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  1. CHAPTER ONE-BASIC FORMS OF BUSINESS ORGANISATIONS BASIC FORMS OF BUSINESS ORGANISATIONS There are two basic distinctions, which underlie the organisation of business enterprise in the private sector –non-corporate and corporate. Non-Corporate Organisations Non-corporate organisations are those which do not have a separate legal identity from their owners. This means that the owners are fully liable for the actions of the organisation, including any debts. The main forms of non-corporate organisation are: (a)Sole proprietors, still often known as sole traders though they are found in activities other than trade (b)Partnerships.
  2. CHAPTER ONE-BASIC FORMS OF BUSINESS ORGANISATIONS Corporate Organisations  Corporate organisations are those which have a separate legal identity of their own.The most common corporate business organisations are:  (a)Public limited companies, which can usually be recognised, as their official title normally ends with the common abbreviation ‘plc’
  3. CHAPTER ONE-BASIC FORMS OF BUSINESS ORGANISATIONS  (b)Private limited companies, which can usually be recognised as their official title normally ends with the word "limited" or with the common abbreviation "Ltd". This can sometimes be confusing, however, since many private limited companies are, in fact, subsidiaries of large public limited companies or of foreign companies. Consequently, you may think you are dealing with a small private company, when in reality you are dealing with a minor offshoot of a giant multinational organisation. The legal independence of the limited company, however, can enable the giant to disown its offshoot if it becomes a financial liability.
  4. CHAPTER ONE-BASIC FORMS OF BUSINESS ORGANISATIONS Limited and Unlimited Liability  The term ‘limited’ in public or private limited companies means that the organisation enjoys ‘limited liability’. This exists where the owners of a business have their individual responsibility for its debts limited in some way should it fail.  In practical terms this means that the shareholders, who are its legal owners, are not liable for any debts of the organisation beyond the amount they have paid or agreed to pay for their shares. They may lose all the money they have invested in the company, but cannot be called upon to pay any more.  The importance of limited liability is that it allows enterprises to raise very large amounts of capital from a great number of investors who need take no part in the running of the business. In contrast to this protection for limited company shareholders, partners (usually) and sole traders have unlimited liability for their business debts and may lose everything if their business fails.
  5. Advantages  Ability to raise large capital  Membership is transferable  Limited liability  Enjoy economies of scale.  Assured continuity  Can expand easily  Quality decisions are produced.
  6. Disadvantages  Difficult to adapt to change  Complicated process when registering.  Decisions take long to make.
  7. CHAPTER ONE-BASIC FORMS OF BUSINESS ORGANISATIONS THE SOLE TRADER  Also known as the sole proprietor, this is the oldest and simplest form of business enterprise.  The proprietor is the sole person who provides the financial resources and who makes the decisions –i.e. he/she both owns and runs the business.  There may be employees in the firm, and decision-making may be delegated to some of them, but the final success or failure of the business rests with the proprietor, who provides the funds and takes the profits or the responsibility for any losses.  The business is not a legal entity separate from the owner, so the proprietor has unlimited liability and all contracts with the business are made with the individual proprietor, not with the firm.  The business is a separate accounting entity which has accounts prepared for it, but these do not need to be a full set of accounts and need only be sufficient to satisfy tax liabilities.
  8. CHAPTER ONE-BASIC FORMS OF BUSINESS ORGANISATIONS Advantages and Disadvantages  There are a number of benefits from being a sole trader as opposed to any other form of business organisation. i. A sole trader business can be established with the minimum of formalities, there are few legal procedures and book-keeping and accounts are straightforward. ii. The owner has independence and control –there is no need to consult with others about decisions. iii. The business can respond flexibly to market changes and to customers' demands as decisions can be taken quickly. iv. Any profit goes to the proprietor. v. Personal supervision by the owner should mean that good customer relations can be established and that employees are well motivated.
