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CHAPTER 3

There are five main forms of business organization in the private sector: Sole Traders Partnerships Private Limited Companies Public Limited Companies Co-operatives.

Limited Liability: It means that the owners of the company cannot be held responsible for the debts of the company they own, their liability is limited to the investment they made by buying the shares.

Unlimited Liability: It means that if a business cannot pay its debts, then the people that the owners owe money to (creditors) can force the owner to sell his possessions in order to pay the them.

Sole Traders: It is a business owned and operated by just one person- although the sole trader can employ other people, the owner is the sole proprietor. It is a common form of organization because there are very few legal requirements to set it up.

Legal regulations which must be followed: The owner must register with, and send annual accounts to the Inland Revenue or Tax Office. the name of the business is significant, it is sufficient to put a notice in the main office stating who owns the business. Certain laws should be obtained, such as health and safety laws and obtaining a licence, for example, to sell alcohol or operate a taxi.

Advantages of a Sole Trader: Very few regulations when setting up the business You are your own boss, you have complete control over the business and there is no need to consult with or ask others before making any decisions. Freedom to choose your own holidays and hours of work, prices to be charged and whom to employ Close contact with costumers Incentive to work hard as you get to keep all the profits after paying tax.

Disadvantages of a Sole Trader: No-one to discuss business matters with Do not have the benefit of limited liability Not enough money to expand, the sources of finance for a sole trader are limited to the owners savings, profits made by the business and small bank loans. Because the business is small, the owner cannot afford specialists to do jobs.

The business is likely to remain small as capital for expansion is restricted. If the owner is sick or dies, there is no one to take control of the business as the business will legally not exist any longer.

Partnerships: Is a group or association of between two and twenty people who agree to own and run a business together.

Legal Regulations which must be followed: A partnership of Agreement or Deed of Partnership is required, A partnership agreement is a written and legal agreement between business partners. Without this document, partners may disagree on who put most capital into the business or who is entitled to more of the profits, a written agreement will settle all of these matters.

A Partnership of Agreement will contain the following points: the amount of capital invested in the business by both partners the tasks to be undertaken by each partner the way in which the profits will be shared out how long the partnership will last arrangements for absences, retirements, and how new partners could be admitted.

Advantages of a Partnership: More capital can be invested into the business Both partners will be motivated to work hard as they both will benefit from the profits made. The responsibilities of running the business is now shared

Disadvantages of a Partnership: The partners did not have limited liability. The business did not have a separate legal identity Partners could disagree on important business decisions and consulting all partners could take time. If one of the partners is very inefficient or dishonest, then the other partners could suffer by losing money in the business. Most countries limit the number of partners to 20.

Unincorporated Business: Is one that does not have a separate legal identity. Sole Traders and partnerships are unincorporated businesses.

Incorporated Business: A company is a separate legal unit from its owners. This means that: a company exists separately from the owner and will continue to exist if one of the owners should die. a company can make contracts or legal agreements company accounts are kept separate from the accounts of the owners.

Shareholders: are the owners of a limited company. They buy shares which represent part ownership of a company.

Private Limited Companies: is a type of company that offers limited liability to its shareholders.

Advantages of a Private Limited Company: Shares can be sold to a large number of people All shareholders have limited liability The people who started the company are able to keep control of it as long as they do not sell too many shares to other people.

Disadvantages of a Private Limited Company: There are significant legal matters which have to be dealt with before a company can be formed: The Articles of Association and The Memorandum of Association. The shares in a private limited company cannot be sold or transferred to anyone else without the agreement. The company cannot offer its shares to the general public. The accounts of a company are much less secret than for either a sole trader or a partnership.

Articles of Association: This contains all the rules under which the company will be managed. It states the rights and duties of all the directors, the rules concerning the election of directors and the holdings of official meetings, and the procedure to be followed for the issuing of shares.

Memorandum of Association: This contains very important information about the company and the directors. The official name and the address of the registered offices of the company must be stated. The objectives of the company must be given and also the amount of share capital that the directors intend to raise. The number of shares to be bought by each of the directors must also be made clear.

Certificate of Incorporation: is a certificate which will be issued to allow the company to start trading.

Private Limited Company: is a company that whose securities are traded on a stock exchange and can be bought and sold by anyone.

Advantages of a Public Limited Company: The form of business organization still offers limited liability to shareholders It is an incorporated business and is a separate legal unit. There is now opportunity to raise very large capital sums to invest in the business, there is no limit to the number of shareholders a public limited company can have. There is no restriction on the buying, selling or transfer of shares. A business trading as a public limited company usually has a high status and if properly managed, will find it easier to attract suppliers prepared to sell goods on credit and banks will be willing to lend to it than other types of businesses.

Disadvantages of a Public Limited Company: The legal formalities forming such a company are quite complicated and time consuming. There are many more regulations and controls over public limited companies in order to protect the interests of the shareholders. Some public limited companies grow so large that it is difficult to control and manage. Selling shares to the public is expensive. There is a very real danger that although original owners of the business might become rich by selling shares in their business, they may lose control over it when it goes public.

