LECTURE 4

FORMS OF BUSINESS ORGANIZATIONS

Functions of a business:
1. To produce goods and services
2. Creating jobs and training employees
3. Purchase goods and services for resale
4. Raise money by borrowing

Objectives of a business:

1. To produce a stream of income

2. To create employment
3. Security of employment
4. Corporate social responsibility

Reasons Businesses are established

Starting a business is a lot of hard work. Therefore persons who decide to start a business
must be ready to dedicate a lot of time and energy to its start-up. It is also very costly and
therefore capital will have to be identified to inject into a new business.

Reasons for starting a Business:

1. Financial Independence

Some persons feel restricted financially with the income received from their job. Starting a
business would give them the opportunity to be a successful business person and achieve
financial independence.

2. Being your own boss

You are able to make decisions about the direction and operation of the business.

3. To use your skills and knowledge for yourself

The skills, knowledge and experience that you have acquired can be put to work for you.

4. Self-actualization/fulfilment

Owning and operating a successful business will give a feeling of accomplishment.

5. To create employment for relatives, friends and community members

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Business can assist in providing jobs for persons in communities with high levels of
unemployment.

Forms of Business Organizations

An organization is a system that groups people together towards establishing a common

goal. Business organizations are centered on creating goods and services for profit. There are
several types of business organizations that one can start.

Forms of Business Organizations:

1. Sole Trader
2. Partnership

3. Private Limited Liability companies

4. Public limited Liability Companies

5. Multinationals

6. Franchise

7. Conglomerates

8. Cooperatives

9. Nationalized Industries

10. Local and Municipal Authorities

11. Government Departments

All forms of business organizations can either be characterized as a part of the private sector
or the public sector.

The Private and Public Sector

Public Sector

 Government control of factors of production on behalf of citizens

 Motive to provide services to citizens

 Consists of nationalized industries, executive agencies, local and municipal

authorities, government departments, public corporations.

Advantages

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  Government provides public goods that the private sector will not provide.
 Government provides welfare services to poorer members of society.

 Government sets the control mechanisms on place for the conduct of business.

Disadvantages

 Government can increase taxes to finance expenditure

 Inefficient use of state resources

 Political interference in private sector

Private Sector

 Private individuals or businesses own the factors of production

 Motive to maximise profits

 Consists of sole traders, partnerships, public and private companies multinationals,

conglomerates, franchises

Advantages

 Brings more competition and product variety to the market

 Increased use of technology

 Provides investment and employment

Disadvantages

 Will only provide products that citizens can pay for

 Engages in the production of demerit goods once there is demand

PUBLIC SECTOR
FEATURES PRIVATE SECTOR

The state, national/local

Ownership and Control Private citizens/individuals government, municipalities.
and firms. Only persons The enterprise is owned by
who purchased shares in the tax payers in general.
company are owners

To provide essential goods

Objective To earn/make profits and services to the country.

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  Taxes, rates, levies and
Source of capital Private individuals and statutory deductions.
persons who choose to buy
shares in the enterprise.  Loans from
Loans from banks, credit governments/institutions
unions, friends, family
members, personal savings.  Funding from donor
agencies.

Terms and concepts:

Insolvent – unable to repay debts or bankrupt

Liquidate – This occurs when a business sells off its assets to repay debts

Limited liability- it means that he or she is not personally responsible for business debts and
obligations of the corporation.

Unlimited liability - refers to the legal obligations general partners and sole proprietors
because they are liable for all business debts if the business can't pay its liabilities.

The Sole Trader

The sole trader is a single business owner. This person may employ several other persons to
work in the organization, but he has to make all decisions, acquire all the capital required and
other resources needed for the business on his own.

Characteristics

 He or she manages the business and may have the help of family and friends.
 He or she enjoys all the profit and bears all the risks

 Capital is limited since the savings of the owner fund the business

 Personal contact with clients

 Performs a large variety of tasks related to the operations of the business

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  This type of business is not incorporated (not given a separate identity) and therefore
easy to set up.

