1.2 Types of organization
Business and management
TYPE OF BUSINESS ORGANIZATION
Private Sector: Public & Private Limited companies
Public Companies
• The word `public` means that the shares are traded on
the stock market and available to any members of the
public to buy and sell.
• Annual reports and adequate disclosure of financial
information must be provided to shareholders and the
general public.
Private Companies
• Owned by individuals or organizations.
• The public cannot buy shares in the company.
• There is no obligation to produce annual reports that
are available to the general public.
TYPE OF BUSINESS ORGANIZATION
Private Sector
• Private sector organizations are those owned
by individuals and not run by the state.
• They generally operate with the main
objective of making a profit, although charities
and independent schools would not.
TYPE OF BUSINESS ORGANIZATION
Public Sector
• The public sector covers activities that are within the
control of direction of the government.
• These organizations do not have outside shareholders
and are solely accountable to the government for their
performance
• Often they do not publish financial information,
although in many democratic countries there are
independent accountants and advisors who monitor
their efficiency.
• In many countries public sector organizations cover
activities such as the state health, education, police
and prison services.
Benefits of Privatization
• Efficiency gains –Inefficient monopolies are exposed
to competitive markets when privatized.
• Lower costs of production-Customers will benefit
from competitive prices.
• Increased choice-Introducing competition to former
public sector monopolists gives customers more
choice.
• Incentives to innovate- to stay competitive in market.
• Less financial burden-government can save money
leading to less financial burden on taxpayers.
• Source of government revenue-by selling public
sector units to private investors.
STARTING A BUSINESS
• The reasons can be remembered by the
mnemonic GETCASH
• Growth
• Earnings
• Transference and inheritance
• Challenge
• Autonomy
• Security
• Hobbies
POSSIBLE PROBLEMS FACED BY START-UPS
New companies face a range of problems:
• Lack of finance capital
• Marketing problems
• Poor Location
• Developing a customer base
• Poor Cash Flow
• People management problems.
• HR management skills
POSSIBLE PROBLEMS FACED BY START UPS
Lack of finance capital
• New businesses find it hard to raise capital.
• In the first instance, they may not be able to
provide any security for loans such as personal
guarantees or property.
• This is often true for young people who may
have little savings.
• Secondly, a new business obviously has no
track record for a bank to assess and therefore
the risks are greater for the banks.
POSSIBLE PROBLEMS FACED BY START UPS
Location
• Anyone involved in a new start-up wants to
minimize costs and so it may be desirable to
work from home to begin with.
• This is not always ideal from an image
viewpoint, but a good location may be very
costly and a drain on cashflow at the very time
when sales are negligible.
POSSIBLE PROBLEMS FACED BY START UPS
Developing a Customer Base
• It is imperative to build long-term
relationships with customers so that they
return time and time again. However, this
takes time and money.
• Investing in after sales service or offering
bespoke advice can be at odds with the short
term need to get money into the business
almost without worrying about the quality of
goods or services.
POSSIBLE PROBLEMS FACED BY START UPS
Poor Cash Flow
• Many new starts ups fail, not because their
product is poor or that their can’t make a profit,
but because they don’t manage their cash flow in
the early years.
• It is imperative that entrepreneurs and small
business owners manage cash as their first
priority when establishing their business.
• This might mean chasing new customers for
payment and slowing down payment to suppliers
POSSIBLE PROBLEMS FACED BY START UPS
HR Management Skills
• Are the entrepreneurs able
to manage and motivate a
workforce?
TYPES OF BUSINESSES:
PROFIT BASED ORGANIZATIONS
There are three main types of businesses:
• Sole Traders or Sole Proprietors
• Partnerships
• Companies or Corporations
Sole Traders or Sole Proprietors
Who are sole traders?
• Sole traders can include trades people, such as
plumbers and carpenters, some shopkeepers,
individual accountants and lawyers, and many
consultants in IT and other fields.
Sole Traders or Sole Proprietors
• This is when the business is set up by an
individual and where that persons is the
owner, the sole trader (known as a sole
proprietor in some countries).
• It is not a company and in a legal sense has
not shareholders.
• In fact the “person is the business” and the
two are the same.
Sole Traders or Sole Proprietors
Advantages of being a Sole Trader
• Ownership and control of the business is with the sole
trader, as the firms doesn’t have to directors and
separate shareholders.
• Sole traders do not have to file financial accounts with
public registrars and competitors, customers and
suppliers cannot easily discover the sales and profits
they make.
• Sole traders only need to submit accounts to the tax
authorities.
• Sole traders pay different tax rates to companies and
have more opportunities to reduce their taxable profits
through the large number of extra allowances.
