Forms of private_and_public_business_ownership_presentation

Chapter 3
Forms of Business Organization
www.igcsebusiness.co.uk

1. The most important thing about your business to you is that:
a. It’s socially and environmentally responsible
b. It’s always growing bigger and better
c. It’s honest and hard working
2. You are most against:
a. Animal testing and unfair trade
b. Giving up if something doesn’t work out
c. Wasting time with people who are trying to take advantage of
you

3. You would proudly work with:
a. Romanian orphanages
b. World leaders to solve global conflicts
c. Children’s hospitals
4. You believe in:
a. Making sure your products and practices are ethical and fair
b. Taking a risk and trying something new
c. Working hard to succeed

5. On a free weekend you like to:
a. Campaign for a social cause
b. Break a world record
c. Share your business skills
Done?? Let’s check out what type of entrepreneur you are!

Mostly As…
You’re most like the
late Dame Anita Roddick,
the founder of The Body
Shop. You’re passionate about the
environment, homelessness… you’re
an activist at heart. It’s important that
your business reflects your beliefs,
and you won’t cheat or take short-
cuts to achieve your goals. Little
things can make a big difference.

Mostly Bs…
You’re most like Sir
Richard Branson, owner
of The Virgin Group. You’ll
try anything once, you love taking
risks and you have a smart business
brain which helps you invest. You like
to think of the big picture and trust
other people to manage the details.
You learn from your mistakes and you
try again. There’s no such thing as
failure.

Mostly Cs…
You’re most like Sir
Alan Sugar, founder of
Amstrad and star of The
Apprentice. You’re proof that hard
work and honesty pays off . You don’t
mind working your way up the ladder,
and you have faith in your team. You
understand the importance of learning
from others. You’re not afraid to say
what you think. Dedication is the key to
success.

When starting their own business the routes are
varied and entrepreneurs always need to weigh their
options to choose the best road to travel on, no
matter how less traveled it is.

 The most common form of business
organization.
 It is a business owned and operated by one
person (even if others are working for the
owner).
 The owner is called the sole proprietor.
 One of the essential reasons it’s very
common is the ease of setting up the
business due to the few legal requirements it
needs.

Mike decided to run his own taxi business. Initially he set
up as a sole trader. Here’s what he thought of…
Advantages
1. Few legal regulations
2. He was his own boss,
having complete
control.
3. He had freedom to
make decisions.
4. Close contact with
customers
5. Incentive to work as he
kept all his profits.
6. Enjoy complete secrecy
in business matters.
Disadvantages
1. No one to discuss business matters
with.
2. Do NOT have the benefit of limited
liability. The business accounts
are the owners’ personal accounts,
therefore they are responsible for
any debt the business may have.
Unlimited liability means that if the
business can not pay its debts, the
owner has to pay them from the
personal belongings.
3. The sources of finance are limited.
4. The owner is forced to do many
jobs at the same time and some of
them he is not skilled at.
5. Since the business is small and the
owner can not afford to expand,
the business remains small and so
is unable to hire specialist or
highly paid workers.
6. No continuity of the business after
the death of the owner.

 A group or association of between two and twenty
people who agree to own and run a business together.
 The partners will
1. Contribute to the business
2. Have a say in the running of the business
3. Share the business profits
 Can be set up very easily
 Agreements need to be stated between partners. They
could be:
1. Verbal agreement: partners agree verbally
2. Written agreement: a Partnership Agreement or Deed of
Partnership. The written agreement documents the amount of
capital, terms of the businesses and sets guidelines to avoid
disagreements.

