Types of Organisations

1. Types of Organisations

2. Introduction A business is always owned by someone. This can just be one person, or thousands. So a business can have a number of different types of ownership depending on the aims and objectives of the owners. Most businesses aim to make profit for their owners. Profits may not be the major objective, but in order to survive a business will need make a profit in the long term. Some organisations however will be ‘not-for-profit’, such as charities or government-run corporations

3. Five main organisation formats: Sole Trader Not-for-Profit Partnership Limited Liability Partnership Limited Company Business Ownership

4. Sole Trader Owned, financed and controlled by one individual but can employ other staff The most common form of ownership in the UK Common in local building firms, small shops, restaurants, butchers etc

5. Advantages • trade in individual’s own name • no formalities to set up • keeps all the profits • makes all decisions • high degree of control – sole management responsibility • can offer a personal/specialist service to customers • can be sensitive to the needs of the customer – since they are closer to the customer and can react more quickly • can cater for the needs of local people – a small business in a local area can build up a following in the community due to trust • no specific law to govern how to run business (subject to tax laws and general contractual law)

6. Disadvantages • Unlimited liability – can be held responsible for all debts of the business – claim on personal assets • Must bear all losses • Must raise all the finance to set up and run the business themselves – including additional capital for expansion • May be difficult to raise additional finance • Potential for long hours • Pressure of being solely responsible – may be difficult to specialise • Lack of continuity – business ceases once the owner retires or dies

7. Sole Trader Accounts A sole trader keeps books for his own benefit to: Record all transactions entered into by him Allows analysis and interpretation of this accounting data Discover whether or not the firm is operating at a profit Know whether or not the business will be able to meet its commitments as they fall due

8. Sole Trader Legal Requirements Keep proper business accounts and records for the Inland Revenue (who collects the tax on profits) and if necessary VAT accounts Comply with legal requirements that concern protection of the customer (eg Sale of Goods Act)

9. Sole Trader – Sources of Finance An owner can raise additional finance in a number of ways: Personal Savings Bank Loan Mortgage Enterprise Grant or EU Grant Take on a partner

10. Not-for-Profit Organisations • Principle function is to provide a service not trading or profit-making • Owned by the members of the Club • Run by a Committee eg Secretary, Treasurer

11. Not-for-Profit Accounts A Club or Society keeps books in order to provide information to the members of the Club/Society normally at the AGM: Receipts and Payments Account – summarises all monies coming in and going out Income and Expenditure Account – equivalent to the Trading, Profit and Loss Account Balance Sheet – to calculate the Net Worth of the Club

12. Not-for-Profit Accounts Accounting records are required for 3 main reasons: Stewardship Executive Purposes/Operational Purposes Planning and Control

13. Stewardship Being accountable to various persons eg members, government To prevent misappropriations of cash, stocks and assets etc To show members all monies coming in and going out of the Club ie Receipts and Payments Account To show profits on enterprises eg fund-raising events/bar To show current position as regards assets and liabilities ie Balance Sheet

14. Executive/Operational Purposes To run the Club efficiently on a day-to-day basis To ensure all debts eg Subscriptions are received To record wages and stocks Planning and Control • For efficient control of present operations and for planning ahead • Clubs still have a need to Break Even ie cover Costs • Budget for future expenditure • To show solvency through Cash Budgets • Decisions to continue existing operations or adopt new ones

15. Not-for-Profit – Sources of Finance A Club or Society can raise additional finance in a number of ways: Bank Loan Mortgage Enterprise Grant, EU Grant or Grant from Local Authority Increase Subscriptions Run a Bar Fund-raising activities eg Dinner/Dance

16. Sole Trader forming a Partnership • Spreads risk across more people • Partner may bring money and resources to business • E.g. better premises to work from • Partner may bring other skills and ideas to business • Increased credibility with potential customers and suppliers – who may see dealing with business as less risky

17. Partnership • Business where there are two or more owners of the enterprise • Most partnerships have between two and twenty members though there are examples like the major accountancy firms where there are hundreds of partners • Bound by the terms of the Partnership Act 1890 • Common in professions – lawyers, accountants, architects, surveyors, estate agents, vets etc

18. Partnership • A partnership is normally set up using a Deed of Partnership. This contains: • Amount of capital each partner should provide • How profits or losses should be divided • How many votes each partner has (usually based on proportion of capital provided) • Rules on how take on new partners • How the partnership is brought to an end, or how a partner leaves • If no Partnership Agreement exists, the Partnership Act 1890 applies – the Partnership will dissolve automatically if a partner retires or dies

