Topic 1 : Business organization and environment 1.2 Types of Organization Private and Public Sector ● Businesses can be classified by sector : Private Sector – businesses are owned and run by individuals They are referred to as ‘private enterprise’ Public Sector – ‘businesses’ are more organizations or public enterprise and are owned and operated on behalf of the public by the federal or local government Public Sector Public Sector Central Government Owned Local Government Owned The Public Sector ● At central government level, money (collected through taxation) is spent on essential services to support the public – eg. Street lighting, fire service, waste disposal ● The nature of the services being provided by public sector organizations means that their objectives are different from those businesses in the private sector. Therefore the priority of most public sector is to provide a value-for-money service ● In general, public sector does not have ‘customers’ personally, but they are expected to still provide the highest quality of service WHILE maintaining tight control on finances as to eliminate wastage of funds Private Sector Private Sector Sole Trader Partnership Limited Company Private Limited Company (ltd) Public Limited Company (plc) Profit-based organizations : Sole Trader / Sole Proprietor ● Extremely simplistic : The sole trader owns the business and makes all the decisions affecting it ; they make all decisions ; in regards to the law, the business and the owner are the same and the business does not exist in its own right – it is ‘unincorporated’ Advantages Disadvantages Few legal requirements are required as a sole trader The sole trader is the ‘business’ – therefore they alone are responsible for all debts No consultation for decisions are made as a sole trader Sole traders have to be good at everything – they must single handedly do everything 100 % of profits (after tax) are kept by the sole trader– not shared Sole traders can easily be overworked Financial state of the business can be kept private (whereas a company has to publish its accounts) Sole traders usually have small businesses – they are not large as they lack in expertise Cannot issue shares and is not subject to a ‘takeover’ in the way a public company can be Since the sole trader IS the business, if they die the business dies with them – there is no continuity Profit-based organization : Partnership ● Just in the case with a sole trader, a partnership is not a legal entity in its own right – the partners are the ‘business’ : the law requires a minimum of two and a maximum of 20 partners ● Partners usually have a ‘Deed of Partnership’ (a legal document) that states and clarifies : -how much money each partner is to contribute -how much income each partner can draw / take -the responsibilities of each partner -how decisions are to be made within the partnership -the arrangements for taking on more partners -the arrangements if the partnership is dissolved -the arrangements for finance Advantages of Partnerships Disadvantages of Partnerships Easy to establish Partners, like sole traders, have unlimited liability (an individual partner is liable for debts incurred by the other partner – even if they are ignorant of those decisions) Additional partners mean more capital. Expansion is therefore easy Decision making is slower and there is the possibility of disagreement Work is shared and different partners with different skills can be employed (and they can specialize in what they do) The legal restriction on the maximum number of partners means that the business can still lack capital for expansion Losses are shared Losses are shared – but so are profits Partnerships, like sole traders, pay income tax, which means that the financial state of the business can be kept private There is no continuity Limited Company ● There are a number of important differences between companies and other types of business organization : Incorporation : Sole traders and partnerships are unincorporated – aka : they do not exist separately from their owners. A company is the opposite : it is ‘incorporated’ – the business does exist as its own entity. Those who own the company (shareholders) are not the same as those who run it (the directors) Shares : Companies can raise capital via the issue of shares, whereas sole traders cannot. A ‘share’ is exactly what is seems : buyers own a share of the company (they basically become one of its owners) Limited Liability : If a company goes into liquidation (ceases to trade) because of financial problems, its shareholders have limited liability – aka the shareholders only lose their shares and they are not personally liable for the business’ debt. Advantages of Companies Disadvantages of Companies The main advantage is access to a large amount of Setting up a company can be expensive (legally and capital through the ability to issue shares. This means start up costs) that there are greater opportunities for growth Limited liability for shareholders encourages people to invest in the company Investors such as banks often regard companies as less risky than a sole trader or partnership. This could mean better terms for borrowing money Continuity – a company is a separate legal entity and so does not come to an end when the original owner dies. Unless a company has severe financial problems, it could exist forever Partnerships, like sole traders, pay income tax, which means that the financial state of the business can be kept private Running a company is far more complicated than being a sole trader or partnership. Directors have responsibilities to the shareholders as well. Public- Private Enterprise ● Is a government service or private business