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Golspie High School
Business Management
Higher
Understanding Business
2 Types of Business Organisation
Understanding Business Types of Business Organisation
25 August 2015 2
TYPES OF BUSINESS ORGANISATION
National 5
Their differing aims, objectives, sources of finance, industrial and economic sectors
they operate in
sole trader
partnerships
private limited company
social enterprises
charities
public organisations
and
how enterprising skills and qualities help business development
Higher
Be aware of the structure of each and be able to describe the similarities and
differences between these structures:
Private sector organisations – private limited companies (ltd), public limited
companies (plc), franchises, multinational organisations
public sector organisations
third sector organisations
Understanding Business Types of Business Organisation
25 August 2015 3
PRIVATE SECTOR ORGANISATIONS
Private-sector organisations are owned and controlled by private individuals and
investors. The most common private sector organisations are discussed below:
Sole Trader/Self-employed
A sole trader is a business which is owned and managed by one person (eg small
shops, hairdressers, trades people).
Advantages Disadvantages
It is very simple to
set up – no legal
formalities to go
through
You get to make
all the decisions
You get to keep all
the profits
Borrowing from the bank is more difficult, and it may
charge higher rates of interest on loans to sole traders
Unlimited liability – if the business runs up debts, the
owner could lose not only the business, but his/her
home, car and possessions to pay off these business debts
Sole traders have to run their business without help.
Taking time off or falling ill would mean that there is no
income, but the costs continue.
Partnership
A partnership is a business which is owned and controlled by 2 or more people but
less than 20 (except for legal and accountancy firms which are allowed more). Again,
it is usually a small business, but is the type of organisation preferred by the
professions.
Advantages Disadvantages
Partners share the responsibilities of
running the business, so taking
holidays or falling ill will not be so
much of a problem
Partners can specialise
More money can be invested in the
business because there are more
owners
Unlimited liability (except for certain
types of sleeping partners)
Arguments may arise between the
partners on how to run the business
Partners can leave or new partners
taken on, which can upset the
running of the business
Profits have to be shared between
partners
Understanding Business Types of Business Organisation
25 August 2015 4
Private Limited Company (Ltd)
Features
Owned by shareholders
Controlled by a board of directors (BOD)
Finance is available from: shareholding,
company profits from previous years, borrowing, government grants, trade credit,
debt factoring, etc
Objectives
To maximise profits, by selling at a higher price than cost and keeping expenses
low.
Sales maximisation
To survive in times of recession or threat of takeover.
To grow or expand by moving into a different country.
To increase market share by taking customers from your competitors.
To be cost effective – not waste money and eat into potential profits.
To be socially responsible – to have a good image in the eyes of consumers or local
communities
Advantages Disadvantages
Limited liability which would reduce the
risk of personal loss to the shareholders
Profits shared amongst more people
Should attract finance easier as a larger
organisation
There is, as with a Partnership, a legal
process in setting up the company
Allows for economies of scale Shares cannot be sold to the public,
therefore, raising finance is more difficult
than for a plc
Less risk of liquidation Firm has to abide by the requirements of
the Companies Act
Control is still not lost to complete
outsiders
Scottish-based firms must provide
Companies House in Edinburgh with a
copy of the annual accounts. They are
then available to anyone who requests a
copy.
Experience and skills can be gained from
shareholders and directors
Understanding Business Types of Business Organisation
25 August 2015 5
Public limited company (plc)
Features
A PLC is generally a large company – it must have a minimum
of £50,000 share capital.
The shares of PLCs can be bought and sold on the stock
exchange – large amounts of capital can be raised by selling shares to
investors. Therefore the shareholders are the owners of a plc. They will
elect a Board of Directors at the AGM to run and control the company for
them.
PLCs must also complete a Memorandum of Association and Articles of
Association. PLCs must also be registered with the Registrar of Companies.