  9. CHAPTER ONE-BASIC FORMS OF BUSINESS ORGANISATIONS On the other hand, there are disadvantages. i. Finance is usually limited to any money the proprietor can provide or borrow from the bank, building society or family and friends, and this limits the scale of the business. ii. Unlimited liability means that, if the business gets into trouble, the owner stands to lose everything, including the family house if it has been put up as security for loans. iii. Expansion is limited to ploughing back the profits, and lack of finance may prevent the business from reaching a viable size. iv. The firm depends on the sole proprietor, so there may be problems in taking holidays or if the owner is ill,and the business is likely to cease with the death of the owner. v. Any one person's range of expertise is limited, so the sole trader may be reliant on others for certain aspects of the business –for example, a sole trader may be good at repairing the bodywork of damaged cars, but completely lacking in financial and marketing skills and need to contract with others for these activities.
  10. CHAPTER ONE-BASIC FORMS OF BUSINESS ORGANISATIONS PARTNERSHIPS The key features of a partnership are: 1) All partners have unlimited liability for the debts of the firm, just as sole traders do, so a partner could lose his/her personal wealth if the business folds. This very heavy liability for the whole of a firm's debts applies to each partner no matter what agreement the partners may have made between themselves for sharing losses. Thus, one partner could be in a position of losing everything, if the other partners do not have sufficient assets, even though the losses may have been caused entirely by one of those unable to pay. It is not difficult to see why a limited company structure is likely to be preferable if there is any risk of substantial financial losses. 2) Any partner can bind the partnership to a contract with third parties.
  11. CHAPTER ONE-BASIC FORMS OF BUSINESS ORGANISATIONS 3) All partners are jointly liable for meeting the obligations of contracts on behalf of the partnership. The partners usually have joint and several liability, which means someone could take legal action against the partners jointly or against each partner individually –for example, in a claim for damages due to negligent performance of the partnership's obligations under a contract. 4) A partnership, like a sole proprietorship, is not a separate legal entity like a limited company, so it is the partners who are personally liable.
  12. CHAPTER ONE-BASIC FORMS OF BUSINESS ORGANISATIONS 5) All partners share profits according to agreed arrangements. 6) The name of each partner and the business address(es) must be shown clearly on all business documents and full names of partners must be displayed at the place of business.
  13. CHAPTER ONE-BASIC FORMS OF BUSINESS ORGANISATIONS Advantages and Disadvantages 1) The advantages of partnerships stem from the fact that their organisational structure lies between that of a sole proprietor and a company, so that in a sense they can obtain the best of both worlds. 2) Like the sole proprietor and the very small limited company, they are small enough to be flexible and the partners are close enough to the "grass roots" of the business to know what is going on. The principle of professional accountability to clients and customers is retained. 3) The legal and financial procedures are relatively simple –for example, the accounts of the business need only be prepared for the information of the partners and for the calculation of tax liabilities. There is no obligation to publish accounts. 4) There can be division of labour between the partners so that each can specialise and benefit from each other's expertise in the running of the business. Such working arrangements are based on trust and mutual confidence between partners.
  14. CHAPTER ONE-BASIC FORMS OF BUSINESS ORGANISATIONS 5. Partnerships need not be too bureaucratic, and systems and controls in the enterprise need not be too complex. 6. Partners may cultivate a degree of interchangeability so that if one is ill or away from the business, other partners can take over the work. 7. While operating as individuals, the partners can share the cost of common premises, staff and services, as in the cases of doctors, dentists and solicitors. 8. It is easier for partnerships to raise extra resources in order to expand or develop –unlike the sole proprietor, the partnership is likely to have more assets to use as security for loans. A partnership can also raise more capital by adding new partners.
  15. CHAPTER ONE-BASIC FORMS OF BUSINESS ORGANISATIONS DISADVANTAGES 1) Partners have unlimited liability –financial failure of the partnership can spell personal financial ruin for the partners. 2) The withdrawal or death of a partner may dissolve the firm. 3) Any partner can enter into an agreement which binds the others. 4) Decision making may be difficult and slow as all the partners have to agree –one difficult partner could create problems. 5) For a variety of reasons partnerships are not as stable as sole trader firms. Shared control means the possibilities of disagreements and delays. Partners are human beings with human feelings; some partners may be dishonest, some may be lazy or there may be clashes of personality.