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IB Business Management
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BusinessManagementIB
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For example two friends could form a
partnership or a private limited liability company, depending on which type of organisational structure best suits
them
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Figure 1: The main types of legal structures for profit-based, private-sector business organisations

TYPES OF ORGANISATIONS – THE DIFFERENT TYPES OF LEGAL STRUCTURES

Sole trader
Description

A sole trader is an individual who is the owner of this or her own business
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IB Business Management
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Examples include selfemployed painters and decorators, plumbers, mechanics, restaurateurs and freelance
photographers
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Capital

Sole proprietorships are usually small family-run businesses that can be set up with relatively
little capital
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Sources of
Finance

Limited sources of finance
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Sole
traders may find it difficult to secure any funds beyond their personal savings
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This means
that the owner is legally as the business – he or she is treated as a single entity
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This means that there is no limit to the amount of debt that a sole trader is
legally responsible to pay if the business fails
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Being your own boss can also bring about its advantages
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Sole traders can also provide personalized services to their customers
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Disadvantages

A sole trader has unlimited liability
Limited sources of finance
High risks- sole proprietorships have the largest risk of business failure
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Workload and stress- Sole traders largely depend upon the abilities and commitment of the
owner
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Lack of continuity- the running of a business may be jeopardized if the owner is not present
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2 Types of Organisation – Summary Notes
Higher costs of production- A sole trader is not able to exploit the benefits of large scale
production
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g
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Ownership
and Control

It is owned by two or more people, and up to 20 (this may vary from country to country)
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Capital

Capital from partners (Partners can pool funds together to make more funds)
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

Also from partners that do not actively take part in the running of the business (silent
partners or sleeping partners)

Legal status

A legal contract is drawn up known as a deed of partnership or a partnership deed
(partnership agreement)
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

Unlimited liability is where the owners are personally liable for the business departments
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

Sleeping partners have limited liability
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

They benefit from division of labour and specialisation
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

Partners have unlimited liability
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

A lack of continuity may still exist if a partner dies or leaves the firm



There must be a huge amount of mutual trust within a partnership
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

Introduction of cash and/or assets by partnerships
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g
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COMPANIES


Companies are businesses that are owned by their shareholders
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

Companies have limited liability which means that the business owners (shareholders) are not personally
liable for business debts
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Often companies are called limited companies to clarify the fact that it has
limited liability



A board of directors is elected by shareholders to run the company on their behalf
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

The more shares a person has in a business, the more influence they have in business decisions as each share
counts for one vote
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2 Types of Organisation – Summary Notes
There are two types of limited companies:
A Private Limited Company is a company that can only raise share capital from friends and family, not the general
public
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Owners (shareholders) of private businesses have more of a say as there are less shareholders so more
influence over business decisions
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A Public Limited Company is a company that is able to advertise and sell its shares to the general public via the
stock exchange
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A disadvantage is that there is a dilution of control as the company has more owners (and voters) which thereby
weakens shareholders’ ability to control the business
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They are also exposed to takeover bids from other investors that seek to purchase a majority
stake in the business
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



The Memorandum of Association: This includes the fundamental details of the company such as name,
its main purpose, its registered address and the original amount of share capital invested
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Articles of Association: This stipulate s the internal regulations and procedures of the company
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Administrates
issues are also covered such as the Annual General Meeting
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Once these documents are approved and an application fee has been paid a verification of incorporation is
issued to the firm
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Company Terminology


Flotation: An Initial Public offering (IPO) occurs when a business first sells all or part of its business to external
investors
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There are three reasons why investors tend to buy shares in a limited company





Dividends: Companies usually pay dividends tot there shareholders biannually/ the dividends represent a
share of the profits
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Capital growth: Stock brokers and investment bankers argue that over the medium to long term, shares
outperform the return from savings in a bank account
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This
gain is known as capital growth
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This reason is generally held by people who are risk
takers and possess high entrepreneurial spirit
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2 Types of Organisation – Summary Notes
Advantages:

Disadvantages:

Public limited companies can often raise vast sums of
money for financing their investment projects
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Financial information must be provided to all
shareholders
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Interest does not have to be paid; instead,
shareholders are paid a dividend (but only if the
company makes a profit
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As companies have limited liability, it is easier for them
to attract both private and commercial investors
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For shareholders, dividends are only paid out if the
business makes a profit
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Benefit from continuity
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Large organisation suffers from communication
problems
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Due to their larger scale business, companies can
benefit from economies of scale
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g
...
This is because
commercial lenders see limited companies as less of
a financial risk; most banks would probably not
hesitate to lend large multinational companies such
as Nike and McDonald’s money to finance their
expansion plans
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Limited companies can hire specialist directors and
mangers to run the firm as there is no need for the
owners to be directly involved in the daily running of
the business
...
Although this may
give them significant voting power, it also means they
have an incentive to perform well in order to achieve
capital growth (higher share prices) and dividends
from the shares
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2 Types of Organisation – Summary Notes
FOR PROFIT SOCIAL ORGANISATIONS