Finance is available from: company profits from previous years, selling
shares to the public, bank loans, bank overdraft, issue debentures,
government grants, trade credit, debt factoring, etc
Objectives
To maximise profits
To expand output
To grow
To have a higher sales revenue than in previous years
To dominate their market
To have a strong image
Understanding Business Types of Business Organisation
25 August 2015 6
Advantages Disadvantages
Shares can be sold on the stock exchange
meaning large amounts of finance can be
raised – huge sums of capital can be
raised from individuals and
institutional investors such as Pension
Funds and Insurance Companies.
Initial set-up costs due to the legal
procedures necessary will be high resulting
in poorer profit results for the first few
years.
Knowledge that shares in public
limited companies can be resold on
the Stock Exchange if required
encourages people to invest.
There is a large amount of legislation
which must be complied with (the
Companies Act) or the company may be
fined or have legal action taken against
them.
PLCs often dominate their market
meaning they can force smaller
organisations out of business and dictate
market prices.
PLCs are required by law to publish
annual accounts which are costly to
produce. Members of the public can
examine this financial information
which is lodged with the Registrar of
Companies. PLCs have to make more
information available to the public
than private limited companies – for
example, they must publish Annual
Reports.
Lenders are more likely to give money as
they have greater confidence it will be
paid back.
PLCs may grow so large that they
become inflexible and difficult to
manage effectively.
Investors (shareholders) will have limited
liability meaning PLCs will find it easier to
attract shareholders.
PLCs have no control over who buys
shares which might mean investors can
plan a hostile takeover.
All the above mean financial stability
for the company which enable it to
develop and expand.
In very large companies employees
may feel out of touch (‘alienated’)
from those at the top and it may be
difficult to take a personal approach
to customer service.
Examples of public limited companies include Legal & General plc, Marks and
Spencer plc, Manchester United plc and the Boots Company plc.
Understanding Business Types of Business Organisation
25 August 2015 7
Multi-national companies
Many large PLCs operate as multi-national
corporations. Multi-national corporations
have branches (called subsidiaries) in more
than one country. Many companies
establish sales outlets for their products in
various countries. However, the
distinguishing feature of an MNC is that it
sets up production facilities in more than
one country. British multi-nationals include BP and ICI. MNCs are major
employers in many countries.
Reasons for establishing MNCs:
to increase market share
to secure cheaper premises and labour
to avoid or minimise the amount of tax which has to be paid
to take advantage of government grants available
to save on costs of transporting goods to the market place
to avoid trade barriers like the EU Common External Tariff
to enable their products to be sold globally without having to rely on other
companies to sell them in some areas, under licence.
Characteristics of a multi-national corporation:
Will involve operations in several different countries
Has a distinct ‘home’ base country
Has a global brand
Can dominate markets across many countries
Can have budgets that are larger than many individual countries
Can greatly influence local economies
Cultural variations
Understanding Business Types of Business Organisation
25 August 2015 8
Advantages of operating as a multinational
An organisation may be given grants from governments to locate in that country
and the grants will not require to be paid back improving their financial position
Organisations will become larger which may result in them being safer from
takeovers
Can allow organisations to increase their sales which in turn should increase their
overall profits
Will allow organisations to take advantage of economies of scale and reduce unit
costs of products
Could allow organisations to employ cheaper staff which will result in greater
profitability
May help avoid legal restrictions in the organisation’s own country which could
allow them to sell/produce their products abroad
Could allow for tax advantages which will increase profitability
Will mean the organisation can avoid restrictions on imports into a country which
will help overall sales
Disadvantages of operating as a multinational
Legislation may be different in other countries which may require the organisation
to alter its product/service
Legislation may exist on how a product/service is marketed and may result in some
marketing techniques having to be changed
Cultural differences will mean that organisations have to be sensitive to different
countries cultures
Different languages will exist and this may mean that organisations have to employ
specialist linguists to work with the organisation
Disadvantages of MNCs for the host country:
They can be very powerful – some of them earn more than some small
countries in the course of a year – and can therefore exert quite a strong
influence on the governments of host countries – for example, by
threatening to close down their operations there.
They can be accused of exploiting labour in low wage countries.
They may use up non-renewable resources in the host country.
