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Business Studies notes

THE BUSINESS ORGANISATION

A business organization is a unit that combines the factors of production to make products

that satisfy people’s wants. It may be know in different names such as factory, firms, company,

etc.

Types of business organizations

We can see that there are businesses owned by the private individuals and the government.

These are the two groups of business organizations known as private sector enterprises and

public sector enterprises.

1. Private Sector Enterprises.

Business organizations which are owned, managed and controlled by a private

individual or individuals are known as private sector enterprises. Profit maximization is the

primary objective of such business enterprises. They get their finance from owners

savings or by borrowing loans or by issuing shares.

2. Public Sector Enterprises.Business organizations, which are owned, managed and controlled by the

government, are known as public sector enterprises. They do not have profit motive. Their

aim is to render service to the people of the nation. They are financed by the government.

Differences between Private Sector Enterprises and Public Sector Enterprises.

Private Sector Enterprises Public Sector Enterprises

1) Businesses are owned, managed

and controlled by private

individuals.

2) Their main aim is to maximize

profit

3) It is financed by private owners.

4) It is accountable to the private

owners.

1) Businesses are owned, managed and

controlled by the government.

2) Their main aim is to render a service

to the people of the nation

3) It is financed by the government.

4) It is accountable to the government.

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Private Sector Businesses

Businesses in the private sector may be incorporated or unincorporated.

1) Incorporated businesses – these are the businesses which have a separate legal

identity from its owners. This means the owner and the business are considered as

two different bodies. These incorporated businesses have limited liability. Limited liability:

This means the owner of a business cannot be held responsible for the debts

of the business. Owners personal properties cannot be sold to pay off the debts

.owners will only loose the amount of money he put in to the business.

2) Unincorporated businesses; these are the businesses which does not have a

separate legal identity from its owners. This means the owner and the business are

one and same. These unincorporated businesses have unlimited liability. Unlimited liability

This means the owners of a business is personally responsible for all the debts

of the business. Even the owner’s personal properties can also be sold to pay

of the debts.

BUSINESS UNITS IN PRIVATE SECTOR

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PRIVATE SECTOR ENTERPRISESSOLE TRADERPARTNERSHIPa) ORDINARY PARTNERSHIPb) LIMITED PARTNERSHIPLIMITED COMPANIESa) PRIVATE LIMITED COMPANIES b) PUBLIC LIMITED COMPANIESFRANCHISESJOINT VENTURES


SOLE TRADER ( Unincorporated ) A business organization owned and managed by a single person is called a sole trader business, Sole proprietorship or individual proprietorship. A sole trader is defined as a person who carries a business exclusively by and for himself.

Features of a sole trader

It is owned and managed by a single person. It is easy to form because there are not much legal formalities. There is no separate legal existence. There is no sharing of profit or loss. He can take quick decisions. The liability of the sole trader is unlimited. It has no punctual succession (lack of continuity). Better personal contact with the employees and customers. It does not require large amount of capital.

Ways of capital or finance of a sole trader

1. Own savings.2. Borrowing from banks and other financial organizations.3. Borrowing from friends and relatives.4. Trade credit.5. Grants or subsidies from the government.6. Hire purchase or leasing.

Advantages of a sole trader

1. Easy formation: there are no complex legal procedures for its formation and it does not need huge amount of capital to start up the business.

2. Quick decisions: the sole trader makes all his decisions. He does not have to waste time discussing ideas with others.

3. Flexibility: the sole trader business is very flexible. He can change his business tactics easily as he is the only one who makes all the decisions.

4. Better personal contacts: as it is a small-scale business, the owner can have personal contact with the customers as well as his employees.

5. Business secrecy: he can maintain secrets of business because he need not discuss them with anyone.

6. No sharing of profit: as it is a one-man business, he can enjoy the entire profit of the business. He does not have to share it with anyone else.

7. Less expensive management: the sole trader performs most of the work relating to his business. So that the expenses can be brought to minimum.

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Disadvantages of a sole trader

1. Shortage of capital: the capital resource of a sole trader is naturally limited. Therefore, expansion of the business is difficult.

2. Unlimited liability: the sole trader has unlimited liability. This means the owner is responsible for all the debts of the business. Even his personal properties can also be sold to pay off the debts.

3. Lack of continuity: the future of this kind of business enterprise is most uncertain. Long illness, death, insolvency or insanity of the sole trader will surely disturb the business or may come to an end.