19. Advantages of Partnership • Easy to set up • Spreads the risk across more people, so if the business gets into difficulty then the are more people to share the burden of debt • Shares responsibilities • Partner may bring money and resources to the business – therefore greater access to capital • Partner may bring other skills (specialism) and ideas to the business, complementing the work already done by the original partner • Increased credibility with potential customers and suppliers – who may see dealing with the business as less risky than trading with just a sole trader

20. Disadvantages of a partnership • Have to share profits • Unlimited Liability • All partners liable for the debts of the other partners • Limited access to Capital • Less control of business for individual • Disputes over workload • Problems if partners disagree over of direction of business - potential for conflict • Partnership dissolved on the death of one partner

21. Partnership – Sources of Finance A Partnership can raise additional finance in a number of ways: Personal savings from existing partners Bank Loan Mortgage Enterprise Grant, EU Grant or Grant from Local Authority Take on additional partners Form a Public Limited Company

22. Limited Liability Partnerships (LLPs) Since 2001, Partnerships can apply to be LLPs • separate legal entity • members enjoy limited liability • must register at Companies House • must comply with ongoing filing requirements - accounts - annual returns • existence continues even if membership changes • minimum of two members otherwise limited status is lost • taxed as a partnership

23. Limited Companies: • Private Limited Company (Ltd) Owned by between 2 and 50 shareholders. Shares only bought and sold with agreement from existing shareholders • Public Limited Company (PLC) Owned by minimum of 2 but no maximum number of shareholders. Shares traded on the Stock Exchange • Has a separate legal identity – the company can sue and be sued • More complex to set up • Minimum share capital of £50,000

24. Setting up a limited company • Company has to register with Companies House • Issued with a Certificate of Incorporation – which allows the Company to trade • Memorandum of Association - describes nature, purpose and structure of the Company • Articles of Association - internal rules covering: • What directors can do • Voting rights of shareholders

25. Controls of a company • Shareholders own company • Company employs directors to control management of business • The directors may also be shareholders (most are) • Directors are employed to undertake the day-to-day running of the Company and are responsible to the shareholders • Have a duty to act in best interests of shareholders • Have to account for their decisions and performance (Accounts)

26. Importance of limited liability • Limited liability means that investors can only lose money they have invested • Encourages people to finance company • Those who have a claim against company: • Limited liability means that they can only recover money from existing assets of business • They cannot claim personal assets of shareholders to recover amounts owed by company

27. Advantages of a plc • Shareholders have limited liability • It is easier to raise extra capital • Often favourable interest rates can be negotiated on loans • No limit to the number of shareholders so large amounts of capital can be raised by selling shares on the stock market • The company is assured of continuity even if one shareholder dies • Companies can issue debentures to raise additional finance

28. Disadvantages of being a plc • Costly and complicated to set up as a plc • Certain financial information must be made available for everyone, competitors and customers included • Shareholders in public companies expect a steady stream of income from dividends • Increased threat of takeover

29. Flotation • When shares in a “plc” are first offered for sale to general public • Company is given a “listing” on Stock Exchange • Opportunity for company to raise substantial funds • Complex and expensive process

30. Buying shares in a company • Shares normally pay dividends (share of profits) • Companies on Stock Exchange usually pay dividends twice each year • Over time value of share may increase and so can be sold for a profit (known as a “capital gain”) • Of course, price of shares can go down as well as up, so investing in shares is risky. • If they have enough shares they can influence management of company • Good example is a “venture capitalist” • Will often buy up to 80% of shares of a company and insist on choosing some of directors

31. Risks faced by company shareholders • Company reduces its dividend or pays no dividend • Value of share falls below price shareholder paid • Company fails and investor loses money invested

32. Other Legal Requirements • A limited company must also send a copy of its annual accounts to the Registrar • It must also hold an Annual General Meeting and invite its shareholders to attend • Becoming a Public Limited Company involves far more time and cost • It must have a minimum of £50 000 share capital

33. Where the Profits Go • Limited companies use part of their profits to pay a dividend to shareholders • They can choose not to pay a dividend but always have to pay interest on any borrowing the company has made • Profits can be ‘retained’ and ploughed back into the company

34. PLC – Sources of Finance A Public Limited Company can raise additional finance in a number of ways: Issue additional Shares Issue Debentures Bank loans