Examples: Electrician, Plumber, small farmers, doctors and lawyers.

Formation

There are no legal formalities in the setting up of a business as a sole trader except for the
registration of a trade name or the acquisition of a license. For example a license is required
for the sale of alcohol or for the sale of food items.

Management and Advantages

1. Enjoys all profits

2. Ease of formation – no legal requirements

3. Independence – find personal satisfaction in working for themselves

4. Simple organisational structure

5. Personal Control – decision making is quick

6. Personal Service

7. Secrecy – No need to disclose info. Except to tax authorities or to creditors

8. Personal Commitment to succeed

Disadvantages

1. Limited source of finance

2. Lack of specialised staff

3. Over reliance upon one’s personal health and vigour

4. Unlimited Liability

5. Lack of leisure time

6. Lack of technology

7. He bears all the risks

Partnership

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A partnership business is formed legally by a minimum of two (2) and a maximum of (20)
twenty persons in a business. There are two types of partnership forms:

Limited Liability Partnership – at least one partner must have unlimited liability

Unlimited liability Partnership- All partners have unlimited liability.

Formation

A deed of partnership must be drafted which set out the terms and conditions of the
partnership. This written agreement helps to settle disputes and in the absence of the deed the
partnership will be governed by the Partnership Act.

A deed will entail:

 Number of partners
 Amount of capital contributed by each partner

 Type of trade engaged in

 Share profits and losses accruing to each partner

 Name of partnership

 Salary of each partner mechanism for dissolution.

Types of Partners

Ordinary/General Partners: take an active part in the running of the business.

 Unlimited liability of partners

 Change of members ends partnership

 Assets and liabilities are owned and shared equally

 Each partner plays a part in the management of the firm

 Partnerships cannot exist without an agreement

Sleeping Partners: invest in the business but do not take an active part in the business.

Limited Liability Partners: assets will not be lost if the business goes bankrupt.

 limited liability of partners but one must have unlimited liability

 Change of members does not end partnership

 Does not play a part in the management of the firm

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Advantages

1. More capital
2. Specialisation – partners use their different skills and knowledge

3. Simple Organisation – easy to form

4. Continuity – more continuity than sole trader

5. Limited Liability

6. Workload Shared

7. Decision making – shares knowledge and expertise

Disadvantages

1. Unlimited liability
2. Binding – all partners lose if mistake is made

3. Limited Capital

4. Disagreement

5. Concentrated risk – risk not spread enough

6. Decision-making

7. Continuity – broken partnership upon death

8. Profits are shared, irrespective of effort in the absence of a partnership agreement.

Limited Liability Companies

A company is a business entity that has been incorporated, that is, the company has a separate
legal identity from that of the owner.

Limited Liability Companies are companies in which shareholders/investors are protected as

they will not lose their personal assets if the business goes bankrupt. They are not liable for
the debts of the company beyond their level of investment. Therefore if a shareholder buys
shares in a company valuing $5000 then he will only lose that $5000 invested and his
personal assets.

There are two types of limited liability companies.

1. Private Limited Liability Company

2. Public Limited Liability Company

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The Private Limited Company only allows friends, relatives and co-workers to purchase
shares and to be a part of the company. Its privacy is also protected by the fact that unlike the
public limited liability company, it does not have to publish its balance sheet in the
newspaper. Legally the private limited company can only have a minimum of two and a
maximum of fifty persons to join.

The Public limited company allows members of the public to purchase shares. The
shares/stocks of public limited companies are traded on the stock market. The public limited
liability company has a minimum of (7) seven members and there is no limit to the number
of shareholders that can join.

The legal procedures for both these types of companies are lengthy as they must submit the
several documents.

The Companies Act contains the laws relating to companies. To comply with certain
requirements which were laid down by the Companies Act, the promoters of the company
must present the following documents:

The Memorandum of Association

 Company name , which must contain the word limited

 Address of the company’s registered office

 Objectives of the company

 Statement that the liability of the shareholders is limited

 Authorized share capital and the types of shares to be issued.