Because they are so powerful and able to take advantage of economies of
scale, they may force local firms out of business.
Profits go back to the parent company – in which ever country it has its
headquarters.
All the major functions tend to remain at headquarters so that, in times of
difficulty, it is relatively easy for the MNC to close down a subsidiary
causing many job losses.
Understanding Business Types of Business Organisation
25 August 2015 9
Franchise
Definition: a business run by one firm under the name of
another. The franchiser gives the franchisee a licence
permitting them to sell goods or services under the
franchiser’s brand name, usually in return for a share of
the franchisee’s profits. The franchisee’s licence permits
him/her to use the franchiser’s name, publicity materials,
decor, uniforms, etc.
Many individuals use franchising as a means of starting up their own business.
There is less likelihood of failure as support and guidance is provided by the
franchiser to the franchisee.
Businesses such as McDonald’s operate some branches directly and others as
franchises. Other examples of franchises: Kentucky Fried Chicken, the Body
Shop and the British School of Motoring (BSM).
Franchiser
Advantages Disadvantages
It is a quick way to enter new
geographical markets and the
franchiser’s name becomes more well
known as the business expands.
Franchisers are reliant on franchisees
to maintain the image and ‘good
name’ of the business – bad publicity
can affect the whole franchise
Can increase market share without
investing further capital
Is paid a percentage of profits or sales or
a royalty
Can control the way the business is run.
Understanding Business Types of Business Organisation
25 August 2015 10
Franchisee
Advantages Disadvantages
The new business can begin trading on
the established reputation and
successful business idea of the
franchiser immediately.
A percentage of the profits has to be
paid to the franchiser.
The franchisee has the advantage of a
well known (established) brand name
and back up service. The franchiser
will advertise nationally.
The franchiser may impose strict rules
on the franchisees and restrict their
ability to operate on their own
initiative.
Product innovation is shared – all
franchisees can benefit from ideas
generated by each of them. For
example, when a McDonald’s
franchisee thought up the ‘Egg
McMuffin’, the recipe was circulated
to all the other franchisees and the
product became very successful.
The franchisee’s reputation and
profitability depend in part on that of
the franchiser and the performance of
the other franchisees.
Reduces the risk of failure in the
marketplace
Franchiser will provide training
Understanding Business Types of Business Organisation
25 August 2015 11
PUBLIC SECTOR ORGANISATIONS
Publicly-funded organisations which are
owned and controlled by the
government and funded through the
taxpayer. These organisations set up and
owned by the government to provide
services to the public. These are services
which the private sector could not
provide very well or could not provide
at all. Making a profit is not always that
important, however, keeping within the
budget (money they are allocated from
the government) is very important. In recent years, this has led to many public
organisations having to change to more private sector-like practices in terms of target
setting and cost cutting.
Public corporations
These organisations are businesses which are owned and run by the government for
us. The best known example of a public corporation is the BBC. The government
appoints a chairman and board of directors to run them on their behalf. There used
to be many more but these were 'Privatised', (sold on the stock market), such as British
Telecom, BP, and the gas and electricity companies. Public corporations receive grants
from the government and also raise finance from the public. For example the BBC
charges the public for a TV licence and also sells videos/merchandise for programmes
it produces.
Government-funded service providers
The government provides us with some services such as the National Health Service,
Social Security and Defence. These are services which the private sector would be
unlikely to offer to the public in ways that the government or the public would find
acceptable. They are financed by the government in order to carry out their policies
in these areas. Each year they are given a set amount of money to spend. Each usually
has its own appointed government minister who has supervisory control and provides
guidelines to managers as to how the service should be run. The managers then make
many of the decisions as to how the money could be best spent to meet the
government objectives.
Understanding Business Types of Business Organisation
25 August 2015 12
Local authorities
These provide us with services such as education, housing, leisure and recreation,
refuse collection and street lighting. They get their money from council tax,
government grants, and from fees for things like using facilities at sports centres.