Cooperatives
Description

Firm owned, controlled, and operated by a group of users for their own benefit
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NB
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Common types of cooperative include:








Financial cooperatives, for example, credit unions are a type of cooperative banking
institution that provides banking and lending services to its members
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Worker’s cooperatives are owned and governed by the employees of the business
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Producer cooperatives, for example, retail cooperatives involve small retailers banding
together to be more competitive with large retailers by sharing advertising costs and
buying as a group for high volume discounts
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Consumer co-ops may sell consumer goods such as food, or provide
housing, or electricity
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Ownership
and Control

Each member contributes equity capital, and shares in the control of the firm on the basis of
one-member, one-vote principle (and not in proportion to his or her equity contribution)
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Capital

Each member contributes equity capital, owns shares in the organisation and is paid dividends
out of profits in addition to their usual remuneration

Sources of
Finance

Equity capital from cooperative members, retained profits and long-term bank loans
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Cooperatives may take the form of companies limited by shares or by guarantee, partnerships
or unincorporated associations
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Advantages





Easy to form
No obstruction for membership
Limited liability

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g
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g
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There is a usually a limited distribution of surplus (profits) to members/shareholders and
some cooperatives may prohibit the distribution of any surplus to members/shareholders
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Active and direct involvement of members/shareholders in the cooperative
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Management may be inefficient as many cooperatives are managed by their nonspecialist members
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The formation of a cooperative is dependent on the form of organisation: limited liability
companies, partnerships or unincorporated associations
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COOPERATIVES

MICROFINANCIERS
Microfinance is defined as financial services for poor and low-income clients, especially microcredit, offered by
different types of service providers
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These institutions commonly
tend to use new methods developed over the last 30 years to deliver very small loans to unsalaried borrowers,
taking little or no collateral
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More broadly, microfinance refers to a movement that envisions a world in which low-income households have
permanent access to a range of high quality and affordable financial services offered by a range of retail
providers to finance income-producing activities, build assets, stabilise consumption, and protect against risks
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How do borrowers use microcredit loans? Many microcredit borrowers have microenterprises – unsalaried,
informal income-generating activities
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Scattered research suggests that only half or less of loan proceeds are used for business
purposes
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An increasing number of
MFIs are now organized as for-profit entities, often because it is a requirement to obtaining a license from banking
authorities to offer savings services
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PRIVATE-PUBLIC PARTNERSHIPS (PPPS)
A public–private partnership (PPP) is a government service or private business venture which is funded and
operated through a partnership of government and one or more private sector companies
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g
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In some types of PPP, the cost of using the service is borne exclusively by the users of the service and not by the
taxpayer (for example, a toll road will be financed by the users of the road)
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In projects that are aimed at creating public goods like in the infrastructure sector, the government may provide
a capital subsidy in the form of a one-time grant, so as to make it more attractive to the private investors
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There are usually two fundamental drivers for PPPs:
Firstly, PPPs are claimed to enable the public sector to harness the expertise and efficiencies that the private
sector can bring to the delivery of certain facilities and services traditionally procured and delivered by the
public sector
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g
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PPP borrowing is incurred by the private sector organisation
and as such is an "off-balance sheet" method of financing the delivery of new or refurbished public sector
assets
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g
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As a social enterprise,
the main features of a PPP include:
While profit is important it is not likely to be the priority
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

NON-PROFIT AND NON-GOVERNMENTAL ORGANISATIONS
NON-PROFIT ORGANISATIONS



An establishment that is run professionally, without profit as the main objective
Aim to provide a service or promote special causes

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Their profit is returned back
into the business for the benefit of its members
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Instead they are
made to benefit others in society
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Operational NGOs are established from a given
objective or purpose, usually relief-based and community projects
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CHARITIES






Type of registered non-profit organisation, with a main aim of collecting donations from individuals and
organisations in order to support a cause beneficial to society
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Some charities are very large and run by a group of managers and trustees, similar to that of a limited
company’s board of directors
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Surplus = Revenues – Costs
Although they are non-profit, they strive to make a surplus
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This is to
prevent misuse of charitable donations which is known
as charity fraud
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This also means those who run the charity are
not help liable for debt
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Charities only survive on donations, and tend to be
the first to lose

PRESSURE GROUPS




Non-profit organisations established by members to address a special interest of the group
Their aim is to win public and media support from their actions
Try to influence government legislation, such as introduction of national minimum wages laws, support low
income earners, gain access to resources (e
...
Arctic drilling), etc
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2 Types of Organisation – Summary Notes



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