4. Hasty decisions: as there is no one to advice the sole trader, his decisions may sometimes be deadly for business.

5. Losses: the sole trader has to suffer all the losses by himself.6. Legal entity: the sole trader business has no separate legal identity from its owners.

Anything the sole trader does will affect his business as the owner and business are one and same.

PARTNERSHIP ( Unincorporated )

Partnership is an unincorporated business organization in which two to twenty persons combine to carry on a business with the aim of making profit.

In professional firms like partnerships formed by the doctors, lawyers, accountants etc there is no maximum limit regarding the membership.

The members in a partnership business are called partners. The partners are collectively known as firm.

Features

It is an association of two to twenty partners. There will be an agreement between the partners (partnership deed). The agreement may be either written or oral. It has no separate legal existence. It has no continuous succession. The partners have unlimited liability. The profits or losses are shared among the partners. All the partners are titled to be involved in the management of the business. There must be a good faith among the partners. The partners are under implied authority. That is: an agreement made by one partner on

behalf of the partnership is valid and has to be accepted by all the partners.

Kinds of partners

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There are different kinds of partners in a partnership based on the nature of the agreement on interest taken in the business. The following are some of the important types of partners:

1. Active partners or working partners: partner who contributes capital and take active interest in the day to day affairs of the firm.

2. Sleeping partner or dormant partner: he is a partner who contributes capital and shares the profit of the business but does not take any active part in the day to day affairs of the firm.

Types of partnership

1. Ordinary partnership:It is a kind of partnership where the liabilities of all the partners are unlimited. It is governed by the partnership act 1980. According to this act, every partnership should have a written agreement. In the absence of any written agreement, the provision of this agreement has to be applied.

Profits and losses should be shared equally. Partners are not entitled to get any interest on capital. Partners cannot claim a salary from the business. Any loan by a partner to the firm carries 5% interest per year.

2. Limited partnership:This is a type of partnership where at least one partner must have unlimited liability. It is formed under the limited partnership act 1901 and is known as a limited partnership. The other partners enjoy limited liability.

The partnership must be registered with the registrar of companies as they enjoy limited liability.

There must be at least one ordinary partner who has unlimited liabilities. The limited partners do not take part in the management of the business.

Partnership deed (partnership agreement)It is a legal agreement signed by the partners to the terms and conditions of the partnership business, which contains all the details, regarding the rights and responsibilities of the partners, management of business etc…

Contents:

Name of the firm Name and address of the partners The nature of the business The amount of capital contributed by each

partner The salary to the partners, if any….

The area of responsibilities to each partner

Procedure for admitting and retiring partners.

Procedure for dissolving partnership The interest of drawings, capital, etc

Advantages of partnership

Easy formation

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Partnership is formed by the agreement. There are no legal complications in forming a partnership business.

Large capitalMore capital is available because of the contribution of the partners. Thus a greater expansion

of the business is possible as compared to a sole trader.

Sharing of lossesThe losses are shared among the partners according to their partnership agreement.

SpecializationPooling of expertise ensures a great degree of specialization.

Efficient managementAs all the partners play an active role in the business, it becomes more efficient.

FlexibilityBy agreement, the partners can change their business tactics very easily.

Disadvantages of partnership

Unlimited liabilityAll the partners except the limited partners have unlimited liability.

Lack of continuityDeath, insanity, bankruptcy, or retirement of a partner may end the partnership.

Future conflictsDisagreement between the partners may lead to dissolution of the business.

No separate legal entityThere is no separate legal existence to the business.

Limited capitalAs there are a limited number of partners in a partnership business, capital can be raised only

from the 20 partners. It is small when compared to the capital of a limited company.

Danger of implied authorityAs there is an agency relationship there is a danger of implied authority. A dishonest partner

might cheat the other partners.

LIMITED COMPANIES

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Limited companies are incorporated business organizations which are set up as legal

entities and exist separately from its owners. There are 2 types of limited companies named as

private limited companies and public limited companies.

Limited companies have very large amount of capital which is contributed by their owners

(shareholders). The owners or shareholders have limited liability for the debts of the business.

Setting up (formation) of a Limited Company

To form a limited company there must be at least 2 without any limit of maximum number.

The people who are taking initial step for the formation of a limited company are known as the

promoters of the company.

