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Types of Organizations

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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.
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