Mike offered his friend, Gita, the chance to become a partner in
his taxi business. They prepared a written Partnership
Agreement which contained the following points…
1. The amount of capital invested by both partners
2. The tasks to be undertaken by each partner
3. The way in which the profits would be shared out
4. How long the partnership would last
5. Arrangements for absence, retirement and how
new partners could be admitted.
After the signing of the agreement and the partnership
had been operating for some time, it was obvious to the
partners that there were some advantages over sole
proprietorship, but there were also disadvantages…

Advantages
1. More capital invested leads to
a greater expansion of the
business.
2. The responsibilities of running
the business were now shared.
3. Both partners were motivated
to work hard because they
would both benefit from the
profits.
4. Any losses made were now
shared by the partners.
Disadvantages
1. The partners did not have limited
liability.
2. The business did not have a separate
legal identity. If one of the partners
died, then the partnership would end.
3. Disagreements on important
decisions can take place and
consulting all partners takes time.
4. If one of the partners is inefficient or
dishonest, the other partners will
suffer.
5. Most countries limit the number of
partners to twenty which means that
business growth is limited to the
maximum amount of capital that
twenty people can invest.

Sole traders and partnerships are
unincorporated businesses.
This means that they do not have a separate
legal identity from their owners. In general
speaking terms, the owner is the business.

Mike and Gita discussed these advantages and disadvantages together
with their lawyer who told them that partnerships are very suitable in
certain situations…
1. People wished to form a business with others but
wanted to avoid legal complications.
2. Where the professional body only allowed people to
create partnerships, not companies, such as
medicine and law.
3. The partners are well-known to each other and want
to run a business together (possibly in the same
family).

Limited partnerships
In some countries, the concept of Limited Liability
Partnerships (LLP) has been introduced recently where
partners have limited liability, shares cannot be bought
and sold and is a separate legal entity with continuity
after death of a partner.

Mike and Gita made it clear that they want to continue working together
and expanding their business but also wanted to protect their own
possessions from business creditors in the event of failure.
Saying this, he realized that another form of business would be more
suitable now…

 Pepsi is one of the
most widely known
brands in the world.
 Pepsico is the actual
name of the brand.
 Pepsico features a
wide array of brands
such as Mirinda, 7-
Up, Lay’s, Dorito’s,
Quaker, Aquafina
and many more…

Government
Banks
Community
Managers
Employees
Owners
Competitors
Customers

Owners of a company are called shareholders
Companies are jointly owned together by the
people who have invested in it. They all have
SHARES in the company.. Hence the name:
shareholders.

 There are two types of companies with
shareholders:
1. Private Limited Companies
and
2. Public limited companies

Mike and Gita made it clear that they want to continue working together
and expanding their business but also wanted to protect their own
possessions from business creditors in the event of failure.
Saying this, they realized that another form of business would be more
suitable now… and they decided on a private limited company.

 These types of companies tend to be owned by either
family or friends and are quite often not that much
larger in size than a sole trader or partnership.
 Name of the business ends in ‘Limited’ or ‘Ltd’
 The owners are called shareholders, each holding a
share of the business.
1. They invest capital into the business
2. Have a say in the running of the business
3. Share the business profits
4. Shares cannot be sold or transferred to anyone else without
the agreement of the other shareholders.
5. Shares are therefore not offered to the public.

 All shareholders have limited liability. They are only
liable for the limited amount that they have invested.
Even if my debtors are chasing
me for payment, they are not
allowed to sell my car or house
to get their money back. I am
only losing what I initially
invested in the business!

1. The Articles of Association 2. The Memorandum of Association
 Contains 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
 The holding of official
meetings
 Procedure to be followed
for the issuing of shares
 Contains extremely
important information
about the company and the
directors.
◦ The official name of the
company
◦ The address of the registered
offices of the company
◦ The objectives of the company
◦ 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 clear

Articles of
Association
Memorandum of
Association
Registrar of Companies
Certificate of Incorporation
Hooray!
We are in
business!

Mike and Gita asked their solicitor to explain the advantages and
disadvantages of a private limited company for their taxi firm.
Advantages
1. Selling shares to a large number
of people will raise large
amounts of capital.
2. All shareholders have limited
liability.
3. The company is a separate legal
identity from its shareholders.
4. The people who started the
business can still maintain
control of the business as long
as they do not sell shares to
many other people.
Disadvantages
1. Significantly larger amount of legal
paperwork to be filed before the
company can be formed.
2. Shares cannot be transferred or sold to
anyone else without the agreement of all
other shareholders, hence causing
investors to be reluctant before spending
capital.
3. Secrecy decreases as the accounts of the
business are now privy to more people.
Each year, they must be sent to the
Registrar of Companies for inspection.
4. The company cannot offer its shares to
the general public, so less funds will be
generated.

