Business Organization and Environment Unit one- section 2 Types of business organization

1. Business Organization and
Environment(Unit one)
1.2 Types of business organization
Dr. Fereshteh Mohammadian

2. Main features of profit-based
(commercial) organization
The most common profit-making business types:
• Sole traders
• Partnerships
• Companies or corporations
• For-profit social enterprises
– Cooperatives
– Micro-financers
– Public-private partnerships (PPPs).
The common feature is to generate profit.
Profits = total revenues – total cost
profits
turnover
employeeassets
equity

3. Sole trader
The main features of a sole trader include:
• owns and runs the business by themselves
• have unlimited liability
• finance is usually limited (personal saving or
limited loan from lender)
• close to the customer (more personalized service)
• has privacy and limited accountability (no need to
declare their finance except of tax authorities).
• Easy, inexpensive and quick business registration

4. Advantages of operating as a sole trader:
• complete control over all the important decisions
• flexibility in terms of working hours, products and services,
and changes to operations
• privacy, as sole traders generally do not
need to divulge information
• minimal legal formalities
• close ties to customers, which can give a
competitive advantage.

5. Disadvantages of operating as a sole trader:
• Daunting challenge by competing with
established businesses.
• Limited time for making all decision without
any opportunity to seek advice form others.
• limited scope for expansion
• focus on having sufficient cash for day-
to-day operations instead of looking to the
future.
• unlimited liability of the owner for any
faults, debts, or mistake made.

6. partnerships
This type of business is formed by two or more people with related
qualifications.
The main features include:
• decisions made by the partners
• owned and managed by more than one person (2-20 partners).
• unlimited liability and legal payment for 100 percent of partnership’s debts
• finance is more available than for a sole trader business
• “sleeping partners” (only investor)
• more varied services than a sole trader
greater degree of accountability than a sole
trader according to the partnership’s
contract (responsibilities, financing,
division or profits, liabilities and
procedures for changing circumstances)
• more stable than sole traders and higher
likelihood of continuity
• share profits according to percentage of
ownership

7. Advantages of partnership compared to sole
traders
• more efficient production, more expertise,
• access to more finance for greater stability
and lower risk of a failed business
• help each other in emergencies,
• more chance of continuity if one partner dies,

8. Disadvantages of partnership
• Only based on the partnership’s deed, some partners
declared “limited partners” otherwise all will have
unlimited liability on the business debts and actions of
other partners.
• Limited finance compared to companies (corporations)
will prevent their business from expanding or
maximizing their opportunities.
• An individual partner does not have complete
control over the business and will rely on the
work and goodwill of others.
• Profits have to be shared among the partners.
• Disagreed partners could break up the
partnership.

9. Companies or corporations
The most important type of business is company which may have
the following abbreviations after its logo:
• INC - Incorporated (USA/ Canada)
• LLC - Limited Liability Company (UK)
• PLC – Private or Public Limited Company (UK)
• PTE – Private Limited Company (UK)
• LTD – Limited Company (various)
• SA – Sociedad Anomia (Latin America except Brazil and
Mexico)
• SA – Sociedads Anomias (Brazil, Portugal)
• SpA – Societa per Azioni (Italy)
• AB – Aktiebolag (Sweeden)
• BhD – Berhad (Malaysia, Brunei)
• GIE – Groupement D’Interet Economique (France)
• GmbH- Gesellschaft mit beschraenktr Haftung (Austria,
Germany, Switzer land)

10. Company’s Features
• the business and the owners of the business are legally separated and the
liability of the company is distinct from the liability of
those who own it.
• Each owners has a fraction of the company in the form of
“shares” (shares of stock or equity shares)
• Company employs executives to manage and workers to handle day-to-day
operations.
• Should obey the laws of the land and pay taxes.
• Owners (shareholders) decide to pay all or a portion of profits to
the shareholders in the form of dividends at the discretion of
company and based on the proportion of the shares of stock.
• Shareholders who own a lower percentage could have less
deciding weight in the decisions.

11. Investing reward ways to the
shareholders in a company
1. increasing of the share’s price
2. depends to the number of shares (pay as dividends each 3-
4 months)
3. not responsible for any company’s debts but they are the
last party to receive monies from sale of the assets of a
business (all debts should be paid first).

