Types of business organization

Types of business organization Types of business entities: partnerships and sole proprietorships private companies (private sector) ● ● ● ● Sole trader Partnership Companies (including multinationals) Public businesses (public sector) Government owned business Sole Trader: Business owned by one person. e.g. manicures, massages. Advantages Disadvantages Easy to set up, no special paper work needed Difficult to raise finances Full control of business Narrow range of skill One owner Cheap to start Unlimited liability Special services optional for customers If sole trader dies, business dies Profits do not have to be shared Prices higher than large businesses Personal attention given to business affairs No breaks/holidays If sick, can’t open Less capital is required; as small business Pay extra self employment tax Speedy decisions can be made by owner, few people involved Mistakes possible, because no colleagues to consult for advice. Unlimited liability: ● ● If a business is in debt, (usually sole traders and partnerships), and have unlimited liability, they are responsible to pay it off, and may need to use personal assets to cover it. This may involve selling off personal possessions such as their home, car, etc. to pay what they owe. Partnership: Business association between 220 members/owners Advantages Disadvantages Capital from partners; so more capital available Unlimited liability Larger scale than sole trader Disagreements between partners Family members can join Limited number of partners (Only 20) Affairs can be kept private If partnership was set up by legal agreement, it will need to be reformed if a partner dies. Risk can be spread across more people Partnerships need to be set up with a Deed of partnership. It includes the following: ● ● ● ● Amount of capital to provide How to take on new partners How a partner leaves/ends Splitting profit and loss Key Points: ● ● A sole trader enterprise is run by one person. A partnership is owned and run by two or more people. Sole traders and partners typically do not have limited liability. Capital raised is restricted to the owner’s own savings, borrowing and any profits made. 5.2 Other types of business organisation Company: ● ● ● Owned by shareholders who bring capital into the business Separate legal entity from owners (incorporation) Shareholders appoint a board of directors to make the decisions (e.g. how much profit should be distributed to shareholders, direction business should take, etc.) Incorporation: Establishing a business as a separate legal entity from its owners, and therefore allowing it to have limited liability. Reasons for incorporating a business: ● ● ● If a business gets into financial difficulty, shareholders only risk losing the value of their shareholding in the business. Private assets are protected by limited liability and only the assets of the business are at risk. An incorporated business is easier to sell than an unincorporated one, as all the arrangements of setting the business up are complete. The main disadvantage of a company concern the administration needed to register the company and the requirement to produce annual reports. Detailed accounts must be kept. These are the two types of limited companies: Public Limited Company (plc) Advantages Disadvantages Limited liability Costly and complicated to set up Has access to more capital Increased threat of takeover Shares can be bought and sold on a stock exchange – anyone can buy them. Shareholders expect steady income from dividends Can have large number of shareholders Certain financial information must be made available to the public (competitors included) Allows fund raising from investors and banks Private Limited Company (ltd) Advantages Disadvantages Limited liability Has access to less capital than a plc Can stop outsiders from buying up the company (takeover) Usually has a small number of shareholders, (a family run business?) Less capital Shares can only be bought direct from the company with permission of board of directors. Registrar of Companies (Documents for companies): ● ● ● Certificate of incorporation Articles of association Memorandum of association Franchises: ● ● ● A business made up of a franchisor and franchisees. Franchisor grants a licence to the franchisee to produce a product, sell products or provide services in a given area. The franchisee pays for the franchise to trade in a given area, but will receive training and equipment from the franchisor Advantages: ● ● ● ● ● Tried and tested market Low risk Easy to raise money from banks National ads paid by franchisor Given right and appropriate materials to do job well. Franchisor: Only have to invest a limited amount of capital in each franchise, and earn some profit from the franchisee. Disadvantages: ● ● ● Costly to buy licence Less flexible, as no control (Some) profits will go to franchisor Joint Ventures: ● When two independent businesses set up a new enterprise they both own. It can take the form of an incorporated business or a partnership. ● ● Usually used when a business wants to enter a new country with the help of a local business. This is because they will have contacts, experience and are familiar with the area and market. Key Points: ● ● ● ● A company is owned by shareholders who are able to bring capital into a business Shareholders are protected by limited liability. The financial risk is limited to the value of shares they hold. Another way for a business to grow with less risk to its own capital is to sell franchises. A good way of entering a foreign market is to create a joint venture with a local company. 