 Master Foods (MARS Ltd)

Mike and Gita discussed these advantages and disadvantages together
with their lawyer who told them that private limited companies are very
suitable in certain situations…
1. Family businesses
2. Partnerships who wished to expand but still maintain
some control over the business
3. Firms who find that the amount of capital that they
can raise is sufficient amongst family and friends.

Mike and Gita were impressed by the benefits of a private limited company
form of organization. The solicitor helped fill out the paperwork and they
named their business Express Taxis Ltd.
The business has been operating for many years. The two directors, Mike
and Gita, still owned most of the shares.
The company now owned 150 taxis and had diversified into the bus
services. It owned 35 buses.
The government had recently announced the privatisation of all bus
services in the country. Both Mike and Gita were determined to expand the
business further by buying many bus routes from the government. Many
new buses would be needed. A huge investment of $90 million would be
needed. Although profitable, the private limited company Express Taxis
Ltd could not afford this.
Mike and Gita went to see a specialist that advised them to convert their
company into a public limited company.

 These types of companies tend to be owned by anyone
buying a share in the company. They buy shares from
the Stock Exchange.
 Name of the business ends in ‘plc’
 Profits given to shareholders are called dividends.

1. A statement must be made to the Memorandum of Association
that the company is now a public limited company.
2. A certain minimum value of shares must be issued (GBP 50,000
in the UK)
3. Accounts must be laid out in a certain way and shared with the
public.
4. The company will apply to the Stock Exchange for a ‘listing’,
which means that it is now accessible for shareholders to buy
and sell shares. The Stock Exchange determines whether or not
it will permit the listing depending upon the performance of the
business.

Mike and Gita asked their solicitor to explain the advantages and
disadvantages of a public limited company for their taxi firm.
Advantages
1. Selling shares to a huge number
of people will raise a large
amounts of capital.
2. All shareholders have limited
liability.
3. The company is an incorporated
business and a separate legal
identity from its shareholders.
There is continuity.
4. There is no restriction on selling,
buying or transfer of shares.
5. These business have high status
in the market, causing attraction
to suppliers and to the banks.
Disadvantages
1. Significantly larger amount of legal
paperwork to be filed before the
company can be formed.
2. There are more regulations and control
to protect the rights of shareholders.
3. Secrecy decreases as the accounts of the
business are now privy to more people.
Anyone can see them, anytime. They also
must be published every year.
4. Can grow to be so large and so difficult
to control and manage.
5. Selling shares to the public is expensive.
6. There is a very real danger that the
original owners might lose control over
the business when it ‘goes public’

 We’ve agreed on the following:
Sole traders
and
Partnerships
No continuity
Unincorporated
Business
Unlimited
Liability
Not a Separate
Legal Identity
The owners take all the decisions and they
will try to make the business achieve all of
its aims.
Control
is very
high!

 We’ve also agreed on the following:
Public Limited
Companies &
Private Limited
Companies
Continuity
Incorporated
Business
Limited
Liability
A Separate
Legal
Identity

Private Limited Companies have relatively few shareholders.
The directors are often the majority shareholders, which means that they can
ensure that their decisions are passed at all meetings.
Public Limited Companies can have thousands, even millions, of
shareholders.
It would be impossible for all the shareholders to be involved in taking
decisions. They are all invited to the Annual General Meeting (AGM).
In this meeting, the only decision that is really effective is the election of the
company directors. These professional managers are shareholders but not
necessarily major shareholders. They are given the responsibility of running
the business and taking decisions. They will only meet with the other
shareholders once a year at the AGM.

Shareholders may attend AGM
(few do)
Vote for Board of
Directors who take all
important decisions
Appoint managers for
day-to-day business
decisions
This is called the
divorce between
ownership and
control.