12. The cost to the shareholders of
investing in a company
1. Decreasing of share’s price by decreasing of the value or the
company profit
2. dividends may not pay (need of sufficient cash on hand or more
investment in equipment and working capital in rapid growing)
3. don’t have meaningful role in giant company’s decisions with
holding less amount of shares

13. The reasons to become a company
• increasing of the business stability
(any minor or major problems for
shareholders)
• Improve of gaining further finance
(loan from financial institutions or
governments) .
• shareholders want to have
limited liability
• recognition of successful
business
• good source of finance through
selling shares

14. Types of companies
• Private limited
– selling the shares only to whom
that owners know (friends,
family and associates)
– Limited shareholders (around
20)
• Public limited company
– offer the company shares in a
public place
– no control over who buys their
shares

15. Main features of a company
• The shareholders own but don not run the business.(decision by the
professional managers).
• The business and the owners are divisible (the owners can change by
selling their shares to others)
• The legal existence and many of the details are legally recorded and
matters of public record.
o Required legal documents to form a company
• memorandum of association: is a legal document prepared in the
formation and registration process of a limited liability company
to define its relationship with shareholders
• articles of association: internal regulation (the executives with
their titles and areas of responsibilities).

16. • Greater finance is generally available (any future gains (or loss) in price are to the benefit (or cost)
of the shareholders)
• A company is held to a high degree of accountability (inform to shareholders about the condition of
their investments by:
– Annual or quaternary of published, audited reports,
– An annual general meeting (AGM)open to all shareholders,
– An extraordinary general meeting (EGM) called by the shareholders.
• Greater stability and higher chance of continuity
• Access to finance is easier than sole traders and partnerships (greater stability and lower risk)
• The investor has limited liability (may only lose the values of shares and nothing else)
• There is continuity (with selling of the shares, leaving of any directors)
• Companies can go bankrupt and be liquidated (with all of assets sold off to pay all the liabilities)
to terminate their operations.
• There are possibilities for expansion (more access to finance for investing in equipment, marketing
effort and new activities)
• An established organization structure (help to keep the customers and suppliers because no need to
change managers and workers even with changing of the shareholders)

17. Disadvantages of operating as a company
• Setting up a company can take time and cost a great deal of money (to fulfill the
necessary legal requirements)
• The risk of selling shares when the company “goes public” (may can not guarantee to
provide desired or intended amount of finance)
• Owners risk partial or entire loss of control (if the company “goes public).
• There is loss of privacy (have to show company’s performance - less sale and negative
profits)
– may some customers do not purchase from or do
business with the company especially for some
products which need warranty or after-sales service.
• A company has no control over the stock market. (some external factors(such as an
election, negative news about another business in same industry, a downturn in the
economy or a natural disaster) may decrease the share values.
• A company has limited control over who buys its share. (a competitor
may want to take over the business by buying the shares of one of the
shareholders or can be vulnerable to being taken over if their share prices fall).

18. For-profit social enterprise
• These organizations have social purposes and aim
to improve human, social or environmental well-
being
• but these aims nevertheless take priority of
growth, maximizing sales or making profits.
• These organization can take the form of sole
trader, partnership or company but often can see
in form of
– Cooperatives
– Micro-financiers
– Public-private partnership[PPP]

19. Cooperatives
A form of partnership which is owned and run
by all the members(> 20).
• Financial cooperative: these businesses take
profit with social and ethical aims.
– Social aims(lending money at lower rates of
interest or non-lending services at lower cost of
other financial institution.
– Provide finance (loans) to their members.

20. • Housing cooperative: provide housing for its members
as opposed to providing rent for private landlords.
• Workers cooperative: is owned and operated by the
workers and does not pay significant higher wages or
salary to the managers
• Producer cooperative: a group of producers collaborate
in certain stages of production (agriculture, grapes)
– Maximizing the utilization of an expensive piece of
equipment/ achieving the cost efficiencies with carrying
out of production stage on a large scale.

21. • Consumer cooperative: provide service to its
consumers who are part owners of the
business.
The cooperative’s priority is to provide products
or services as close to cost price as possible,
they make some profit only for difficult period
or unexpected expenses.

22. Micro-financiers
Provide small amounts of finance with low
interest rate to those who can not have access
to it and need the finance for the first steps
towards economic independence (such as low-
income individuals, families in rural
communities and women)

23. Public- Private Partnership [PPP]
A PPP is a business created between a private sector
business and the public sector. The public sector provides
the finance and the private business the expertise.
The main common features:
• Profit is important but not the priority
• There is collaboration between the business and the
local community.
• There is greater democracy in the business than in other
organizations (decision making tends to be more
consultative and transparent )
• The business operates the same functions as any other
business (HR, finance, marketing and operation).

