LESSON 13 (A & B) – Types of Business Organizations

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    Main Lecture:-

     

    1. Introduction

     

    To produce goods and services, the resources of land, labour and capital are needed. These resources need to be organized, and decisions need to be taken. The person who makes these decisions and owns a business is called the entrepreneur. It is the job of the entrepreneur to organize resources in a business or firm.

     

    In a mixed economy there are three main types of firm:

    1. a) Public corporations (owned by the government)
    2. b) Co-operatives (owned mostly by shoppers and workers)
    3. c) Private firms (owned by ordinary people)

     

     

    1. Private firms

    There are different types of private sector organizations. Here’s a detailed look at all of them, with their respective merits and de-merits.

     

    (a) The sole trader

     

    A sole trader business is a one-person business. A sole trader may have more than one employee but it is always owned and controlled by one person.

     

    Advantages:-

    (i) It is a very personal business. The owner of the business will have personal contact with customers and staff. He’ll be able to adhere to their needs. This encourages customers to be loyal to the business.

     

    (ii) The owner is his/her own boss. Because he is the only owner of a business, the sole trader does not have to ask anyone’s permission before making a decision.

     

    (iii) The owner receives all the profits. (This explains why the sole trader type of business is so popular!)

     

    (iv) It is easy to set up and manage a sole trader business. Sole traders need very little capital to start up with, so it is fairly easy for one person to setup a business alone.

     

    Dis Adv:

     

    (i) The sole trader has unlimited liability. Unlimited liability means that the sole trader is liable to lose everything he has in order to pay off debts in the events of bankruptcy. It means that his personal belongings (e.g his own car, laptop, etc!) are in danger of being snatched away if he cannot pay for the payments and clear off his dues.

     

    (ii) The sole trader has full responsibility. Being the only boss of the business might mean that you get all the money, but it also means you have added responsibility on your shoulders. The person has to manage everything on his own.

     

    (iii) Sole traders lack capital. They only have their own income to invest into the business. They also cannot borrow a huge amount of money from the banks.

     

     

    (b) Partnerships

     

    A partnership is a business run by a minimum of 2 entrepreneur and a maximum of 20. Partnerships are common particularly amongst solicitors, doctors etc.

     

    Adv:-

     

    (i). Partners bring new skills and ideas to a business. Two heads are always better than one!

     

    (ii). More partners means more money for the business. All the partners will contribute financially and so a large pool of cash can be collected.

     

    (iii). Partners can help is decision making. A sole trader has full responsibility for making decisions in a business, whereas in a partnership all decisions are shared.

     

    Disadvantages:-

     

    (i) Partners can disagree. Its only natural that a dispute might arise between the partners. Such disputes can affect the functioning of the business, and may aggravate to result in a break up.

     

    (ii) Partnerships have unlimited liability

     

    (iii) Partnerships lack capital. Because there are more people in a partnership the business will have more money than a sole trader, but it is difficult for a partnership to have more than twenty partners. This puts a limit on the amount of money that may be brought into a business.

     

     

    (Extra Info:- Sometimes you have partners in a business who only provide you with the finance, but do not take part in running the business. Such partners are called sleeping partners. It is possible for such partners to enjoy limited liability.)

     

     

    (c) Private limited company

     

    Private limited company is a Joint stock company. A joint stock company is the one that sells shares to investors in order to raise money. A share is simply a piece of paper that states that the person who holds it has paid for part of the company and now has a share in its ownership. The more shares a person holds, the more of the company they own and bigger their share of profits.

     

    Advantages:-

     

    (i) Shareholders have limited liability. This means a person who owns the company is only responsible for the repayment of any debts up to the amount of money they originally put into the company. This means their personal belongings and assets aren’t in danger of being taken away!

     

    (ii) Shareholders have no management worries. The company is run by a board of directors who are selected by voting in an Annual General Meeting (AGM)

     

    (iii) The company has a separate legal identity. If the company owns money, the name of the company can be sued and taken to court, but the owners cannot. (similar to limited liability)

     

    Dis Adv:-

     

    (i) Limited Companies must disclose information about themselves to the public. They have to publish their spending, revenue and profit details so the shareholders can read. However rival firms can use this information to their advantage.