5.3 – Objectives, growth, and business organisation ● There are a variety of objectives different businesses will target, depending on what they want. How they make a profit varies with the type of business These are the key differences between various business forms: Organisation Objectives Control Sources of Finance Distribution of profits Sole trader To provide a living for the owner, profit, growth By the one owner Owner’s capital. overdraft, credit, loans, grants, mortgage, profit All to the owner Partnership To provide a living for the owner, to run a professional service, profit, growth, increased market share. By the partner Partner’s capital, credit card, overdraft, loans, grants, mortgage, profit Between partners Incorporated business Profit, growth, increased market share. By the board of directors, and managers working on their behalf Share capital, overdraft, loans, mortgage, debentures, profits Between shareholders Franchise Franchisor: To expand business over a wider area and increase profits. Franchisee: To set up a profitable enterprise using the support of the franchising organisation. Joint venture To create a new venture based on an agreement between two existing companies; to make a profit in a new area of operations. By the franchisee, subject to limitations establishe d when forming the franchise. Franchisees: Pay a fee to the franchisor to buy the rights; then access other sources of finance (e.g. bank loans), to keep business running Franchisees pay a set % of their profits to the franchisor. The new venture becomes a distinct entity, with responsibili ty for running the venture. Funds provided by the companies that create the joint venture; the JV can then access other sources of funds The joint venture distributes the profits to the companies that set it up Key Points: ● ● ● ● Business objectives are best met when there is a suitable form of business organisation. Sole traders and partnerships are a good way of setting up small independent businesses If a firm wants to expand and grow, it may need to become a company, or it may set a franchise Forming a joint venture can help a company expand into a new market. 5.4 – Multinational companies Multinational: A company with its headquarters in one country, but which produces and sells its products in other countries. Want to grow to benefit from wider market opportunities (e.g. access to scarce resources, new pool of labour) Advantages (Host country): ● ● ● Capacity to make use of natural resources in many countries Making use of labour in other countries, which are lost cost and have the right skills. The opportunity to have a global market, with a presence in many countries Advantages (Other countries): ● ● ● Create employment in many countries Help build infrastructure (e.g. roads and railway links) Spread expertise in a new technology to a country (e.g. training new employees) Disadvantages (Other countries) ● ● ● Causes pollution, damaging local environments Undercut local firms, as they are a large multinational Take profit out of domestic economy to pay shareholders Key Points: ● A multinational is a company that operates in several countries Companies become multinationals to benefit from wider market opportunities, access scarce resources, and take advantage of a new pool of labour 5.5 – Limited and unlimited liability ● The owners of a business are liable for its debts. The amount of liability that sole traders and most partners are accountable for is not restricted to the sums that they have put into the company. Limited Liability: ● ● ● Legal protection which limits the risk for a shareholder to the sum they have invested in a company. Shareholders are not responsible for the company’s debts unless they have given guarantees. (e.g. bank loan) They can only lose the money they have invested into the business. Key Points: ● ● ● Limited liability is a legal protection that reduces risks involved in a business A shareholder or other owner of a business with limited liability is only liable for the value of their investment in a business There are certain types of partnerships that have limited liability status. However, in ordinary partnerships, there is unlimited liability of partners. 5.6 – Roles and responsibilities Organisation charts: ● ● ● Show the roles of people in an organisation and the relationship between them. Role: what an individual does in an organisation It shows the internal structure and lays out who is responsible for who. Levels within an organisation: ● ● ● ● An organisation chart usually indicated positions that have roughly equal amounts of responsibility on the same level. There are hierarchies, in which different levels of importance/power can be shown. As you go up, there are increasing levels of responsibility Going down, you can see the different chains of command (who’s in charge of who) Span of control: The span of control of an individual is the number of people he/she manages directly. ● Best – finding a balance between controlled/being controlled. (Being able to trust them) Flat organisations: ● ● ● In a flat organisation, managers delegate responsibility to subordinate staff. Managers need to have more trust in subordinates than in a large organisation Much wider, making it more efficient Tall organisations: ● ● ● ● Narrow span of control allows control and communication to be closer However there are many levels of management this is very difficult to run It may also take a long time for information to be passed down Key Points: ● ● ● Organisation charts show the roles of members of an organisation and shows the links of an organisation between its members There is a limit to an effective span of control Tall organisations are hierarchical and may be difficult to run 5.7 Internal organisation Managers: People who help to steer the organisation