The Articles of Association

 Procedures for calling an Annual General meeting.

 Rights and obligations of the directors

 Procedures governing the election of Directors

 Statement concerning the borrowing power of the company

 Procedures dealing with the payment of dividends

Statements of authorised, Registered or Nominal Capital

This is the amount stated in the MOA, which is the maximum amount which the company is
authorized to raise.

Prospectus

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This is an invitation to the public to buy shares in a public company. It contains detailed
information to enable investors to estimate its prospects. It is important that the public should
not be misled.

Statutory Declaration

Statutory declarations are commonly used to allow a person to declare something to be true
for the purposes of satisfying some legal requirement or regulation.

Certificate of Incorporation

This is a legal document relating to the formation of a company or corporation. It is a license

to form a corporation issued by state government. Its precise meaning depends upon the legal
system in which it is used.

Certificate of Trading

It is the certificate issued by the registrar of companies to the public limited company to
grant permission to commence its business.

The private limited company may begin trading after receiving the certificate of
incorporation, but the public limited company must issue a prospectus inviting the public to
subscribe for shares before a certificate of trading is issued.

Advantages of Private Limited Companies

1. A larger capital base than sole trader or partnership.

2. The company has continuity and thus can obtain loans easily.

3. The company has a separate legal identity from ownership.

4. Shareholders have limited liability

Disadvantages

1. Capital is limited since the membership is limited to fifty person.

2. Must file reports with the registrar of companies

3. Selling of shares is restricted to the private grouping.

Advantages of a Public Limited Company

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 1. It is easier to obtain financing
2. Shareholders have limited liability

3. Share can be quoted on the stock exchange and sold to the public

4. Company able to grow and obtain economies of scale

5. It has a separate legal existence. Changes in shareholders and directors do not affect
continuity of the company.

Disadvantages

1. The legal requirements may be costly and time consuming

2. The accounts have to be made public

3. Because of large size, decision making can be long

4. Differences in opinion may develop owners and directors.

5. Loss of control of company if sufficient shares are obtained.

6. These companies lack a personal element.

Multinationals

A multinational company is a company that has headquarters in a home country and operates
businesses in various host countries. Examples of Multinational companies in the Caribbean
are Shell, Kentucky Fried chicken and Digicel.

Advantages

 They provide employment.

 They introduce advanced technology.

 Provide well needed goods and services.

Disadvantages

 Profits earned are repatriated to the main centre in their home country.
 They may exploit the workers by paying low wages and having them work long hours.

 They cause unemployment when they close down to take advantage of cheaper labour
and lower operational cost in another country.

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Franchise

A franchise is an agreement between a franchisee (the person requesting permission to set up

business) and the parent company to allow the franchisee to sell its products or services.
Some businesses begin by the owner acquiring a franchise to operate under an already
existing business name. Many multinational companies expand into new regions through
franchises.

The franchisee bears the name of the parent company. They must abide by all the rules and
guidelines outlined by the parent company to sell its products. It pays royalties (a fee) to the
parent company to operate under its business name.

Advantages

 Access to new markets for the franchisor

 Source of revenue for the franchisor

 The franchisee bears some of the risks

 Franchisee benefits form the support provided by the franchisor eg. Training

 The franchisee’s risk is reduced because it is selling a recognised brand.

Disadvantages

 The Franchisee must pay the royalties regardless of business size

 The franchisee has to operate under supervision of the franchisor

 The franchisee is legally bound to sell only the products of the franchisor

Conglomerates

This is a group of unrelated companies (e.g. a restaurant, shoe store a travel agency etc,)
under one umbrella. A parent company owns a controlling stake in each company which
conducts business separately.

Advantages

 The risk is spread over multiple businesses

 Economies of scale

 Easier to access financing due to asset base

Disadvantages

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  Management can be difficult
 Some businesses may increase the risk of the conglomerate

Cooperatives

These are business entities owned by their members who purchase shares to join them. They
are usually established because of a need existing among a number of persons who wish to
acquire particular goods and services at a reasonable cost.

