Types of Business Organization (Copy)

Reasons for Business failure

• Poor Management
  • Lack of experience
  • Management issues
• Failure to plan for change
  • Dynamic environment of business world
  • Those that don’t respond to changes do not fare well
• Poor financial management
  • Cash flow issues and debts etc
• Over Expansion
  • Diseconomies of scale
  • Risk from business becoming too large
• Risk of new start uos
  • New startups require much research etc
  • Financial requirements for new businesses
  • Managerial skills required
  • Decision making skills and experience

Types of Business Organizations

There are many different types of business organizations

• Sole Trader

  • 1 owner
  • Also called sole proprietor
  • Few legal requirements
    • Owner must register with and send annual accounts to government tax office
    • May or may not be required to register with the Registrar of business names
      • Name must be significant
    • Laws of the industry must be observed
  • Benefits
    • Own boss
    • Freedom of choice on everything including work routine
    • Close contact to customers so customer loyalty
    • Incentive to work hard as all profits are of owner
    • Business secrecy maintained
  • Drawbacks
    • No business secrecy and no limited liability
      • Limited liability means that only the investment of owner is at risk not his personal assets
    • No discussion for secret business matters
    • Less finance for growth
    • Less chance for economies of scale
    • No one can take control of owner ill
    • Lack of continuity
      • Business ends when owner dies
    • All loses borne by owner

• Partnership

  • Association of 2 to 20 people (usually).
  • Easy set up as Deed or Partnership or partnership agreement required which is written
    • Decides things like percentage of capital employed
    • Profit sharing ratio etc
    • How long will partnership last
    • Duties of partners
    • What will happen in retirement, absence and how to add new partners
    • If not present then equal division applied for profits
  • Verbal agreement also possible – but without written agreements there can be disagreement
  • Benefits
    • More capital than sole trader
    • Division of responsibilities
    • Profits kept and losses shared
  • Problems
    • Still no limited liability
    • No separate legal identity
      • Unincorporated business
    • Disagreement in partners over financial decisions
    • The problems and issues caused by one partner can affect other partners and the entire business
    • Limitation to the number of partners can limit the amount of capital that can be raised.

• Limited Partnership

  • Limited Liability Partnership
  • Shares in business
    • Can not be bought or sold
  • Limited liability
  • Separate legal identity
    • Continuity after partner’s death
• Companies are separate legal units (incorporated) and have limited liability. They continue to exist even if shareholders die. Can also make legal contracts and agreements. Owners of companies are called shareholders. Shareholders elect directors of business who run it.

  • Private Limited Companies

    • Shares can be sold to a certain large number of people
    • Usually friends and relatives
    • Can lead to more finance generation
    • Limited liability
      • Only to the amount of original investment
      • Shows Ltd or Limited with name
      • Also called Proprietary Limited (Pty) Ltd
      • If not too many shares sold, original owners can retain much control
    • Problems
      • Many legal requirements
      • Articles of Association or the rules under which the company shall be managed are to be followed
      • Memorandum of association has information of directors and company itself
      • After these documents given to Registrar of Companies, Certificate of Incorporation given so long process
      • Shares can not be sold or transferred without agreement of other shareholders
      • Less secrecy of accounts than sole proprietor and partnerships as these accounts can be scrutinized by any member of the public
      • Can not offer share to general public so less capital raised.

• Public Limited Company

  • NOT IN PUBLIC SECTOR
  • Called plc in United Kingdom. In some countries it is called limited but in UK limited means private limited company
  • Benefits
    • Limited liability
    • Incorporated
    • Shares can be sold to general public on stock market allowing for very large sums to be raised as capital
    • No restriction on buying selling and transfer of shares
    • High status and attracts suppliers and customers
  • Problems
    • Many legal formalities
    • More regulations and controls on their activities
    • Over growth
    • Share selling ca be expensive as merchant bank services are usually used and prospectus issues
    • Change of ownership issue if someone buys more percentage of shares than original owners
  • In public limited company there is a divorce of ownership and control
    • Shareholders are owners
    • They select directors at AGM who make crucial decisions
    • Day to day running in hands of managers who might not even be owners so divorce between who owns and who controls the business.
  • Dividends are paid to shareholders as a share of the profits but this depends on directors to decide the rate and depends on profit being made.

• Joint Ventures

  • 2 or more business start project together pooling resources for example google and apple make a smartphone together
  • Benefits
    • Costs shared
    • Local knowledge used (usually joint ventures are between foreign and local firms so)
    • Risk shared
  • Problems
    • Profit shared
    • Disagreement in decision making
    • Different cultures of the businesses

• Franchising

  • Franchisor (already established business) allows franchisee to use the brand name promotional technique, logo and trading methods.
  • Benefits to franchisor
    • Franchisee pays for the license to use brand name etc
    • Franchised business expands faster as more finance
    • Management of franchised outlets done by franchisee
    • All products obtained from franchisor
  • Benefits to Franchisee
    • Lesser chance of business failure than setting a completely new business
    • Advertisement done by franchisor
    • Supplies from franchisor so central source
  • Problems for franchisor
    • Bad practices at one outlet can damage the reputation of the business
    • Franchisee keeps the profits from the franchised outlets
  • Problems to franchisee
    • Less independence than personal business
    • Product range can not be altered as per local area
    • License fee paid to franchisor and maybe a percentage of the profits too.

Public sector organizations

These are state controlled organizations

• Public Corporations

  • Fully state owned
  • Usually nationalized business (private sector business taken in state control)
  • This include like water supply corporations
  • Business objectives are set clearly by the government
  • Benefits
    • Important industries are under government like electricity
    • Natural monopolies are under government. These are business where 2 firms are unnecessary like 2 railway lines
    • Important failing can be kept alive because they are important to society like rural bus route
    • Strategic industries like media etc can be under government control
  • Problems
    • No private share holders – no pressure for high profits and efficiency
    • Subsidies can make the business ineffective
    • No close competition can lead to lower quality
    • Businesses being exploited for political reasons.
• Local government owned organisations
  • Can be free for user as paid from local taxes like schools
  • Can be charged and expected to break even like local theatre.