is mainly done by the state providing grants, although some legislation allows
the organisations to raise their own funds

2. The state or state appointed auditors monitor all accounting procedures

3. Annual accounting reports must be sent to the Auditor General

4. The aim of the state is not to make a profit but is expected that these corporations may
break even.

Nationalised Industries

Nationalised industries are firms, which were once privately owned, but have been taken over by
the Government. Governments seek to nationalise the ‘key’ industries, that is, the industries on
which the Government depends for the country’s economic survival, for example, the oil
industry in Trinidad and Tobago.

Formation
 A company becomes nationalised when the government purchases all or majority of shares in the
company.

Management

Like State Corporations, a Board of Governors is appointed. The Board reports to the line
Minister of Government. Each nationalised industry has an Executive Director who heads the
company. The audited accounting reports of these companies must be laid with the Auditor
General or a Government accounting firm.

Characteristics of Nationalised Industries

1. They are legal entities

2. The state is the only shareholder
3. They are managed by Board of Directors that are appointed by the state

Advantages Disadvantages
Ownership and control are in the hands Relatively low salaries paid to
of the State, thus all profits remains in Executive Directors may not attract the
the country. The company is in a better best expertise.
position to service the needs of the
community, for example, the funding
of community projects in education,
sporting and cultural projects.

Nationalisation prevents private The industries may be a strain on the

monopolies from being formed. government’s revenue.

Government Department

The system of Governance in the Caribbean is divided into (2) two broad categories – Central
and Local government.

The Central Government consists of the Ministries and Departments such as: Education, Youth
and Information, Health and Wellness, National Security, Finance, Foreign Affairs, Labour and
Social Security, Local Government etc. Each ministry is headed by an elected official, the
Minister, and a team of technocrats headed by a Permanent Secretary.

The Local Government system consists of the municipal authorities, for example, the City
Corporations. This arm of government serves at the local or community level. They are mainly
responsible for the local road maintenance, garbage collection, maintenance of parks and
roadways, cleaning of gullies and culverts, public cemeteries, and the consumer markets.
Funding is provided by central government and the collection of rates and taxes from the local
residents. At Local Government election, Councillors are elected. The mayor of capitals is
appointed as head of the municipality; he/she is selected from among the councillors.

Other Forms of Businesses

1. Joint Venture – cooperation between a domestic company and foreign company to

accomplish specific project.

2. Franchise – an agreement between an established company (a franchiser) and a franchisee

in which permission is granted to conduct business in a prescribed manner set by the
franchiser.

The franchise has an obligation to pay royalty’s fee to the franchiser periodically but the
franchisee in return gains the reputation and business expertise or management of the
franchiser. This business arrangement is gaining increasing popularity in the Caribbean,
example, KFC, Little Caesars, Wendy’s and McDonald’s

3. Conglomerate is a business made up of several unrelated businesses, multi- industry

company. This involves a parent company with many subsidiaries. They can maintain
stability no matter what is going on in the market place.
Example: Grace, Jamaica Broilers Group and Lasco

Privitaisation and Nationalisation

\When a business moves from being run by the government to being publicly owned, this
is referred to as privitisation. Movement from the private sector to public sector is called
nationalization. Nationalisation encourages higher level of competition which leads to
better use of resources, hence the reason for the government privatizing some businesses.