Procedure for converting a private to a public limited company: A statement must now be made in the Memorandum of Association that it is now a public limited company. A certain minimum value of shares must be issued. Accounts must be laid out in a certain way and made available to members of the public. Usually, the company will apply to the Stock Exchange for a listing, which means that it will be easy for shareholders to buy and sell these shares. The Stock Exchange will look carefully at these accounts and the trading record of the company to ensure that it is not a poorly operated company.

Prospectus: It is an invitation to the general public to buy shares in the newly formed plc. Annual General Meeting: Is a legal requirement for all companies. All shareholders may attend. They vote on who they want to be on The Board of Directors for the coming year. Dividends: are payments made to shareholders from the profits of a company after it has paid corporation tax. They are the return to the shareholders for investing in the company. Co-operatives: are groups of people who agree to work together and pool their resources. All co-operatives have certain common features:

All members have one vote, no matter how many shares they have bought. All members help in the running of the business. The workload and decision-making are shared. In larger co-operatives, it is common to find that a manager is appointed to manage the day-today matters of the business. The profits are shared equally amongst all members. The two most common forms are: Producer co-operatives which are groups of workers who design and produce products in just the same way as other manufacturing businesses. Retail co-operatives which have the aim of providing their members with good quality consumer goods and services at a reasonable price. Close Corporations: This type of business organization is similar to a private limited company but it is quicker to set up. Regulations to be followed: They are limited to a maximum of ten people

A simple founding statement, sent to the Register of Companies, is all that is needed to set up the organization. The members are also the managers (no separation between ownership and control) They are separate legal units offering both limited liability and continuity. There are two criticisms of close corporations: As membership is limited to ten people, it is not a suitable form of organization for large businesses. As in a partnership, members may disagree over decision-making. Joint Ventures: is when two or more businesses agree to start a new project together. Joint ventures can help spread risks and reduce costs for any business however they can lead to disagreements and disputes over policy and management of the new venture. Franchising: The franchisor is a business with a product or service that it does not want to sell consumers directly. Instead it appoints franchisees to use the idea or product and sell it to consumers. Advantages to the franchisor: Expansion is paid for by the license that pays for the shop and has to purchase the licence to use the product name. Expansion is much faster than if the franchisor had to finance new outlets from its own capital. The sale of the licences to use the brand name and products is a major source of profits. The franchisor does not operate the retail outlets- the management problems belong to the franchisee. Advantages to the franchisee: The chances of the business failing are much reduced because a well-known brand and product is being sold. The advertising is paid for, usually, by the franchisor. All supplies are obtained from a single source- the franchisor. Many decisions have already been made by the franchisor and cannot be changed; there are fewer decisions to worry about. Training for staff and management is already provided by the franchisor. Banks are often prepared to lend to franchisees when they might refuse a loan application of a business without the support and advice of a huge franchisor organization. There are two main types of business organizations in the public sector: Public corporations Municipal enterprises.

Public Corporations: these are wholly owned by the state or central government. They are usually businesses which have been nationalized. This means that they were once owned by private individuals, but were purchased by the government. Objectives of public corporations: To keep prices low so that everybody can afford the service. To keep people in jobs so that unemployment does not rise. To offer a service to the public in all areas of the country. To reduce costs, if necessary, by reducing the number of workers. To increase efficiency and operate more like a company in the private sector. To close loss-making services, even if this means that some consumers are no longer provided with the service.

Advantages of Public Corporations: Some industries are considered t be so important- strategically necessary- that government ownership is thought to be essential. If industries are controlled by monopolies because it would be wasteful to have competition, then these natural monopolies are often owned by the government. It is argued that this will ensure that consumers are not taken advantage of by privately owned monopolists. If an important business is failing and likely to collapse, the government can step in to nationalize it. This will keep the business secure and jobs open. Important public services, such as TV and radio broadcasting, are often in the public sector. Nonprofitable but important programmes can still be made available to the public. Disadvantages of Public Corporations: There are no private shareholders to insist on high profits and efficiency. The profit motive might not be as powerful as in private sector industries. Subsidies can lead to inefficiency as managers will always think that the government will help them if the business makes a loss. Often there is no close competition to the public corporations, there is therefore a lack of incentive to increase consumer choice and increase efficiency. Governments can use these businesses for political reasons. This prevents the public corporations being operated like other profit-making businesses. Municipal Enterprises: Local government authorities or municipalities usually operate some trading activities. Some of these activities are free to the user and paid out of local taxes, such as street lighting and schools. Other services are charged for and expected to break even at least. These might include street markets, swimming pools and theatres. If they do not cover their costs, a local government is usually provided, In order to cut costs and reduce the burden on local taxpayers, an increasing range of services are now being privatized, so reducing the role of local government in providing goods and services.

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