Local authorities either set up their own departments to provide these services, or they
'contract out' to private companies who receive a fee for providing these services, such
as cleaning or meals for schools. The local authority has to do this, as national
government legislation insists that some services have to be put out to 'compulsory
tendering', where private companies are invited to bid for the work. Those who offer
the best value for money are given the contract for a number of years. It is argued
that this will result in a more cost-effective service for the community because,
unlike government-run enterprises, private firms have an incentive to keep
costs low and efficiency high in order to survive and to maximise profits.
Public Sector Organisations – Features
• owned by the taxpayer/government
• controlled by local or central government (or an elected party or minister)
• financed by taxation
Public Sector Organisations – Objectives
• To provide their local area with a wide range of efficient services.
• To be cost effective – use taxes wisely, stick to a budget.
• To improve the standard of living in an area.
• To meet the needs of their constituents/serve public interest.
• To improve society.
Public Sector Organisations – Sources of Funding
• Taxation
• Council Tax
• Charging for some services, eg, leisure centres
• Business Rates
• Grants from lottery
Understanding Business Types of Business Organisation
25 August 2015 13
THIRD SECTOR ORGANISATIONS
Non-profit making organisations
These consist of charities and voluntary organisations which are set up to support
specific causes.
Charities are regulated by the government and the income they make is put towards a
specific cause. For example, the RSPCA uses the income they make to prevent animal
cruelty and to promote animal welfare. To be recognised officially as a charity,
the organisation must have one or more of 4 main objectives:
to relieve poverty
to advance education
to advance religion
to carry out activities beneficial to the community.
The Charity Commissioners are appointed by the government to regulate the
activities of charities. They keep a Register of Charities. Recognised charities
are given ‘charitable status’ which means that they are exempt from paying
certain taxes, such as VAT.
Voluntary organisations such as community football clubs or youth clubs aim to
provide a service to people, but without a profit-making motive. Run and staffed by
a committee of elected volunteers, they bring together people with similar interests.
These organisations can raise finance by applying for grants from the Lottery, Sports
Council or local authorities. They may also charge a fee to become a member of their
organisation or to use their facilities.
Social Enterprises
These have a main social or environmental aim rather than to make profit for owners
or shareholders but they are run in a business-like way. People know what social
enterprises try to do and who they are trying to help. At least half of the profit that
social enterprises make, through selling goods and services, must be invested into
meeting the stated aim of the social enterprise. Unlike some charities, they don’t rely
on grants and donations but some social enterprises do become charities. The main
difference between a social enterprise and a charity is its legal structure and the fact
that social enterprises are less regulated by the government.
Examples of Social Enterprises include Ness Soap (Inverness) and BlindCraft
(Inverness).
Understanding Business Types of Business Organisation
25 August 2015 14
Co-operatives
Today, whilst we still see co-operatives, we also buy fair-trade produce, and see lots
of smaller local organisations - like credit unions or small local childcare groups –
which are set up to benefit the buyers and users of the service, not just to make profit
for the owners. These organisations may make a profit, however instead of these
profits being returned to the owners, the profits are either shared between the
members of the society, or reinvested into the business to provide future benefits for
the community.
The co-operative society is a common form of social enterprise found throughout
Scotland. A co-operative society (like Scot-Mid or the Co-operative chain in Scotland,
which has food stores and funeral homes throughout the country) functions like any
other business, until it comes to the issue of profits. In the case of the Co-operative
Society, profits are shared amongst their members (customers) in the form of a
dividend.
Understanding Business Types of Business Organisation
25 August 2015 15
TASK 1 (Source: Higher Business Management with Answers by Peter Hagan & Alistair B Wylie Page 15)
For each of the following examples, identify which would be the best type of business
organisation to use. Justify your decision for each.
(a) Firm of solicitors
(b) Window cleaner
(c) Garage repair and sales
TASK 2 – Public or Private? (Source: Higher Business Management with Answers by Peter Hagan & Alistair B Wylie Page 17)
Which of the following services are provided by government and are publicly funded?
You should also identify whether they are provided by local or national (Scottish or
UK) government.