Sole Traders or Sole Proprietors
The Problem of Unlimited Liability
• There is no legal distinction between the business and
person: the assets and liabilities of the two are not
separated.
• This leads to a very important weakness of being a sole
trader – “unlimited liability”.
• If the individual is sued, for example for giving bad advice
or supplying a faulty product, there is no limit on his or her
liability.
• This means that if the business cannot pay the debt or
court fine, the person’s private assets can be seized to pay
it off.
• The person’s private wealth is not protected from
shareholders.
Case study:
Flowers by Cam:
Cam Tran is self employed florist who operates a small florist Hill,
London. She is married with three school-aged children. Her
husband’s commitments mean that he only comes home at the
weekends. Cam arranges and delivers flowers to local hospitals and
schools mainly in Southeast London. From time to time, she also
receives large orders for weddings.
1.Analyse the costs and benefits to Cam in operating as a sole trader.
2.Examine whether sole traders, like florists, benefit from a high
degree of specialization.
Reference:
1.2.2 Case study Business and Management By Paul Hoang
Partnerships
• These are organizations where two or more
individuals choose to work together as coowners
• These organizations are not companies.
• As with sole traders, there are no
shareholders and the owners all have
unlimited liability.
• There private wealth is at risk if the business
fails.
Partnerships
The problem of liability for each other’s debts
• There is one further disadvantage from
unlimited liability – the partners are liable for
each other’s debts.
Partnerships
The problem of liability for each other’s debts
Case Study
• A two person law firms owes a customer $5
million for giving bad advice.
• When the business is closed down, it cash
reserves show that it can only pay $2 million.
• Partner A has private wealth of $1 million and
Partner B has wealth of $20 million.
Partnerships
The problem of liability for each other’s debts
Case Study (continued)
• As the partners jointly owe another $3 million to clear
their debt to client you might think that it should be
divided equally and that they now owe $1.5 million
each, but you would be wrong.
• The partners are liable for each other’s debts, and as
the customer knows that partner B has more wealth
the customer will chase partner B for the remaining $3
million and will probably ignore parter A>
Partnerships
The problem of liability for each other’s debts
The need for INSURANCE
• If you go into partnership with other people get a
very good insurance policy to cover giving bad
advice or else you could end up paying for more
than you bargaining for.
• Most partnerships will take out extensive
insurance policies to cover bad advice and faulty
goods affecting customers and the public more
generally.
Partnerships
Advantages of Partnerships
• The advantages of a partnership is that you can
share the risks a little more than when a sole
trader.
• You can also specialize in certain tasks.
• Many accountants and law practices are
partnerships.
• Accountants PwC have thousands of partners
around the world as does Freshfields, a large
international law firm.
Partnerships
Tax Issues & Financial Disclosure
• As with sole traders, partnerships do not need to file
financial accounts with public registrars, but they do
file accounts for the tax authorities.
• Another advantages is that they pay different tax rates
from companies and have more opportunities to
reduce their taxable profits through a large number of
extra allowances or deductions.
• Partnerships also make no distinction between the
owners and managers of the business – they are
usually the sample people.
Partnerships
A Rule Book or Partnership Agreement
• Partnerships usually establish a rule book to
avoid arguments or confusion arising later on.
• However, in some countries, if not partnership
agreement exists, it will be assumed that
profits and losses are shared equally.
• Arguments over strategic development for the
business often a serious issue, something a
sole trader would never face.
Partnerships
Customer Impressions of Partnerships
• Partnerships look more substantial to
potential customers than sole traders, as their
letterhead will list all the partners’ names, or
for very large organizations it may indicate
that the names can be viewed at one of the
organizations offices.
Companies or Corporations
• A company has shareholders and directors
and they often not the same people.
• This means there is separation in ownership
and control (management of the business).
Companies or Corporations
Limited Liability
• The shareholders are limited in their ability to
the amount of their investment.
• If they have invested $100,000, then that is
the limit to the amount the can lose.
• Their private wealth is untouchable and
equally they cannot be held liable for other
shareholder debts.
Companies or Corporations
Legal Structure & Obligations
• To establish a limited company the owners must
complete registration documents and pay a small
fee.
• Companies also have to file annual financial
information to public registrars.
• This means various external stakeholders can
analyse how well the business is performing and
that may impact on whether a supplier will
continue giving credit, whether a customer will
place an order, or whether a bank will lend more
money.
Companies or Corporations
Public Perceptions
• It is often considered that a company presents
a more solid and trusting image than a sole
trader.
• The company’s letter head will have a
registration number and most large
businesses are companies.