24. Advantages of for-profit social enterprises
• A favorable legal status is achieved.
– the legal structure allows individuals to engage in
activities without being personally liable or
accountable to the stakeholders
• There is a strong communal identity.
– the motivated employee and stakeholder work
together with a common sense of purpose
• There are benefits to the stakeholder community.
– ameliorate human, social or environmental problems
which are not addressed by government and help
reduce them in the community.

25. Disadvantages of for-profit social enterprises
• Decision making is complex and time consuming
can limit the effectiveness of the business.
• There may be insufficient capital for growth in
the long term (without large profits the social
enterprise may struggle to survive and expand).
• There may be insufficient capital for financial
strength (producing products as inexpensive as
possible makes lower profit margins and profits
which can not help them survive a recession or
when finance is less available).

26. Non-profit social enterprises
The main features of NPOs are as follow:
• The businesses which are social enterprises and
their main aim is social purpose do not make any
profits whatsoever.
• They generate surplus which conceptually is
similar to a profit and is used to advance the
social purpose of its business
Surplus = total revenues – total cost
Two broad categories of non-profit social enterprises are NGOs and charities.

27. Non- Governmental Organization [NGOs]
These social enterprises support a cause that is considered
socially desirable such as:
• Save the Whales (single issue),
• Greenpeace (broader spectrum),
• Aga Kahn Development Network (apolitical-conduct their
programs without regarding faith, gender or origin),
• Amnesty International & National Rifle Association (political
aim)
The common element NGOs is that they are not organized
or run by any government.

28. Charities
• Charities are a specific form of NGO whose aim is to
provide as much relief as possible for those in need.
• They focus on philanthropy and a desire to help those
who cannot help themselves.
Different type of charities are:
– Emergency aid for specific natural disasters or war (single-
event)
– Save the children of Oxfam (single issue)
– Red Cross, Red Crescent and Half the Sky (apolitical)
– Catholic Charities USA (partisan or particular preferences
Business of charities is not run by any government and it operates in the private
sector of the economy.
Charities have tax exemption.

29. Common features of non-profit social enterprises
• Profits are not generated. (generated surpluses are
used directly to provide the goods and services for
which the charity was created)
• Donations are important. (needs of voluntary donation
from individual because governments funding or other
forms of income are not enough)
• There is unclear ownership and control. (who are the
owners, who decides about who sits on the board of
directors, who selects new members, how are
managers selected, what is an appropriate
compensation?...)

30. Advantages of non-profit social enterprises
• They help people or causes in need (individuals,
organizations and governments almost never have
sufficient resources to solve all the needs of local people or
community).
• They can foster a philanthropic spirit in the community
(positive attitudes in a community can make it a better
place to live and can improve the general business climate).
• They can foster informed discussions in the community
about allocation of resources.
• They can innovate (because of not sufficient profits, they
pushed people to be creative for finding solutions and
tactics to address the problems).

31. Disadvantages of non-profit social enterprises
• The lack of control but intense lobbying can
lead to socially undesirable goods.
• Sometimes the employees of non-profit social
enterprises have a passion and zeal that ill
serve the organization or its cause.
• Funding can be irregular (reliance on
donations can make a problem in economic
recessions).

32. PEST factors
• Political – Here government regulations and legal factors are assessed in
terms of their ability to affect the business environment and trade markets.
The main issues addressed in this section include political stability, tax
guidelines, trade regulations, safety regulations, and employment laws.
• Economic – Through this factor, businesses examine the economic issues
that are bound to have an impact on the company. This would include
factors like inflation, interest rates, economic growth, the unemployment
rate and policies, and the business cycle followed in the country.
• Social – With the social factor, a business can analyze the socio-economic
environment of its market via elements like customer demographics,
cultural limitations, lifestyle attitude, and education. With these, a business
can understand how consumer needs are shaped and what brings them to
the market for a purchase.
• Technological – How technology can either positively or negatively impact
the introduction of a product or service into a marketplace is assessed here.
These factors include technological advancements, lifecycle of
technologies, the role of the Internet, and the spending on technology
research by the government.