(a) University education
(b) Local bus service
(c) Water supply
(d) Sheltered housing
(e) Letter postal service
TASK 3 – Public & Private (Source: Scholar Study Guide)
Q1: What is the name of the process by which a new or existing business is converted into a
corporate body.
_____________________________________________________________________________
Q2: A memorandum of association gives:
a) the names of associated companies.
b) the company's name, location and what it will do.
c) a list of the company's products.
Q3: A public limited company must have at least:
a) one director and one company secretary.
b) two directors and one company secretary.
c) one director and two company secretaries.
Q4: What is the difference between a public limited company and a private limited
company?
a) Public limited companies have to declare all their activities - private limited
companies can be secretive.
b) Public limited companies do not need a minimum share capital - private limited
companies must have a minimum £50,000.
c) Public limited companies can raise money by selling shares on the stockmarket -
private limited companies cannot.
Understanding Business Types of Business Organisation
25 August 2015 16
TASK 4 – Control, Ownership and Finance
For each of the types of organisations listed, summarise who owns them, controls
the running of them and the sources of finance available to each of them.
Ownership Control Finance
Sole Trader
Partnership
Private Limited
Company (Ltd)
Public Limited
Company (plc)
Franchise
Multi-national
Public Sector
Organisations
Charity
Social Enterprise
Understanding Business Types of Business Organisation
25 August 2015 17
TASK 5 – Past Paper Questions
Question 1
(Source: 2012 SQA Section 2 Question 5)
(a) Describe the main characteristics of a multi-national corporation. 4
(b) Describe the possible objectives of a private limited company. 4
Question 2
(Source: 2011 SQA Section 2 Question 3c)
Explain advantages and disadvantages of becoming a public limited company. 5
Question 3
(Source: 2010 SQA Section 2 Question 2e)
Many companies are now classed as multinationals. Explain the advantages and
disadvantages of operating as a multinational. 5
Question 4
(Source: 2010 SQA Section 2 Question 3e)
Discuss the effects of becoming part of a franchise. 5
Question 5
(Source: 2009 SQA Section 1 Question 2a)
Explain 3 reasons why an organisation would become a private limited company. 3
Question 6
(Source: 2007 SQA Section 2 Question 2b)
Public sector organisations are owned and controlled by Central Government.
(i) Describe 2 strategic objectives of a public sector organisation. 2
(ii) Identify 2 sources of funding for a public sector organisation. 2
Question 7
(Source: 2006 SQA Section 3c)
Explain the advantages of franchising for the franchiser. 3
Understanding Business Types of Business Organisation
25 August 2015 18
TASK 6
Activity 2
Your friend tells you she wishes to become a self -employed hairdresser. Describe two
types of business organisation she might establish to achieve this aim, pointing out at
least two advantages and two possible disadvantages of each.
Activity 3
Explain why a local authority might find it cheaper to contract out the provision of
school meals to a profit-making organisation rather than provide them itself.
Activity 4
How might the objectives of an NHS hospital differ from those of a private hospital?
TASK 7 – Franchising
Read the case study below and answer the questions which follow.
McDonald’s has had great success with franchises in Scotland, Wales and Northern
Ireland, but until 1994 most of their branches in England were company-owned. In
that year they embarked on a plan to double the number of franch ises within ten
years, and by 1997 almost half of McDonald’s outlets were operating as franchises.
McDonald’s takes great care in selecting its franchisees. Each year it receives
thousands of enquiries about franchises. Before even being considered as a franchisee
candidates have to work in a McDonald’s for several days. Training for franchisees
takes 9 months and includes a stint at Hamburger University in London where, at
their own expense, franchisees learn how to motivate their staff and satisfy cus tomers
in the McDonald’s way. Franchisees use McDonald’s materials and equipment so that
the meals offered are of a standard quality in all outlets. In return franchisees have
to finance 40% of the cost of setting up their branch, and pay McDonald’s an annual
royalty.