venture which is funded and operated through a partnership of government and one or more private sector companies. These schemes are sometimes referred to as PPP, P3 or P3. ● PPP involves a contract between a public sector authority and a private party, in which the private party provides a public service or project and assumes substantial financial, technical and operational risk in the project. ● A typical PPP example would be a hospital building financed and constructed by a private developer and then leased to the hospital authority. The private developer then acts as landlord, providing housekeeping and other non-medical services Benefits to Public-Private Enterprise Costs of Public-Private Enterprise It is a way of introducing private sector technology and innovation in providing better public services through improved operational efficiency Development, bidding and ongoing costs in PPP projects are likely to be greater than for traditional government procurement processes Is a way of developing local private sector capabilities through joint ownership with large international firms, as well as sub-contracting opportunities for local firms in areas such as civil works, electrical works, facilities management, security services, cleaning services, maintenance services, etc. Some projects may be more politically or socially challenging to introduce and implement than others - particularly if there is an existing public sector workforce that fears being transferred to the private sector Supplementing limited public sector capacities to meet the growing demand for infrastructure development Government responsibility continues – citizens will continue to hold government accountable for quality of utility services Creating diversification in the economy by making the country more competitive in terms of its facilitating infrastructure base (such as construction, equipment, support services, etc.) Given the long-term nature of these projects and the complexity associated, it is difficult to identify all possible contingencies during project development and events and issues may arise that were not anticipated in the documents or by the parties at the time of the contract Cooperatives ● In many ways a cooperative is like any other business; but in several important ways it's unique and different. A cooperative business belongs to the people who use it— people who have organized to provide themselves with the goods and services they need. ● These member-owners share equally in the control of their cooperative. They meet at regular intervals, hear detailed reports, and elect directors from among themselves. The directors, in turn, hire management to handle the day-to-day affairs of the cooperative in a way that services the members' interests. ● Members invest in shares in the business to provide capital for a strong and efficient operation. All net savings (profits) left after bills are paid and money is set aside for operations and improvements, are returned to co-op members. Microfinance Organizations ● Microfinance refers to an array of financial services, including loans, savings and insurance, available to poor entrepreneurs and small business owners who have no collateral and wouldn't otherwise qualify for a standard bank loan. Most often, microloans are given to those living in still-developing countries who are working in a variety of different trades, including carpentry, fishing and transportation. ● Microloans typically are not more than several hundred dollars. Examples of uses include money for tools to start work in construction, or makeup and other supplies needed to become a cosmetologist. Because they are the ones that commonly use their profits to provide for their families with things like food, clothing, shelter and education, women currently comprise roughly two-thirds of all microfinance clients. ● The goal of microfinancing is to provide individuals with money to invest in themselves or their business to help get them out of poverty. When providing loans, microfinancing institutions do not require collateral, but do insist that the loan is repaid within six months to a year. Non- Profit and Non Governmental Organization (NGO) ● Non-profits and NGO’s are essentially the same : they are neither governmental organizations or private firms, but rather all other types of organizations ● Taken from the World Bank definition : “characterized primarily by humanitarian or cooperative, rather than commercial, objectives… that pursue activities to relieve suffering, promote the interests of the poor, protect the environment, provide basic social services, or undertake community development” in developing countries”. ● The term NGO is an umbrella phrase that encompasses nearly all other organizations which are not classified as Government or Private sector industries. ● These organizations vary in size and strength. They can be a large organization with multiple regional offices, or they can be a community based organization with a staff of five. Charitable Organizations ● Charitable organizations are a kind of business that fits within the nonprofit organization (NPO) category. In general, this type of entity is sometimes referred to as a charity or foundation, which can be run publicly or privately. ● Some charities may be centered around religious, educational or other public interest activities that are philanthropic in nature. ● Depending upon the location of the charity, the legal definition of what constitutes a charitable organization may vary according to its country of origin. ● Therefore, the tax implications for a charity will also depend upon the region or country in which the charitable organization operates.