Principles of Cooperatives

1. Open membership- All persons over the age of 16 may join for a fee
2. Democratic Controls- Governed by its own members who attend a general meeting
where members elect a committee to run the cooperative

3. Limited interest on capital invested – low interest rates for members

4. Distribution of Surpluses- surpluses are distributed amongst members fairly-

ploughed back into business to expand and to sometimes for health care or education.

Types of Cooperatives

1. Consumer
2. Producer

3. Financial

4. Services

5. Worker

For example, members of a credit union purchase shares in these entities in order to obtain
loans at low interest rates.

There are several types of cooperative, for example, Retail/Consumer cooperatives and
Producer cooperatives. Shares invested in a retail cooperative are used to buy goods in bulk at
a very low cost and then resold to members. Producer cooperatives may include a group of
farmers who will obtain raw material at a low cost.

Profits are distributed to members based on the amount of goods that they buy and not on the
amount of investment that they make in the business. At the annual general meeting,
shareholders elect their management committees from among their members and vote on
proposals put forward. Benefits of being a part of a cooperative are therefore obtaining goods
and services at low costs and a guaranteed market as members are also customers. A
disadvantage is that its management may be inexperienced as they are chosen from their
membership.

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Advantages

 Creates employment for members

 Democratic Management

 Benefit from economies of scale

 Support services such as purchasing and marketing for members

 Profit shared among the members

Disadvantages

 Limited capital input depending on the size of the cooperative or the credit union
 May lack managerial expertise in membership

Nationalized Industries

Definition

Nationalized industries are firms which were once privately owned, but have been taken over
by the government. Government seek to nationalize the key industries that is the industries on
which the government depends for the country’s economic survival for example Trinidad’s
oil industry or bauxite in Jamaica.

Formation

A company becomes nationalised when the government purchases all or the majority of
shares in the company

Management

Like State corporations, a Board of Governors is appointed. The board reports to the line
Minister. The Executive Director heads the company. The audited accounting reports of these
companies must be laid with the Audit General or Government accounting firm.

Characteristics

 They are legal entities

 The state is the only shareholder

 They are managed by Boards of Directors that are appointed by the state

Advantages

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  State has Ownership and control, hence profits remain in the country.
 The company is in a better position to service the needs of the community, for
example the funding of community projects in education, sporting and cultural
projects.

 Nationalization prevents private monopolies from being formed.

Disadvantages

 Relatively low salaries paid to Executive Directors may not attract the best expertise.
 The industries may be a drain on the Governments revenues.

State Corporations

These are independent organisations set up by the government to carry out a service. The
Government does not control their daily operations but can fix the overall strategy and
nominate their board of directors. These are usually non-profit making, but in the long term,
they have to be self-financing. State Corporations are usually in the broadcasting field,
transportation, power and telecommunications industries.

Formation

State Corporations are formed by legislation i.e passing of laws in Parliament.

Management

The government appoints a Board of Governors or Directors for a stipulated time frame. An
Executive Director is also appointed to head each organisation. The Executive Director
reports to the board of Directors or Directors.

Characteristics

 Funding is mainly done by the state providing grants, although some legislation allows
the organisations to raise their own funds.
 The state or state appointed auditors monitor all accounting procedures

 Annual accounting reports must be sent to the Auditor General.

 The aim of the state is not to make a profit but it is expected that these corporations may
break even

Government Departments

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These include the government ministries e.g. the Ministries of Finance and Education. A
minister is appointed in charge of each ministry. These departments are very important to the
running of government.

Local and Municipal Authorities are government bodies which are run by elected local
officials, e.g., the Kingston and St. Andrew Corporation (K.S.A.C.) in Jamaica. These bodies
fulfil local needs and allow for more balanced local development. They carry out duties such
as cleaning gullies and drains and fixing community roads.

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