1. Describe the advantages of becoming a McDonald’s franchisee.
2. Identify three advantages to McDonald’s of franchising some of its outlets.
3. In which sector of industry is franchising most common? Give examples of actual
businesses and explain why this sector is particularly suited to being organised via
franchises.
Understanding Business Types of Business Organisation
25 August 2015 19
TASK 7 – Multinational Companies
Your teacher will name a multinational company for you to investigate and fill in
the details below:
Name:
Founder(s):
Base Country:
Global Revenues:
Type of Company (what does it sell?):
Operating Countries:
Number of Employees (globally):
Brief History:
AG Barr
SAS
NetApp
C&C Group
FedEx Express
Vodafone
Marriott
McDonald’s
Kimberly-Clark
SC Johnson
Diageo
American Express
Medtronic
Intel
Hilti
Colgate
Telefonica
National Instruments
Mars
Accenture
Roche
Novo Nordisk
The Coca-Cola
Company
Hewlett Packard
Unilever
Shell
TASK 8 – Choose Your Own Franchise
Access the webpage http://www.franchisedirect.co.uk/ and spend some time choosing a
business franchise to invest in.
Name of Company:
Area/Industry:
Minimum
Investment
Required:
Brief Description of
Business:
Location of
Business:
Justify why this
franchise business
would suit you and
how you would
make a success of
it:
Understanding Business Types of Business Organisation
25 August 2015 20
TASK 9 – Social Enterprises (Source: Scholar Study Guide)
Are there any social enterprises in your own local community?
You may use the Internet to carry out this research.
Write a short report (200-300 words) detailing what these organisations do, and how
they distribute/reinvest their profits, and submit to your teacher.
TASK 10 - The Dean Tavern (Source: Scholar Study Guide)
The Dean Tavern in Newtongrange is (and has always been) a busy local pub. Founded in 1899, it has always operated as a "Gothenburg System" pub, where profits are used for the good of the local community. In the early days of the pub, the profits were shared between the residents of the village - most of whom were employed as miners at the local pit, the Lady Victoria Colliery. Today, although the mine is long gone and the village is much larger in size, there is still a strong community spirit, and whilst the pub profits are not split between local families, they are used for the good of the local people. This means that a number of local voluntary organisations, for example the children’s gala, the pipe and brass bands, and Brownie and Scout groups, all receive an annual donation towards their running costs. They can also apply for an extra grant if they require funding for a special project – for example, a local football team tour to Germany.
1. Can you suggest a reason why the Dean Tavern would choose to operate as a
Gothenburg and redistribute any profits to the local residents?
2. Taking into account the changes that have happened in society, can you suggest a reason
for the change in profit distribution, so that profits are given to local voluntary
organisations rather than individual residents?
Understanding Business Types of Business Organisation
25 August 2015 21
TASK 11 – (Source: Scholar Study Guide)
Complete the sentences using following options.
a) meaning they can force smaller organisations out of business.
b) meaning PLCs will find it easier to attract shareholders.
c) which will be costly to produce.
d) meaning large amounts of finance can be raised.
e) as they have greater confidence it will be paid back.
f) or the company may be fined/have legal action taken against them.
g) resulting in poorer profit results for the first few years.
h) which might mean investors can plan a hostile takeover.
1. Shares can be sold on the stock exchange
2. PLCs often dominate their market/dictate
market prices
3. Lenders are more likely to give money
4. Investors will have limited liability
5. Initial set-up costs will be high
6. There is a large amount of legislation which
must be complied with
7. PLCs have no control over who buys shares
8. PLCs are required by law to publish annual
accounts
TASK 12 – (Source: Scholar Study Guide)
Copy and complete the sentences using the following words.
taxes private donations
trustees government ministers
1. A public sector organisation is owned by the __________ whereas a third sector
organisation is owned by (but does not benefit) __________ individuals.
2. A public sector organisation like the NHS is controlled by government __________
or their appointed managers whereas a charity operating in the third sector is
controlled by a board of __________.
3. A public sector organisation is mainly funded through __________ whereas a third
sector organisation is funded through __________ or fundraising activities.