BUSINESS AND MANAGEMENT

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BUSINESS AND MANAGEMENT

• MODULE 1
• BUSINESS ORGANIZATIONS ENVIRONMENT

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The Sole Trader/Proprietor

• This is the most common form of business
  organization.
• One person provides the finances and in return,
  has full control of the business and is able to
  keep all the profits.

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The Sole Trader/Proprietor

• Advantages
• Easy to set up-no legal formalities.
• Owner has complete control not answerable to
  anybody else.
• Owner keeps all profits.
• Able to choose times and patterns of working.
• Able to establish close personal relationships
  with staff (if any are employed) and customers.
• The business can be based on the interest and
  skills of the owner rather than working as an
  employee for a larger business.

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Continued

• Disadvantages
• Unlimited liability all of the owners a assets
  are at risk.
• Often faces intense competition from bigger
  firms, for example, food retailing.
• Owner is unable to specialise in areas of the
  business that are most interesting it is
  responsible for all aspects of management.
• Difficult to raise additional capital.
• Long hours often necessary to make business pay.
• Lack of continuity- as the business does not have
  separate legal status, when the owner dies, the
  business ends too

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Discussion

• Nancy is a self-employed florist who operates in
  Brockville. She is married with three young
  children, and her husbands job keeps him on the
  road many days at a time. Nancy arranges and
  delivers flowers to hospitals and schools, and
  occasionally gets a large wedding order.
• Analyse the costs and benefits to Nancy in
  operating as a sole trader.
• Do sole traders benefit from entrepreneurs having
  a high degree of specialization?

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Partnerships

• Partnerships are agreements between two or more
  people carry on a business together, usually with
  a view of making a profit.
• The Deed of Partnership establishes the rights
  and privileges of the partners.
• This document includes issues such as voting
  rights, distribution of profits, the management
  role of each partner and who has the authority to
  sign contracts.

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Partnerships

• Advantages
• Partners may specialise in different areas of
  business management.
• Shared decision making.
• Additional capital injected by each partner.
• Business losses shared between the partners.
• Greater privacy and fewer legal formalities that
  corporate organizations (companies)

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Continued

• Disadvantages
• Unlimited Liability for all partners.
• Profits are shared.
• There is, as with sole traders, no continuity and
  the partnership will have to be reformed in the
  event of the death of one partner.
• All partners are bound by the decision of any one
  of them (mutual agency)
• Not possible to raise capital from selling
  shares.

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Corporations

• Businesses that are owned by shareholders
  (individuals who have invested money to provide
  capital to the company)
• Unlike sole traders or partners, shareholders
  have limited liability
• They do not bear the responsibility of company
  debt and their personal assets are not linked to
  the company

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Continued

• Additional Characteristics
• Very complex and expensive set up
• Legal personality
• Continuity
• Two types of limited companies
• Private
• Public

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The Private Limited Companies Characteristics

• Tend to be relatively small companies.
• Their business name ends in Limited or Ltd.
• Shares can only be transferred privately and all
  shareholders must agree to the transfer.
• Private Limited Companies are often family
  businesses owned by members of the family or
  close friends.
• The directors of these companies tend to be
  shareholders and are involved in the running of
  the business.

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Private Limited Companies

• Advantages
• Shareholders have limited liability therefore I
  is easier to attract investors
• More capital can be raised as there are no limits
  on the number of shareholders.
• Control of companies cannot be lost to outsiders.
• The business will continue even if one of the
  owners dies.
• Financial information is usually held in private
• Benefits from economies of scale

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Continued

• Disadvantages
• Profits have to be shared out amongst a much
  larger number of members.
• There is a legal procedure to set up the
  business. This takes time and costs money.
• Firms are not allowed to sell shares to the
  public therefore restricting the amount of
  capital that can be raised.
• As financial information can be withheld,
  interested shareholders may be turned off

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Public Limited Companies

• Often called plcs (in Europe) or simply a
  corporation in Canada
• Shares of plcs can be bought and sold on a stock
  exchange
• Plcs make up the smallest number of businesses
  in Canada, however they contribute greatly to
  Canadas domestic growth

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Continued

• The company needs lawyers to ensure that the
  prospectus is legally correct.
• A large number of publications have to be made
  available.
• The company must use financial institutions to
  process share application.
• The share has to be underwritten. A fee is paid
  to an underwriter who must buy any unsold shares.
• The company will have advertising and
  administrative expenses.
• The company must have a
• minimum of 50,000 share capital.

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Public Limited Companies

• Advantages
• Huge amounts of money can be raised from the sale
  of shares to the public.
• Production costs may be lower as firms gain
  economies of scale.
• Because of their size, a plc can often dominate
  the market.
• It becomes easier to raise finance as financial
  institutions are more willing to lend to plcs.

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Continued

• Disadvantages
• Setting up costs can be very expensive.
• Since anyone can buy shares, its possible for an
  outside interest to take control of the company.
• All company accounts can be inspected by member
  of the public.
• The way they operate is controlled by various
  company acts which aims to protect shareholders.
• There is divorce of ownership and control which
  might lead to the interest of owners being
  ignored to some extent.
• Plcs are inflexible due to their size.

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Franchises

• This is a contract between two firms
• The contract allows one of them, the franchisee,
  to use the name, logo and marketing methods of
  the other, the franchiser.

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Cooperatives

• This is a common form of business organisation in
  some countries, especially in agriculture and
  retailing.
• Features
• All members can contribute to the running of the
  business, sharing the work load, responsibilities
  and decision making.
• All members have one vote at
• important meetings.
• Profits are shared equally among
• members.

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Cooperatives

• Advantages
• Buying in bulk.
• Working together to solve problems and make
  decisions.
• Good motivation of all members to work hard as
  they will benefit from shared profits.

• Disadvantages
• Poor management skills unless professionals are
  employed.
• Capital shortages because no sale of shares to
  the non-member general public is allowed.
• Slow decision making if all members are to be
  consulted

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Factors Affecting the Choice of Organizations

• Age Many businesses change their legal status as
  they become older.
• The Need for finance A change in legal status
  may be forced on the business.
• Size The size of a business operation is likely
  to affect its legal status.
• Limited Liability Owners can protect their own
  personal financial position if the business is a
  Limited Liability company.
• Degree of control Owners may consider retaining
  control of the business as important.
• The Nature of the Business The type of business
  activity may influence the choice of legal
  status.

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Research and Presentation Task

• How are Charities different from Cooperatives in
  relation to the following
• Characteristics
• Role in community development
• Advantages and Disadvantages
• Identify two Non-Governmental organizations which
  are currently working within your community and
  assess the impact of their contributions to the
  development of your community internationally
• Be prepared to present your findings to the class
  in a 3 to 5 minute discussion

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Formative Case Study

• Case James Hull Associates
• Source Jones, Hall, Raffo, Business Studies 3rd
  Edition, Unit 6, page 51.

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DECA Connection

• You are the owner/manager of a local bookstore.
  You are interested in changing the ownership
  structure to either a partnership or corporation.
• You want to present your findings to your
  financial consultant.
• Your evaluation will consist of
• Explain the types of business ownership
• Describe legal issues affecting businesses
• Explain the nature of tax regulations on the
  business
• Explain business risk