Business Organization and

Environment(Unit one)

1.2 Types of business organization

Dr. Fereshteh Mohammadian

Main features of profit-based

(commercial) organization

The most common profit-making business types:

• Sole traders

• Partnerships

• Companies or corporations

• For-profit social enterprises

– Cooperatives

– Micro-financers

– Public-private partnerships (PPPs).

The common feature is to generate profit.

Profits = total revenues – total cost

profits

turnover

employeeassets

equity

Sole trader

The main features of a sole trader include:

• owns and runs the business by themselves

• have unlimited liability

• finance is usually limited (personal saving or limited loan from lender)

• close to the customer (more personalized service)

• has privacy and limited accountability (no need to declare their finance except of tax authorities).

• Easy, inexpensive and quick business registration

Advantages of operating as a sole trader:

• complete control over all the important decisions

• flexibility in terms of working hours, products and services,

and changes to operations

• privacy, as sole traders generally do not

need to divulge information

• minimal legal formalities

• close ties to customers, which can give a

competitive advantage.

Disadvantages of operating as a sole trader:

• Daunting challenge by competing with established businesses.

• Limited time for making all decision without any opportunity to seek advice form others.

• limited scope for expansion

• focus on having sufficient cash for day-

to-day operations instead of looking to the

future.

• unlimited liability of the owner for any

faults, debts, or mistake made.

partnerships

This type of business is formed by two or more people with related

qualifications.

The main features include:

• decisions made by the partners

• owned and managed by more than one person (2-20 partners).

• unlimited liability and legal payment for 100 percent of partnership’s debts

• finance is more available than for a sole trader business

• “sleeping partners” (only investor)

• more varied services than a sole trader

greater degree of accountability than a sole

trader according to the partnership’s

contract (responsibilities, financing,

division or profits, liabilities and

procedures for changing circumstances)

• more stable than sole traders and higher

likelihood of continuity

• share profits according to percentage of

ownership

Advantages of partnership compared to sole

traders

• more efficient production, more expertise,

• access to more finance for greater stability and lower risk of a failed business

• help each other in emergencies,

• more chance of continuity if one partner dies,

Disadvantages of partnership

• Only based on the partnership’s deed, some partners

declared “limited partners” otherwise all will have

unlimited liability on the business debts and actions of

other partners.

• Limited finance compared to companies (corporations)

will prevent their business from expanding or

maximizing their opportunities.

• An individual partner does not have complete

control over the business and will rely on the

work and goodwill of others.

• Profits have to be shared among the partners.

• Disagreed partners could break up the

partnership.

Companies or corporations

The most important type of business is company which may have the following abbreviations after its logo:

• INC - Incorporated (USA/ Canada)

• LLC - Limited Liability Company (UK)

• PLC – Private or Public Limited Company (UK)

• PTE – Private Limited Company (UK)

• LTD – Limited Company (various)

• SA – Sociedad Anomia (Latin America except Brazil and Mexico)

• SA – Sociedads Anomias (Brazil, Portugal)

• SpA – Societa per Azioni (Italy)

• AB – Aktiebolag (Sweeden)

• BhD – Berhad (Malaysia, Brunei)

• GIE – Groupement D’Interet Economique (France)

• GmbH- Gesellschaft mit beschraenktr Haftung (Austria, Germany, Switzer land)

Company’s Features• the business and the owners of the business are legally separated and the

liability of the company is distinct from the liability of those who own it.

• Each owners has a fraction of the company in the form of “shares” (shares of stock or equity shares)

• Company employs executives to manage and workers to handle day-to-day

operations.

• Should obey the laws of the land and pay taxes.

• Owners (shareholders) decide to pay all or a portion of profits to the shareholders in the form of dividends at the discretion of company and based on the proportion of the shares of stock.

• Shareholders who own a lower percentage could have less

deciding weight in the decisions.

Investing reward ways to the

shareholders in a company

1. increasing of the share’s price2. depends to the number of shares (pay as dividends each 3-

4 months)3. not responsible for any company’s debts but they are the

last party to receive monies from sale of the assets of a business (all debts should be paid first).