     

    (ii) The original owners of the company may lose control. Some of the original founders might be voted out in the AGM and may be replaced by newly elected directors.

     

    (iii) Company profits are taxed twice by the government. When a company makes a profit, some of this money is paid to the Government as tax. However when shareholders receive their money (dividends), they also have to pay tax on it. This way its double trouble!

     

    (iv) Private Limited Companies cannot sell shares on the Stock Exchange market. They have to sell their shares privately to people that know like family, friends and workers. This caps the number of shareholders there can be and subsequently the cash that is invested into the business.

     

     

    (d) Public limited company

     

    Public limited companies are the largest and some of the most successful firms in the whole world. Examples include Pepsi Cola, Marks and Spencer etc.

     

    A plc usually offer their shares for sale on the Stock Exchange. Shares can be sold to any member of the general public.

     

    Advantages:-

    The plc has all the advantages of a private limited company. Here are some additional advantages:

     

    (i) Public limited companies can sell shares on the Stock Exchange. This means more capital for the business

     

    (ii) Public limited companies can advertise their shares. This means more shareholders are attracted into buying the shares. When there are more shareholders, there is more capital involved, which means more investment into the business.

     

    Disadvantages of plc:-

     

    (i) It is expensive to form a plc. Many legal documents are required. Advertisements in newspapers are needed and a prospectus needs to be publishes.

     

    (ii) The original owners of the company may lose control. Since there are so many shareholders, not all of them can run the business. They can only cast their vote for selecting the Board of Directors.

     

    (iii) plcs may face management problems. The larger the organization, the more difficult it is to manage!

     

     

     

    (e) Co-operatives

     

    There are two main form of co-operative enterprise. One is controlled by workers, and one is controlled by consumers. The aim of a Co-operative business is to provide benefits for its owners. In turn, each of the owners or workers, lower prices for consumers. In turn, each of the owners or members of the co-operative has an equals say in how the company is run, regardless of how much money they put into business, that is, one person, one vote. Unlike other business types, co-operatives do not strive to make profits. They simply work to provide benefits to its members.

     

     

    (f) Multinationals

     

    A multinational company or corporation is a firm that operates in more than one country, although its headquarters may be in one particular country. These companies are some of the largest firms in the world, often selling billions of Rupees worth of goods and services, and employing many thousands of workers around the globe. Examples include McDonalds, Pepsi etc.

     

    Advantages of being a Multinational:-

     

    (i) Multinational companies are able to sell far more than other type of company because of the scale on which they operate.

     

    (ii) Multinational companies can avoid transport costs because they produce on that land itself.

     

    (iii) Multinationals can take advantage of different wage levels in different countries.

     

    (iv) Multinationals can achieve great economies of scale.

     

    *Economies of scale is term used to describe the advantages of operating at a large scale. We’ll discuss this in detail in the tutorial “Growth of firms”.

     

    Advantages of multinationals to the host country:-

     

    (i) They provide employment to the labour of that country

     

    (ii) They introduce new technology in the country

     

    (iii) They bring investment into the country

     

    Disadvantages of multinationals to the host country:-

     

    (i) Multinationals move their facilities to wherever it is profitable to produce. They are not concerned with the well being of the host country. In the process of production, they don’t care about the level of pollution they spread, and also exploit the country’s resources to the fullest.

     

    (ii) Multinationals sends part of its profit back to its head quarters which is located in another country. This way the host country’s money is being transferred to another country.

     

    (iii) They may force competing firms out of business. The economy will suffer if local firms are driven out of competition. Not only the supply will fall, but the prices will also rise. Also there will be more need of imported goods.

     

    (iv) Some multinationals may exploit workers. Many multinationals locate in countries where labour is cheap. By locating in less developed countries they are able to keep their wage costs low by paying workers far less for doing the same, or even more work, than a worker in the developed country.

     

    (v) Some multinationals may even become powerful enough to interfere in the internal matters of the government of a country.

     

     

     

    1. Public Sector Organizations

     

    A public corporation is a company owned by the government. It usually provides those goods to the public which are necessities such as communication, transport, electricity etc. One such example is WAPDA.

    These are non-profit organizations, that is they do not seek to gain profit but instead they work to provide the population with the necessary commodities.