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Bm 1.2 Types Of Organizations


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IB Business and Management (Standard Level)
All material taken from the IB Business and Management Textbook:
"Business and Management", Paul Hoang, IBID Press, Victoria, 2007

Published in: Business
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Bm 1.2 Types Of Organizations

  1. 1. Business and Management : 1.2 Types of Organizations <ul><li>Lesson 1-3 : Companies </li></ul>
  2. 2. 1. Focus Question <ul><li>What are companies? </li></ul><ul><li>What are private limited companies? </li></ul><ul><li>What are public limited companies? </li></ul><ul><li>… </li></ul>
  3. 3. 2a. Three Main Types of Businesses <ul><li>3. Companies (Corporations): </li></ul><ul><ul><li>Companies are owned by whom? </li></ul></ul><ul><ul><ul><li>Shareholders. </li></ul></ul></ul><ul><ul><ul><ul><li>Who are the shareholders? </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Individuals or other businesses. </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Invested their money to provide capital for a company. </li></ul></ul></ul></ul></ul><ul><ul><li>Sometimes called joint-stock companies…why ? </li></ul></ul><ul><ul><ul><li>Because the shares / stocks are jointly held by many people or organizations. </li></ul></ul></ul><ul><ul><ul><li>Common term for a company is corporation. </li></ul></ul></ul>
  4. 4. 2b. Three Main Types of Businesses <ul><li>Companies are incorporated businesses. </li></ul><ul><ul><li>What does this mean? </li></ul></ul><ul><ul><ul><li>Legal difference. </li></ul></ul></ul><ul><ul><ul><li>The company is acting as a separate entity. </li></ul></ul></ul><ul><ul><ul><ul><li>It has its own legal rights and duties. </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>They have limited liability. </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Shareholders are not responsible for a company’s debts. </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>They will not lose personal belongings. </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>The maximum they can lose is how much they have invested. </li></ul></ul></ul></ul></ul><ul><li>Can you imagine if you were to share in a large multinational company’s debt? </li></ul>
  5. 5. 2c. Three Main Types of Businesses <ul><li>Setting up a limited company : </li></ul><ul><ul><li>Is complicated and expensive. </li></ul></ul><ul><ul><li>Lots of rules and regulations to follow. </li></ul></ul><ul><ul><ul><li>One reason is to protect the investor. </li></ul></ul></ul><ul><ul><li>A board of directors is elected by the shareholders. </li></ul></ul><ul><ul><ul><li>They will run the company. </li></ul></ul></ul><ul><ul><ul><li>Usually elected based on their skills and expertise. </li></ul></ul></ul><ul><ul><ul><li>Each share equals one vote. </li></ul></ul></ul><ul><li>What does the term “ limited company ” mean? </li></ul><ul><ul><li>To let you know that the companies liability is limited  </li></ul></ul><ul><ul><ul><li>Two types private limited companies and public limited companies. </li></ul></ul></ul>
  6. 6. 3. Three Main Types of Businesses <ul><li>Private Limited Companies: </li></ul><ul><ul><li>Can not raise share capital from the general public. </li></ul></ul><ul><ul><ul><li>Shares are sold privately to family and friends. </li></ul></ul></ul><ul><ul><ul><li>Usually these companies have Ltd. After its name. </li></ul></ul></ul><ul><ul><ul><ul><li>Eg. ABC Ltd. </li></ul></ul></ul></ul><ul><ul><ul><li>Shares in these companies can not be traded without the agreement of the Board of Directors. </li></ul></ul></ul><ul><ul><ul><ul><li>Why not? </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>To maintain control of the company. </li></ul></ul></ul></ul></ul><ul><ul><ul><li>Main advantage of these types of companies is that the owners have greater control. </li></ul></ul></ul><ul><ul><ul><li>Also, these companies are cheaper to set up. </li></ul></ul></ul>
  7. 7. 4. Three Main Types of Businesses <ul><li>Pubic Limited Companies: </li></ul><ul><ul><li>Are able to advertise and sell its shares to the general public via what? </li></ul></ul><ul><ul><ul><li>The stock exchange. </li></ul></ul></ul><ul><ul><li>One disadvantage is the dilution of control </li></ul></ul><ul><ul><ul><li>Issuing more shares, company will have more owners, this weakens the owners ability to control the business. </li></ul></ul></ul><ul><ul><li>Also they are exposed to takeover bids . </li></ul></ul><ul><ul><ul><li>Whereby other companies purchase the majority of the stock in the company. </li></ul></ul></ul><ul><li>REMEMBER : </li></ul><ul><ul><li>All companies are businesses, but not all businesses are companies. </li></ul></ul>
  8. 8. 5a. Open for business…trading… <ul><li>You will need two documents: </li></ul><ul><ul><li>Both PLC’s will need to produce and submit to the government… </li></ul></ul><ul><ul><ul><li>The Memorandum of Association </li></ul></ul></ul><ul><ul><ul><ul><li>Details of the company: name, purpose, address, amount of money invested. </li></ul></ul></ul></ul><ul><ul><ul><li>Articles of Association </li></ul></ul></ul><ul><ul><ul><ul><li>Includes the company’s regulations and procedures of the company. </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>The rights, roles and power of the board of directors and shareholders. </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Administration issues. </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Procedure for appointing directors </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>And most importantly, how profits will be divided  </li></ul></ul></ul></ul></ul>