The cost to the shareholders of

investing in a company

1. Decreasing of share’s price by decreasing of the value or the company profit

2. dividends may not pay (need of sufficient cash on hand or more investment in equipment and working capital in rapid growing)

3. don’t have meaningful role in giant company’s decisions with holding less amount of shares

The reasons to become a company

• increasing of the business stability

(any minor or major problems for

shareholders)

• Improve of gaining further finance

(loan from financial institutions or

governments) .

• shareholders want to have

limited liability

• recognition of successful

business

• good source of finance through

selling shares

Types of companies

• Private limited

– selling the shares only to whom that owners know (friends, family and associates)

– Limited shareholders (around 20)

• Public limited company

– offer the company shares in a public place

– no control over who buys their shares

Main features of a company

• The shareholders own but don not run the business.(decision by the

professional managers).

• The business and the owners are divisible (the owners can change by

selling their shares to others)

• The legal existence and many of the details are legally recorded and

matters of public record.

o Required legal documents to form a company

• memorandum of association: is a legal document prepared in the

formation and registration process of a limited liability company

to define its relationship with shareholders

• articles of association: internal regulation (the executives with

their titles and areas of responsibilities).

• Greater finance is generally available (any future gains (or loss) in price are to the benefit (or cost)

of the shareholders)

• A company is held to a high degree of accountability (inform to shareholders about the condition of

their investments by:

– Annual or quaternary of published, audited reports,

– An annual general meeting (AGM)open to all shareholders,

– An extraordinary general meeting (EGM) called by the shareholders.

• Greater stability and higher chance of continuity

• Access to finance is easier than sole traders and partnerships (greater stability and lower risk)

• The investor has limited liability (may only lose the values of shares and nothing else)

• There is continuity (with selling of the shares, leaving of any directors)

• Companies can go bankrupt and be liquidated (with all of assets sold off to pay all the liabilities)

to terminate their operations.

• There are possibilities for expansion (more access to finance for investing in equipment, marketing

effort and new activities)

• An established organization structure (help to keep the customers and suppliers because no need to

change managers and workers even with changing of the shareholders)

Disadvantages of operating as a company

• Setting up a company can take time and cost a great deal of money (to fulfill the

necessary legal requirements)

• The risk of selling shares when the company “goes public” (may can not guarantee to

provide desired or intended amount of finance)

• Owners risk partial or entire loss of control (if the company “goes public).

• There is loss of privacy (have to show company’s performance - less sale and negative

profits)

– may some customers do not purchase from or do

business with the company especially for some

products which need warranty or after-sales service.• A company has no control over the stock market. (some external factors(such as an

election, negative news about another business in same industry, a downturn in the

economy or a natural disaster) may decrease the share values.

• A company has limited control over who buys its share. (a competitor

may want to take over the business by buying the shares of one of the

shareholders or can be vulnerable to being taken over if their share prices fall).

For-profit social enterprise

• These organizations have social purposes and aim to improve human, social or environmental well-being

• but these aims nevertheless take priority of growth, maximizing sales or making profits.

• These organization can take the form of sole trader, partnership or company but often can see in form of– Cooperatives– Micro-financiers– Public-private partnership[PPP]

Cooperatives

A form of partnership which is owned and run by all the members(> 20).

• Financial cooperative: these businesses take profit with social and ethical aims.

– Social aims(lending money at lower rates of interest or non-lending services at lower cost of other financial institution.

– Provide finance (loans) to their members.

• Housing cooperative: provide housing for its members as opposed to providing rent for private landlords.

• Workers cooperative: is owned and operated by the workers and does not pay significant higher wages or salary to the managers

• Producer cooperative: a group of producers collaborate in certain stages of production (agriculture, grapes)– Maximizing the utilization of an expensive piece of

equipment/ achieving the cost efficiencies with carrying out of production stage on a large scale.

• Consumer cooperative: provide service to its consumers who are part owners of the business.

The cooperative’s priority is to provide products or services as close to cost price as possible,

they make some profit only for difficult period or unexpected expenses.

Micro-financiers

Provide small amounts of finance with low interest rate to those who can not have access

to it and need the finance for the first steps towards economic independence (such as low-

income individuals, families in rural communities and women)

Public- Private Partnership [PPP]

A PPP is a business created between a private sector business and the public sector. The public sector provides the finance and the private business the expertise.