towards meeting their objectives. Managers are responsible for making sure than an organisation’s resources are used efficiently. This means making the best use of: ● ● ● ● ● ● ● ● People – employees Finance – Making sure that costs are adequately provided for sales and profit objectives to be met Opportunities – Making sure they are spotted and exploited Materials – Minimising waste and maximizing output Machinery and equipment – Making sure that it is correctly maintained and replaced when necessary Time – Making sure that it is not wasted Buildings – Making sure that the premises are safe and used efficiently Information – Making sure that the organization has market knowledge, and that the right IT specialists are in place to provide high quality information Managers are usually responsible for one specific area of work, e.g. sales, marketing. They may also be in charge of one geographical area. Ownership and control: ● ● ● ● The owners of a business (shareholders) do not always control the business. They usually elect directors to represent them, who appoint managers to run the business on a day-to-day basis The directors are accountable to the owners for their managerial actions but do not own the business. Shareholders have the power to remove the board of directors at an annual general meeting (AGM) These are the owners and controllers of different types of business: Type of enterprise Owned by Controlled by Sole trader One owner One owner Partnership Partners Partners – although a senior partner may have more power to make decisions Company Shareholders Directors and paid managers; shareholders can vote at an AGM to replace the board Franchise Franchisee holds the license for a given period Franchisee makes day-to-day decisions with the rules set out by the franchisor Joint venture The businesses that set up the joint venture Managers of the joint venture Key Points: ● ● ● ● Management is the process of planning, organizing, leading and controlling the efforts of organization members. Management involves the effective use of resources such as people, finance and time, so that objectives are met Directors are appointed by shareholders to direct the organization and make sure that it runs smoothly. Managers control day-to-day activities The owners of a business are responsible for controlling small organisations. In larger companies there is a separation of ownership and control. 5.8 – Communication Communication: Passing on or exchanging information, ideas, or feelings. ● ● ● It involves sending a message to a receiver. The sender must select the best method of communication such as oral, written or electronic Communication takes place both within a business and between the business and other organisations Effective communication depends upon: ● ● ● ● ● ● Clearly defining the objective of the message Taking account of the needs, attitude, and knowledge of the receiver Being aware of how distractions (noise) can distort the message Selecting the best medium for communication Checking that the message has been understood through feedback Listening to feedback and responding The communication process Internal and external communication: ● ● Inside the business (Internal communication) à E.g. instructions, orders, lists and specifications to colleagues Outside the business (External communication) à Information to contacts and suppliers outside the business Communication problems: ● ● ● ● Language ○ The sender may not be a good user of language, or may use jargon, unfamiliar technical language or abbreviations. ○ There may also be different languages used, making understanding difficult ○ It is essential when creating a message to think about the needs of the receiver and be clear and direct Emotional state ○ The sender of receiver may be upset or angry and set out a message poorly ○ They may also fail to listen carefully to a message ○ The receiver may read or hear what they want to hear rather than the message sent Communication method ○ The method chosen may be inappropriate for the receiver. ○ Some topics may be better handled in person than by phone Cultural differences ○ The receiver’s interpretation of the message may be different due to differing culture experience and language ○ Organisations need to have a good understanding of the culture of countries that they communicate with Solutions to communication failure: ● ● ● ● All employees in an organization need to be aware of the importance of effective communication Making them aware of the problems of poor communication, and familiarizing them with the best communications through training would be the most effective and informative way Organisations need to have the right resources to enable effective communication. This involves investing in good communication technologies and making sure that employees know how and when to use different types of communication Key Points: ● ● ● Communication involves exchanging ideas and messages with others Communication takes place within an organization (internal) and with those outside the organization (external) Careful attention must be given to framing clear messages, and using an appropriate medium in a way that recipients find easy to understand. 