  9. 9. 5b. Open for business…trading… <ul><li>After you… </li></ul><ul><ul><li>Submit all the documents, pay the application fee you get… </li></ul></ul><ul><ul><ul><li>A Certificate of Incorporation </li></ul></ul></ul><ul><ul><ul><li>This is a license which recognizes the business as a separate legal entity from its owner and allows you to start trading. </li></ul></ul></ul><ul><ul><li>Now…you start your limited company…but you need what? </li></ul></ul><ul><ul><ul><li>CAPITAL… </li></ul></ul></ul><ul><ul><ul><ul><li>How do you get it? </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Well one way is to float your company. </li></ul></ul></ul></ul><ul><ul><li>Floatation : </li></ul></ul><ul><ul><ul><li>When your business first sells all or part of its business to investors. </li></ul></ul></ul><ul><ul><ul><li>When you float your company, you are listing it on the stock exchange. </li></ul></ul></ul><ul><ul><ul><li>When you do this it is called Initial Public Offering . </li></ul></ul></ul>
  10. 10. 5c. Open for business…trading… <ul><li>So why list on the stock exchange? </li></ul><ul><li>Why do investors buy shares in a limited company? </li></ul><ul><ul><li>1. $$$$$ ~ DIVIDENDS ~ $$$$$ </li></ul></ul><ul><ul><ul><li>Companies will usually pay these to the shareholders twice a year. </li></ul></ul></ul><ul><ul><ul><li>The dividends are a share of the profits distributed to all the shareholders. </li></ul></ul></ul><ul><ul><ul><li>So the more shares you hold, the more money you make. </li></ul></ul></ul><ul><ul><ul><ul><li>Example, lets say you hold 50,000 shares of XYZ Ltd. and the pay you 0.50 cents per share as a dividend. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>How much do you make ? </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>$25,000.  </li></ul></ul></ul></ul></ul>
  11. 11. 5d. Open for business…trading… <ul><li>2. Capital Growth : </li></ul><ul><ul><li>Capital growth or gain. </li></ul></ul><ul><ul><li>You buy in at 5 dollars and a year later it is at 100. SWEET!!! </li></ul></ul><ul><ul><li>BUT…this doesn’t happen all the time. </li></ul></ul><ul><li>3. Voting Power : </li></ul><ul><ul><li>If you hold enough shares in a limited company, you can have a lot of influence. </li></ul></ul><ul><ul><li>You can influence the management and operation of the company. </li></ul></ul><ul><li>However, the largest shareholders of a company will be other companies or institutes. </li></ul>
  12. 12. 6a. The Risks <ul><li>Sound great so far? </li></ul><ul><li>So…what are the risks? </li></ul><ul><ul><li>Well... Companies are not always successful. </li></ul></ul><ul><ul><li>Some tend not to give dividends. </li></ul></ul><ul><ul><li>Shareholders put to much trust in the directors and management to run the company. </li></ul></ul><ul><ul><li>Interest of the shareholders and management might conflict. </li></ul></ul><ul><li>So how can you minimize your risk? </li></ul>
  13. 13. 6b. The Risks <ul><li>Well… </li></ul><ul><ul><li>All companies must hold an AGM or Annual General Meeting . </li></ul></ul><ul><ul><ul><li>This allows the owners to have a say or vote in the running of the company. </li></ul></ul></ul><ul><ul><ul><li>A typical AGM will look like this : </li></ul></ul></ul><ul><ul><ul><ul><li>Shareholder vote on resolutions or re-elections of the BoD. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Shareholders ask questions to the CEO and directors. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Shareholders approve the previous years’ financial accounts. </li></ul></ul></ul></ul><ul><li>Limited companies must supply an Annual Report and Final Accounts. </li></ul><ul><li>These annual reports includes : </li></ul><ul><ul><li>Profits  or Losses  </li></ul></ul><ul><ul><li>The Assets of the business. </li></ul></ul><ul><ul><li>Where cash has been spent in the last 12 months. </li></ul></ul><ul><li>These reports are prepared by an external auditor. </li></ul><ul><li>It is very expensive. </li></ul>
  14. 14. 7. Advantages and Disadvantages <ul><li>Advantages : </li></ul><ul><ul><li>Can raise permanent capital </li></ul></ul><ul><ul><li>Pays dividend if makes a profit </li></ul></ul><ul><ul><li>Limited liability </li></ul></ul><ul><ul><li>Benefits from Continuity </li></ul></ul><ul><ul><ul><li>Divorce of ownership and control </li></ul></ul></ul><ul><ul><li>Directors hold large amount of shares. </li></ul></ul><ul><ul><li>Economies of Scale. </li></ul></ul><ul><ul><li>Hire specialists </li></ul></ul><ul><li>Disadvantages : </li></ul><ul><ul><li>Must provide expensive annual reports </li></ul></ul><ul><ul><li>More paper work and bureaucracy…can be expensive. </li></ul></ul><ul><ul><li>Pay dividend if company makes a profit. </li></ul></ul><ul><ul><li>Communication problems. </li></ul></ul>