Understanding Organization Types in Business

Unit 1.2 – Types of Organizations IB Business Lincoln High School

In this chapter you will learn . . . • Difference between the private and public sector • The main features of sole traders, partnerships and corporation • The main features of cooperatives, microfinance providers and public-private partnerships • The main features of non-governmental organizations and charities

Main features of profit-based (commercial) organizations • Profit-making businesses can be organized many ways. Most common are: • Sole traders • Partnerships • Companies or corporations • For-profit social enterprises • Cooperatives • Micro-financers • Public-private partnerships (PPPs) • Common Feature – to generate a profit

Profits • Profits = Total Revenues – Total Costs • Revenue – aka Sales

Sole trader or sole proprietor • Features: • The sole trader owns & runs the business • No legal distinction between the business and the owner • Finance is usually limited • Business is close to the customer • Sole trader has privacy and limited accountability • Registering the business is relatively easy & inexpensive and quick

Advantages & Disadvantages Majority remain small; typically business comes to an end if the owner dies. Sole traders often have a “niche” in the market;

Partnerships – 2 or more people • Features: • Decisions are made jointly by the partners; owned and managed by more than one person • No legal distinction between business and partners; • Usually more financing available • Business can offer more varied service; more stable • Some partners may be “sleeping partners” • Typically a greater degree of accountability – partnership agreements • Partners do not necessarily share all the profits • Depends on what is agreed to

Advantages & Disadvantages Safer than sole traders; more complex organizations

Companies or Corporations • Look at corporation abbreviations from the US and other countries – page 23 • The business is a joint stock or limited company • Businesses can become corporations by a simple, powerful process- Incorporation • Legal difference between company and owners • Liability of the company is separated from liability of owners • Multiple owners, each owning a fraction • Shares

Corporation • Business has legal existence in its own right • Managers handle day-to-day operation • Has responsibilities in the community – paying taxes, etc. • Companies keep the profits unless they declare a dividend • Dividends – at the discretion of the company • If issued, profit divided by number of shares to get a dividend per share. • Usually many shareholders, especially in a large company • Small companies or family-owned companies • Someone may own all the shares

How are shareholders rewarded • Price Increases • If the company does well, in theory the price per share should increase • Dividends • Amount each shareholder receives varies • Dependent on whether a dividend is issued, size of company, etc. • Limited Liability • Single most important feature and benefit of a corporation • Shareholder can only use the money they have put into the corporation

Cost to shareholders • Price of the shares they hold may decrease • Company may NOT issue dividends • As “owners” of only a fraction of the company, may not have a say in how the company operates

Reasons to organize as a corporation • Limited liability • Enhanced status • Selling shares is a good way to raise capital • Increased stability of the company • Better chance of obtaining financing

Public v. private limited company • Privately held corporation or private limited company • Usually family owned • Public Limited Company • Going public • IPO – Initial public offering

Main features of company • Shareholders own but don’t run the business • Business and owners are divisible – • Not liable for business debts • Legal existence a matter of public record • Memorandum of association • Articles of Association • Greater finance is available • Company held to a higher degree of accountability • Companies have greater stability and higher chance of continuity

Corporations • Board of Directors • Elected by Shareholders • Limited Companies • In U.S. LLC – limited liability company • Private Limited Company • Shares sold to family members • Private corporation in the U.S. • Not publicly traded • Easier to establish than publicly traded company

Corporations • Public Limited Company • In the U.K. PLC after its name • Sells shares to the general public • Examples of private and public corporations • Table 1.2a page 31 • Memorandum of Association • Articles of Association (Incorporation)

Why buy shares? • Dividends • Capital Growth • Voting Power • Risks associated with investing • Annual Meeting must be held • Auditor must examine accounts

Advantages of Corporation • Companies can raise large amount of capital • Companies have limited liability • Continuity in the company • Benefits from Economies of scale • Can hire specialists to run the firm

Disadvantages • Financial information must be provided to all shareholders • Far more bureaucracy • Dividends only paid out if business makes a profit • Large corporations can suffer from communication problems

Non-Profit Organizations • Definition • Organization run like a business; but profit isn’t the objective. • Examples: • Libraries, schools, museums, social services, community organizations, etc.

Non-Governmental Organizations • Operate in the private sector • Not controlled by government • Include environmental protection groups, etc. • Unicef • Amnesty International;

Charities • Registered not-for profit; • Collect donations to support a cause • Advantages • Provide financial support to help a cause • Usually exempt from corporate tax • Donors get a tax deduction • Can register to be limited companies to protect interest of investors.

Charities - disadvantages • Lack of profit may cause problems; motivation may be lacking • Must go through the process of registering • Charities survive solely on the giving of donations • Financial activities must be reported to the government

Type of business depends upon .. • Amount of finance • Size • Limited liability • Degree of ownership of control • Type of business activity

Unit 1.2 • Question 1.2.1. • Question 1.2.2 • Question 1.2.4

Understanding Organization Types in Business