The main common features:

• Profit is important but not the priority

• There is collaboration between the business and the local community.

• There is greater democracy in the business than in other organizations (decision making tends to be more consultative and transparent )

• The business operates the same functions as any other business (HR, finance, marketing and operation).

Advantages of for-profit social enterprises

• A favorable legal status is achieved. – the legal structure allows individuals to engage in

activities without being personally liable or accountable to the stakeholders

• There is a strong communal identity.– the motivated employee and stakeholder work

together with a common sense of purpose

• There are benefits to the stakeholder community.– ameliorate human, social or environmental problems

which are not addressed by government and help reduce them in the community.

Disadvantages of for-profit social enterprises

• Decision making is complex and time consuming can limit the effectiveness of the business.

• There may be insufficient capital for growth in the long term (without large profits the social enterprise may struggle to survive and expand).

• There may be insufficient capital for financial strength (producing products as inexpensive as possible makes lower profit margins and profits which can not help them survive a recession or when finance is less available).

Non-profit social enterprises

The main features of NPOs are as follow:• The businesses which are social enterprises and

their main aim is social purpose do not make any profits whatsoever.

• They generate surplus which conceptually is similar to a profit and is used to advance the social purpose of its business

Surplus = total revenues – total cost

Two broad categories of non-profit social enterprises are NGOs and charities.

Non- Governmental Organization [NGOs]

These social enterprises support a cause that is considered socially desirable such as:• Save the Whales (single issue),• Greenpeace (broader spectrum), • Aga Kahn Development Network (apolitical-conduct their

programs without regarding faith, gender or origin), • Amnesty International & National Rifle Association (political

aim)

The common element NGOs is that they are not organized

or run by any government.

Charities

• Charities are a specific form of NGO whose aim is to provide as much relief as possible for those in need.

• They focus on philanthropy and a desire to help those who cannot help themselves.

Different type of charities are: – Emergency aid for specific natural disasters or war (single-

event)

– Save the children of Oxfam (single issue)

– Red Cross, Red Crescent and Half the Sky (apolitical)

– Catholic Charities USA (partisan or particular preferences

Business of charities is not run by any government and it operates in the private sector of the economy.

Charities have tax exemption.

Common features of non-profit social enterprises

• Profits are not generated. (generated surpluses are used directly to provide the goods and services for which the charity was created)

• Donations are important. (needs of voluntary donation from individual because governments funding or other forms of income are not enough)

• There is unclear ownership and control. (who are the owners, who decides about who sits on the board of directors, who selects new members, how are managers selected, what is an appropriate compensation?...)

Advantages of non-profit social enterprises

• They help people or causes in need (individuals, organizations and governments almost never have sufficient resources to solve all the needs of local people or community).

• They can foster a philanthropic spirit in the community (positive attitudes in a community can make it a better place to live and can improve the general business climate).

• They can foster informed discussions in the community about allocation of resources.

• They can innovate (because of not sufficient profits, they pushed people to be creative for finding solutions and tactics to address the problems).

Disadvantages of non-profit social enterprises

• The lack of control but intense lobbying can lead to socially undesirable goods.

• Sometimes the employees of non-profit social enterprises have a passion and zeal that ill serve the organization or its cause.

• Funding can be irregular (reliance on donations can make a problem in economic recessions).

PEST factors• Political – Here government regulations and legal factors are assessed in

terms of their ability to affect the business environment and trade markets.

The main issues addressed in this section include political stability, tax

guidelines, trade regulations, safety regulations, and employment laws.

• Economic – Through this factor, businesses examine the economic issues

that are bound to have an impact on the company. This would include

factors like inflation, interest rates, economic growth, the unemployment

rate and policies, and the business cycle followed in the country.

• Social – With the social factor, a business can analyze the socio-economic

environment of its market via elements like customer demographics,

cultural limitations, lifestyle attitude, and education. With these, a business

can understand how consumer needs are shaped and what brings them to

the market for a purchase.

• Technological – How technology can either positively or negatively impact

the introduction of a product or service into a marketplace is assessed here.

These factors include technological advancements, lifecycle of

technologies, the role of the Internet, and the spending on technology

research by the government.