The promoters have to submit the documents such as Memorandum of association, Articles of association and statutory declaration to the registrar of companies to get

incorporation (registration) of the company. The promoters may seek the service of a solicitor

(lawyer) to draft the above mentioned documents: the promoters have to submit it to the register

of companies with the required fee to get registration.

If all the documents are in order, he will issue a certificate called the certificate of incorporation to grant registration. Now, if the proposed company is a private limited company, they can start the business.

If it is a public limited company they have to work for another certificate called the

‘certificate of trading’ to start the business.

To get certificate of trading, they have to submit another application along with the copy of

the prospectus. If the registrar of the companies is satisfied with the given documents he will issue

a certificate of trading. Now a public limited company can start its business.

Memorandum of association

It is the constitution of the company. It deals with the rules and regulations for the external management of the company. It consists of the following six important clauses:

1. Name of the company2. Address of the registered office3. Purpose of the company4. Registered capital of the company5. Statement showing the liability of the shareholder is limited6. Subscription and association clause.

I. Showing number of shares to be taken by each of the directors.II. Statement showing the willingness to start a limited company.

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Articles of association

It is by law of the company. It deals with the internal rules and regulations of the company. It includes things such as.

The rights and obligations of the directors Procedures for calling an annual general meeting Procedure for electing directors Borrowing powers of the company The different classes of shares The power of different classes of shareholders

Statutory declaration

It is a declaration given by the solicitor to confirm that the proposed company is fulfilled all the legal requirements to get the registration. It also accompany with statement showing the willingness of the director of the company.

Certificate of incorporation

It is a certificate issued by the registrar of the companies to a limited company to grant registration. It gives the company a separate legal existence therefore, it is known as the birth certificate of the company.

Certificate of trading

It is a certificate issued by a registrar of companies to a public limited company to grant permission to commence its business. It is otherwise known as certificate of commencement. A private limited company does not need a certificate of trading.

Ownership and management of a limited company

The capital of the limited company is divided into smaller units called shares. The people

who buy and own these shares are called shareholders. They are the real owners of the

company. Shareholders buy large amount of shares and the more shares a shareholder owns,

he/she can have more influence on the company.

The proportion of profit given by the company to its shareholders is known as dividend.

The shareholders elect the board of directors at an Annual General Meeting (AGM) among

themselves to control the company. The board of directors will elect the managers to run the day-

to-day affairs of the company. This ensures that there is separation of ownership and

management.

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Limited company is responsible for its own affairs and debts. Limited company can own

property and equipments, employ people and borrow money from banks. The owners or

shareholders have limited liability for the debts of the business.

Types of Limited Companies:1) Private Limited Companies

This is an incorporated business organisation which have separate legal entity and whose

shares cannot be sold to general public. They have limited liability. These companies are smaller

businesses and the number of shareholders is also restricted (limited). Normally these businesses

are family businesses.

Features

1. The name of the company must end with the word ‘limited’ or ‘Ltd’2. It is an incorporated association which is registered with the registration of companies

under the companies’ act of the country.3. It has separate legal existence:After registration, a company becomes a legal person having a separate identity. It can acquire (purchase) properties and operate bank accounts, borrow money, enter into contracts with others etc…like a living person.

4. It has perpetual succession:The company has a continuous existence apart from its shareholders. The death, insolvency, insanity etc…. of its shareholders or directors do not effect the existence of the company.

5. Limited liability:The liability of a shareholder of a company is limited: each shareholder is only liable to the extent of the face value (value of share) of shares held by him.

6. Transferability of shares:The shares of a private limited company are not freely transferable. This means shares

cannot be sold to others without agreement of existing shareholders (the articles of association restrict the transfer of shares).

7. Separation of ownership and management:The ownership of a company is vest with the shareholders. The shareholders are larger in number and are scattered widely. Therefore, it is not practical to control and manage the company by all of them collectively. They elect a board of directors from themselves to control and manage the company. The board of directors elects managers to manage the day-to-day affairs of the company. The ownership is separated from the management.

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Advantages of private limited companies (Pvt ltd co….) The shareholders of a private limited company enjoy limited liability. They are liable for the

business debts up to the amount of money they originally invested in the company. They don’t have to sell their own properties to pay the business debts.

With limited liability, the company is able to attract more capital towards the business. In a private limited company, the founders of a business can usually keep control of it by

holding majority of shares. Shares can only be sold to new members if the all existing shareholders agree.

Private limited companies have a separate legal existence. It can enter in to contracts, operate bank accounts, sue and can be sued in its own name. Anything the shareholder does will not affect the company.