Companies or Corporations
LIMITED LIABILITY COMPANIES
Privately Owned
• Could be controlled by family, a group of
individuals or be a subsidiary of a larger company.
Public Corporations
• Shares can be purchased and a traded on the
stock exchange.
OWNERSHIP STRUCTURES
CHANGE OVER TIME
• As businesses develop and become more
established the changes are that the
organizational type will change – often from
being unlimited liability to limited liability
companies.
• The need for future finance to support expansion
may encourage the owners to change the status
of the business, such as changing from a private
to a public limited company.
• How much control they want will also dictate the
type of organizational structure.
OWNERSHIP STRUCTURES
CHANGE OVER TIME
Example
• A number of well known entrepreneurs have
taken their companies off the stock market and
have become privately listed companies.
• In this way they are free from the media spotlight
and do not need to meet short term profit
objectives, which may hinder long term
development plans.
• Company specific examples include Richard
Branson with his Virgin Empire.
NON PROFIT ORGANIZATIONS
• Some organizations are not run for profit, for
example charities and pressure groups.
• Charities include well-known international
organizations like the Red Crescent, Medicins
san Frontieres, and Oxfam.
• Charities also include local fundraising groups,
religious groups and private schools.
NON PROFIT ORGANIZATIONS
Pressure Groups
• Pressure groups include political parties, trade
unionists, commercial lobby groups (such as
the hand gun association in the UK) and local
protest action groups, perhaps trying to stop
new airport or motorway from being built in a
rural area.
NON PROFIT ORGANIZATIONS
Legal Issues
• All non profit organizations need to be
established carefully and comply with legal
requirements for charities and the like.
• If they don’t they may loose their charitable
status and this may mean their funding or tax
benefits are lost.
Group Discussion
• Partners are “jointly and severally
liable” for each others debts; but
shareholders in companies have
limited liability to the amount they
invested.
• Discuss whether you think this is fair
for all stakeholders.
NON PROFIT ORGANIZATIONS
Operational Issues
• Charities tend to run along business lines, they
aim to minimize costs in order to maximize net
revenue and therefore charitable donations.
• They also seek to educate and inform the
public about their area of expertise or
concern.
• Charities focus their objectives on money
raising, education and lobbying.
NON GOVERNMENT ORGANIZATONS
(NGOs)
• This covers a diverse range of organizations,
but they all tend to be involved economic
development and humanitarian issues.
• Many charities can also be considered to be
NGOs, or not for profit organizations.
• NGOs plan and implement specific projects in
developing countries such as earthquake relief
in Pakistan in 2007.
NON GOVERNMENT ORGANIZATONS
(NGOs)
• NGOs also try to influence government
policies on areas such as poverty and human
rights.
• They work in the field where a disaster
happens and often in places that official
government aid does not reach.
The Business Impact of non-profit
organizations & NGOs
• Non profits organizations and NGOs have both a direct
and indirect impact on business.
• Pressure groups trying to stop low wages or child
factory in Africa may have an impact by persuading
European or US consumers to stop buying cheap
clothes from shops that sell these products.
• Charities with retail outlets (eg: Amnesty International)
may have an impact on the sales of other shops in the
high street.
• Equally, there is an opportunity for manufacturers to
devise life-saving products or vaccines.
The Business Impact of non-profit
organizations & NGOs
Example
• A UK company recently invented a special
bottle that can clean the worst river or pond
water and make it drinkable for humans.
• The likely sales of this device will no doubt
make the inventors very rich indeed.
• Organizations can also offer sponsorship to
NGOs and thereby improve their corporate
image.
PUBLIC & PRIVATE SECTOR
PARTNERSHIPS
• PPP occur when the government creates
commercial partnerships with the private sector
to provide certain goods or services.
• Sometimes they work together on one-off
projects like building a new road and renting it
out to motorists to use (by paying a toll).
• In the UK & Australia there has been two specific
initiatives between the two sectors.
 public private partnerships (PPPs)
 private finance initiative. (PFI)
Hong Kong Disneyland
• Hong Kong Disneyland (HKDL) is a theme park with two onsite hotels owned jointly by the Hong Kong government
(the majority shareholder) and the Walt Disney Company.
The project was announced in November 1999 with the
media reports suggesting that up to 36,000 jobs would be
created. HKDL was finally opened on 12th September 2005.
The government estimated that the first phase of the
theme park would generate HK$148 billion($19 billion) in
net benefits to the economy over a 40-year-period.
• Examine two benefits of the HKDL public-private enterprise
to Hong Kong.
• To what extent should a government use tax revenues to
fund public-private-enterprise?
Thank you