Mike and Gita decided to convert the company into a public one and
named it Express Taxi and Bus plc.
By selling shares in their company they had not only raised the capital they
needed but they had also become very rich. They were elected as directors
at the first AGM for the new plc.
The expansion into buying the privatised buses was successful – at first.
Profits rose and management salaries did too.
However, new bus competitors were forcing bus fares down. Profits
started to fall. The accounts published last year showed the lowest profits
for three years. Mike and Gita were voted off the Board of Directors. They
no longer had a majority of the shares. They therefore lost control of what
had been their business.
The new directors owned a few shares. They cut dividends to shareholders
and announced a new expansion programme to increase profits.
Mike and Gita were rich but they no longer controlled the business that
had once belonged to them.

 Nike plc.  Pepsico plc.
.

shareholders
voting
managers
Strategic decision
makers
Board of Directors
Public limited
companies
Annual General
Meeting
Dividends
Control
Ownership

Co-
operatives
Groups of people who
agree to work together
and pool their
resources
Owned and controlled
by employees
Everything is shared;
decisions, profits,
costs, resources
Producer Co-ops:
Smallholder farmers
working together to
share costs of fertilizer
and transport
Retailer Co-ops:
Small village shops
which aim at providing
their members with
good quality consumer
goods

 A joint venture is when two or more
businesses agree to start a new project
together, sharing the capital, the risks and
the profits.
 Many European companies have set up joint
ventures in China with Chinese businesses, as
the local managers will have good knowledge
of market needs and consumer tastes.

Advantages
 Sharing of costs
 Local knowledge
 Risks are shared
Disadvantages
 Profits have to be shared
 Disagreements
 different cultures.

 The franchisor is a business with a product or
a service idea that it does not want to sell to
consumers directly.
 Instead, it appoints franchisees to use the
idea or product and to sell it to consumers.

Advantages
1. The franchisee buys a licence
from the franchisor to use
the brand name.
2. Expansion of the franchised
business is much faster than
if the franchisor had to
finance all new outlets
3. The management of the
outlets is the responsibility
of the franchisee.
4. All products sold must be
obtained from the franchisor.
Disadvantages
1. Poor management of one
franchised outlet could lead
to a bad reputation for the
whole business.
2. The franchisee keeps profit
from the outlet.

Advantages
1. The chances of business
failure are much reduced
because a well-known product
is being sold.
2. The franchisor pays for
advertising.
3. All supplies are obtained from
a central source – the
franchisor.
4. There are fewer decisions to
make than with an
independent business – prices,
store layout and range of
products will have been
decided by the franchisor.
5. Training for staff and
management is provided by
the franchisor.
6. Banks are often willing to lend
to franchisees due to relatively
low risk.
Disadvantages
1. Less independence than with
operating a non-franchised
business.
2. May be unable to make
decisions that would suit the
local area – e.g. new
products that are not part of
the range offered by the
franchisor.
3. Licence fee must be paid to
the franchisor and possibly a
percentage of the annual
turnover.

 So far.. All organizations discussed were in the
private sector. This means that they are owned
by private individuals in the economy. These
include
1. Sole traders
2. Partnerships
3. Private Limited Companies
4. Public Limited Companies
5. Co-operatives
6. Joint ventures
7. Franchising
 However, there is still a very important part of
the economy that we haven’t tackled.. The
public sector, businesses owned by the
government.

All the previous
organisations are
in the
PRIVATE SECTOR
They are owned by individuals

 Includes businesses owned by the
government such as public hospitals, public
schools, fire services, police services, the
military and government departments.
 The area of our concern is public
corporations.

 Wholly owned by the state or the government
 Businesses that have been nationalized.
 Nationalized means that they were once
owned by individuals but have been bought
by the government. This is the opposite of
privatization.
 They are owned by the government. The
government doesn’t necessarily run it, rather,
it appoints a Board of Directors to fulfill its
objectives and carry out a plan.

 They used to be given certain social
objectives.
 These may include
1. To keep prices low so that everyone can afford the
service
2. To keep people in jobs so that unemployment does
not rise
3. To offer a service to the public in all areas of the
country

However… keeping to these objectives often costs a great deal of
money. Therefore, this lead to public corporations making losses.
These losses were paid for by subsidies from the government out
of taxes. Most governments realized that they could not continue
to pay for these subsidies!