5.9 – Internal communication Types of communication: ● ● ● Formal communication takes place through the official channels in an organization In contrast, informal communication does not follow set guidelines Electronic communication takes place through email, telephone, video conferencing, and using a company website for employees. Formal written: ● ● Memorandum – a thing to be remembered. They are used to pass on information, instructions and enquiries. Report – Written communication from someone who has collected some facts or issues. A report is written for a particular purpose and is set out in a particular format: ○ Title page ○ List of contents ○ Terms of reference (why the report is being written) ○ Procedure (how the report has been put together) ○ Findings (what has been discovered that is of interest) ○ Conclusion (a summary of the findings) ○ A fax machine is connected to a telephone line. Documents can be fed into one machine and are received and printed by another. ○ Businesses also communicate internally through posters and through in-house magazines Formal verbal: ● ● ● ● Verbal communication takes place within an organization including telling someone what to do and giving feedback about their performance Meetings are held regularly and are usually formal. There is a chairperson to conduct the meeting, with an agenda, and a minute taker to make sure things run smoothly. Training sessions are organized to help employees develop their skills and knowledge required to do the job well Appraisal interviews – an employee is given targets to work towards Informal: ● ● ● Communication within a company may take place informally using what is referred to as a grapevine. This helps to develop working relationships. Networking describes building informal contacts with others. Electronic: ● ● ● ● ● Most companies have an intranet. This is a network of linked computers and databases of information This serves as in internal company website, providing information about the company and its departments to people inside the organization Mobile phone links help with employees are working away from the workplace A company website allows everyone to know about the activities Video conferencing enables visual link-ups between members of the same company at different locations. Key Points: ● ● ● ● Internal communications take place within an organization Communication methods need to be appropriate to the type of audience to be reached and the messages to be sent Electronic communications, such as emails, fax, intranet, internet and video conferencing, have replaced many traditional methods Electronic communications enable immediate, relatively low-cost links in which a lot of information can be exchanged. 5.10 – External communication ● ● External communication indicates how a business communicates with individuals and other businesses outside itself. It must be effective because it gives the outside world a view of the company, its brands and products. Purposes of external communication: Purpose 1. Providing information and making sales Example ● Most large companies have a website giving product details and inviting customers to make purchases ● Transport companies provide sites through which passengers can check details. They also include terms and conditions, costs, etc. 1. Giving instructions ● Telling suppliers where to deliver goods or telling customers how to use products 1. Confirming arrangements ● Confirming meetings, conferences, or details of transactions 1. Improving customer service ● Helplines – to deal with customer issues and complaints. This may reduce error and provide feedback and enquiries for customers ● Communication is part of the service for a customer (Spoken to in a polite way) ● Brochures and advertising material ● Effective PR projects a positive image, in which a company is professional in its dealings with its stakeholders. 1. Public relations (PR) Methods of external communication: 1. Personal relationships: Contacts and relationships that people in an organization build up with others. 2. Business letter: This is an important form of formal written communication. It makes the business organization look professional, should look attractive. It will contain the following features: ● Addresses of the recipient and sender ● Date ● Greeting (e.g. Dear Sir/Madam) ● Subject heading – the title of the topic the letter refers to ● Body of the letter ● Close (e.g. Yours sincerely) 1. Email: This is the most widely used form of communication and now has the same ‘weight’ as a traditional letter. Writers need to take care with the contents of business emails 2. Company website: Websites have been made for many forms of external communication. A successful site must be easy to use for purchasing: There should be credit card security measures as many users are concerned about security. An effective site will: 3. Customer newsletters: The company can send mail directly to customers giving details of new developments 4. Advertisements: Found in various media (e.g. television, magazines, newspapers) 5. Telephone: These links are important to businesses such as banking, insurance and utilities. These types of companies run call centers, which operate helplines to deal with customer queries, sell products over the phone or handle billing and other payment systems. 6. File transfers: Large quantities of data can be sent electronically. File transfer involves sending ‘bunches of data from a sending to a receiving computer 7. Electronic data interchange (EDI): This can be set up to allow you to purchase goods electronically. EDI is a network link that allows retailers to pay suppliers electronically, without using invoices and cheques. This reduces time, paperwork and costs. 8. Video conferencing: Workers at different locations can see and talk to each other on screen using electronic links. This avoids the expense and inconvenience of travel. Key Points: ● ● ● Internal communication takes place within a business; external communication is with individuals and businesses outside a given business Electronic communications such as email are replacing traditional methods Company websites enable an organization to present itself in a positive way to consumers all over the world.