The company has a continuous existence apart from its shareholders. The business will be continued even if the owners (shareholders) get sick or die. Because private limited companies are managed and controlled by directors.

Disadvantages of private limited companies Firms are not allowed to sell their shares to public in the stock market. Shares are sold

privately. This restricts the number of shareholders and hence reduces the amount of capital that can be raised from those shareholders.

There is a legal procedure to setup the business. They have to fill many documents. This takes time and also costs money.

All the final accounts of the company must be filled annually with registrar of company. This can be inspected by any member of the public. Competitor could use this to their advantage.

Profits have to be shared out amongst a much larger number of members.

2) Public limited companies (plc)

This is a limited company whose shares can be freely bought and sold by members of the public from the stock market. Their owners (shareholders) have limited liability. These companies tend to be larger and the company’s name must include ‘plc’ on its name.

Features of public limited companies (plc)

It is registered under the companies act with the word ‘plc’ as part of its name. To start the business public limited companies must have a minimum of £50000 as capital. All the shares of public limited companies can be issued to general public and are freely

transferable. The company is owned by shareholder and managed and controlled by board of directors,

who are selected by the shareholders. Public limited companies have a separate legal existence. It can enter in to contracts,

operate bank accounts, sue and can be sued in its own name. The shareholders of a public limited company have limited liability.

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In public limited companies also the ownership and management is separated (divorce of ownership from control).

Advantages of public limited companies

The shareholders of a public limited company enjoy limited liability. They are liable for the business debts up to the amount of money they originally invested in the company. They don’t have to sell their own properties to pay the business debts.

With limited liability, the company is able to attract more capital towards the business. Because more people are prepared to risk their money at the business as they know their personal things won’t be sold to pay business debts.

Public limited companies can sell their shares to general public in the stock market. This will help them to raise more capital to the business.

Public limited companies are normally larger than other companies. This will reduce their production costs and will be able to enjoy economies of scale.

Public limited companies have a separate legal existence. It can enter in to contracts, operate bank accounts, sue and can be sued in its own name. Anything the shareholder does will not affect the company.

Disadvantages of public limited companies (plc)

The formalities of forming public limited companies are quite complex. The setting up cost can be very expensive.

Since anyone can buy the shares of a public limited company from stock market, it is possible for an outside interest to take control of the company (takeover)

All of the company’s accounts can be inspected by members of the public. Competitors may be able to use this information to their advantage. They have to publish more information than private limited companies. So fewer secrets can be maintained about its affairs.

Sometimes a public limited company grows so big that it becomes difficult to manage and they are not able to deal with their customers at a personal level.

Raising capital can be very expensive as normally a merchant bank is used to organize the share issue.

What happens if things go wrong?

If a limited company gets in to debt and cannot pay the money it owes, its creditors can sue (take legal actions against) the company to recover their money. An official receiver may then be appointed to find a way for the company to pay its debts. If a way cannot be found, the company will go in to liquidation. It is where the assets of the company will be sold and the proceeds are used to pay all or proportion of the company’s debts. After liquidation also if the company cannot

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pay its debts then they may have to give their business in to the hand of their creditors, until they get their money back.

Capital of limited companies (private & public ltd companies)

By issuing shares: most of the capital of limited companies comes from selling shares. They can sell 2 types of shares named as ordinary or equity shares and preference shares. Shareholders are the owners of the company. They get dividend out of company’s profits. - Public limited companies sell their shares to the general public and collect huge capital. - Private limited companies sell shares to the small number of shareholders.

By issuing debentures: a company can also raise capital by issuing debentures. These are long term loans given to the company by creditors. Debenture holders are the creditors of the company. They get fixed rate of interest whether the company makes profit or not.

By borrowing from financial institutions like banks. Retained profits of the company can be used for future investment. Companies could be able to get trade credit from their suppliers. Subsidies and grants from the government. Hire purchase and leasing facilities will be available for the limited companies.

Reasons for changing a pvt ltd company to a plc (floatation)

Becoming a public limited company, gives them almost limitless source of capital.

Business can raise huge amount of capital by selling shares in the stock market.

Businesse are able to fund expensive development and expansion programes in this way.

The amount of money collected by selling shares does not have to be paid back.

Plc's are laeger than pvt limited companies.so going public will help them to enjoy the benefits of economies of scale. It will reduce the average cost of production which will increase the sales and profits of the business. Also, it will improve the productivity and efficeincy of the busienss.