 They therefore shifted to other objectives,
which are...
1. To reduce costs, if necessary, by reducing the
number of workers
2. To increase efficiency and operate more like a
company in the private sector
3. To close loss-making services, even if it means
that some consumers are no longer provided with
the service

This policy of reducing subsidies and operating more like a private
sector business is sometimes called corporatization – the public
corporations are being made ready for full privatization.

1. Some industries are considered
important that government control
is thought of as necessary. This
can include electricity and water
generation.
2. If industries are controlled by
monopolies because it would be
wasteful to have competitors then
these natural monopolies are often
owned by the government. For
example, the railway stations.
3. If an important business is failing
and likely to collapse, the
government steps in and
nationalizes it. This will keep the
business open and secure jobs.
4. Important public services, such as
state-owned TV stations and radio,
are often in the public sector. The
BBC is an example of a public
corporation in this industry. Non-
profitable but important
programmes can still be made
available to the public.
Advantages
1. There are no private shareholders
to insist on high profits and
efficiency. The profit motive is not
as high a priority as in the private
sector.
2. Subsidies can lead to inefficiency
as managers will always think that
the government will help them if
the business makes a loss. It is
also considered unfair if the public
corporation receives a subsidy but
private firms in the same industry
do not.
3. Often there is no close competition
to the public corporations. There is
therefore a lack of incentive to
increase consumer choice and
increase efficiency
4. Governments can use these
businesses for political reasons,
for example just before an election
they could create more jobs. This
prevents the public corporations
being operated like other profit-
making business.
Disadvantages

 A number of workers have been made
redundant (lost their jobs) following a
business failure. They agree to put some of
their savings together to buy an old factory.
They plan to make bicycles for export. They
want everybody to have equal rights in the
business.

 A business with many hotels is planning to
expand abroad. A substantial sum of money
will be needed to finance this expansion.
Expert managers will be needed to run the
business.

 A young student is planning to offer his
services to neighbours as a gardener. He will
purchase only cheap tools to start with.

 A TV and radio broadcas

Model Answers Chapter 3

J.T Enterprises is a large private sector business that owns a
number of farms in country A. The business breeds a variety of
animals such as cows and sheep as well as growing crops. They
employ many workers and the business is successful and
profitable.
Why is profit important to a business such as J.T. Enterprises?
Profit is the main objective for the existence of the business. Without
profits, the business would not be operating and continuing in its field of
work. It is the reward entrepreneurs gain for investing their money in a
business and taking risks.
Profits are also important since they are a source of fund for future
investment and growth. A firm that doesn’t accumulate profits will not
be able to survive in the long run. It is therefore an important measure of
success of a business.
3 marks

Explain the purpose of the Annual General Meetings held by
Public Limited Companies (plc).
The Annual General meeting has three main functions. The first one is to
explain to the shareholders the performance of the business. They also
discuss with them the future plans of the company.
The second function is to declare the dividends in the meeting. Dividends
are payments made to shareholders from the profits of a company after it
has paid its corporation tax. They are the return the shareholders are
waiting for in return for their investments and risk-taking.
The third function is that they vote on who they want to be on the Board
of Directors for the coming year.
3 marks

The directors of Hussain Ltd. are considering converting the
business into a Public Limited Company.
a) Explain the term limited liability.
Limited liability means that the owners of a company, known as the
shareholders, cannot be held responsible for the debts of the company
they own. Their liability is limited to the investment they made in buying
the shares.
2 marks
b) Explain the term limited dividend.
Dividends are payments made to shareholders from the profits of a
company after it has paid its corporation tax. They are the return the
shareholders are waiting for in return for their investments and risk-
taking.
2 marks

The directors of Hussain Ltd. are considering converting the
business into a Public Limited Company.
c) Identify and explain one feature of private limited companies
that makes them different from public limited companies.
The shareholders in the private limited companies are limited to family
and friends who are invited to participate in raising capital for the
business. The shareholders in the public limited companies could be
anyone who is eligible to trade on the Stock Exchange. The number of
shareholders in public limited companies far exceeds the number of
shareholders in public limited companies.
2 marks

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