Types of Organisations

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

Business Ownership

Five main organisation formats:

Sole TraderNot-for-ProfitPartnershipLimited Liability PartnershipLimited Company

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

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)

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

Sole Trader Accounts

A sole trader keeps books for his own benefit to:Record all transactions entered into by himAllows analysis and interpretation of this

accounting dataDiscover whether or not the firm is

operating at a profitKnow whether or not the business will be

able to meet its commitments as they fall due

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)

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

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

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

Not-for-Profit Accounts

Accounting records are required for 3 main reasons:StewardshipExecutive Purposes/Operational

PurposesPlanning and Control

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

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

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

Sole Trader forming a Partnership

Spreads risk across more people Partner may bring money and

resources to businessE.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

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

Partnership

A partnership is normally set up using a Deed of Partnership. This contains:Amount of capital each partner should provideHow profits or losses should be dividedHow many votes each partner has (usually based on

proportion of capital provided)Rules on how take on new partnersHow 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

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

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

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

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

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 ExchangeHas a separate legal identity – the company

can sue and be suedMore complex to set upMinimum share capital of £50,000

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 doVoting rights of shareholders

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 shareholdersHave a duty to act in best interests of

shareholdersHave to account for their decisions and

performance (Accounts)

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

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

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

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

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

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

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

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

PLC – Sources of Finance

A Public Limited Company can raise additional finance in a number of ways:

Issue additional Shares

Issue Debentures

Bank loans