It is also easier to raise money through other sources of finance. Eg. Banks. Because plc’s will have huge capital with fixed assests to mortgage the loans when compared to a pvt ltd company.

Sources of finance for the limited companies

1. Most of the capital of limited companies is raised by selling shares.

- Private limited companies sell shares to the small number of shareholders.

- Public limited companies sell their shares to the general public and collect huge capital.

2. Raise money by borrowing from banks and other financial institutions.

3. Retained profits of the company can be used for future investment.

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4. Companies could be able to get trade credit from their suppliers.

5. Subsidies and grants from the government.

6. Hire purchase and leasing facilities will be available for the limited companies.

FFRANCHISE

ranchise is a business process or agreement where the owners of a business allows others to sell their goods and services or trade under the company’s name. The business granting the franchise is called franchiser. The business taking out franchise is called franchisee. Examples of franchise includes MacDonald’s, Body Shop, wimpy, Kentucky Fried Chickens (KFC) etc.

Features of franchise business1. Franchise an agreement allowing one business to run on the name of the other business, and sell their products and services.2. The business is owned and run by the franchisee.3. Franchisee has to pay certain sum of money for the permission to use the name of the other business.4. Franchisee has to pay a royalty from its turnover (sales) to the franchiser every year.

5. The business (shop) that sells the franchised products is decorated or designed in the same style, are used the same name and are sold at the same price.6- Success of both franchiser and franchisee depends on the close co-operation between both businesses.

Advantages of franchise business to the Franchisee1. Taking out franchise is an easy way of avoiding risks involved with setting up a business.2. Franchise business has greater chance of success as they are operating under the name and logo of a well known company. So the chance of failure is reduced.3. Franchiser may provide advertise locally or nationally and train the employees for the franchise business. This may reduce the cost of running the business.4- Sometimes franchisee can get loan facilities from the franchisor

Disadvantages of franchise business to the Franchisee1. The business which takes out the franchise is normally a sole trader or a partnership. Because of this they have unlimited liability and will lose everything if things go wrong.2. Franchisee has less control over his own business.

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3. Sometimes it is very expensive to buy a franchise4. The franchisee has to pay an annual fee every year regardless of loss the business may make.5. The franchise business is tied to the franchiser and the success depends on the success of the franchiser’s product.6. The franchisee has no freedom regarding decorating his own shop, designing his products and putting a price on his product. Freedom is restricted.7- Fro starting the business franchisee has to give a lump sum amount of money to the franchiser.8-franchisee has to bear all the expenses and losses of the firm.

Advantages of franchise business to the franchiser1. By selling franchises, a business is able to expand without committing its own resources.2. The franchiser also receives a share of the franchisee’s profit (royalty). So a fairly reliable amount of revenue can be received by the franchiser. Because royalties are based on sales not profits. Money is guaranteed even if a loss is made by the franchisee.3. The risk can be spread between the businesses. The success of one business benefits the other as they are depending on each other.4. By franchising a part of its operation, a business is able to concentrate on its core activity.

5- Franchiser can use the specialist skills of franchisee to develop a good market for them.

Disadvantages of franchise business to the franchiser1. The franchiser loses his customers who go away to the franchised outlets (shops) for their convenience. This will reduce their sales.2- Sometimes the franchisee may cheat to franchiser by understating their sales and profit figures.

Advantages of franchise to the customers

1. The customer knows he is buying a known product whose quality is guaranteed when he buys from a franchised outlet.2. It is very easy for a customer to identify a franchised outlet as the price and design of the product and shop will be same as the franchiser’s shops.

Sources of finance for the franchiseThe ways that the franchise gets money to operate their business is same as the sole traders and partnerships. Sometimes the Franchisee also gets finance from the franchiser.

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Joint ventures

Joint venture is the business enterprise formed by joining two or more companies which pool resources to under take large projects. The businesses in a joint venture may be in private sector and public sector or in both private sectors.For example new hospital or railway may be built as a joint venture between government and private enterprise (company).

Features of joint ventures1. It involves two or more businesses joined to under take large projects.

2- The businesses which are involved in the joint venture will give finance, resources and raw

materials for the project.

2. The businesses in the joint venture may be private businesses or public sector business.

3. The cost and the risk of the projects will be spread between the businesses involved in the joint

venture.

4. When the project is over or completed the joint venture will be dissolved or separated.

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