1.2 Types of organisations

Question 1

Charities

Answer 1

Charities are non-profit social enterprises that provide
voluntary support for good causes (from society’s point of view), such as protection of children, animals and the natural environment.

Question 2

Cooperatives

Answer 2

Cooperatives are for-profit social enterprises set up, owned and run by their members, who might be employees and/or customers.

Question 3

A company (or corporation)

Answer 3

A company (or corporation) refers to a business that is owned by shareholders. It has been issued a certificate of incorporation, giving it a separate legal identity from its owners

Question 4

Deed of partnership

Answer 4

Deed of partnership is the legal contract signed by the owners of a partnership. The formal deeds specify the name and responsibilities of each partner and their share of any profits or losses.

Question 5

Incorporation

Answer 5

Incorporation means that there is a legal difference between the owners of a company and the business itself. This ensures that the owners are protected by limited liability.

Question 6

initial public offering (IPO)

Answer 6

An initial public offering (IPO) occurs when a business sells all or part of its business to shareholders on a stock exchange for the first time.

Question 7

Limited liability

Answer 7

Limited liability is a restriction on the amount of money that owners can lose if their business goes bankrupt, i.e. shareholders cannot lose more than they invested in the company,

Question 8

Microfinance

Answer 8

Microfinance is a type of financial service aimed at entrepreneurs of small businesses, especially females and those on low incomes.

Question 9

Non-governmental organizations (NGO) and 2 types

Answer 9

Non-governmental organizations (NGO) are private sector not-for-profit social enterprises that operate for the benefit of others rather than primarily aiming to make a profit,e.g. Oxfam and Friends of the Earth.

1. Operational NGOs
   are established from a given objective or purpose. These NGOs tend to be involved in relief based and community projects, e.g. Oxfam and UNICEF.
2. Advocacy NGOs
   take a more aggressive approach to
   promote or defend a cause, striving to raise awareness
   through direct action (such as lobbying, public relations
   and mass demonstrations), e.g. Greenpeace and Amnesty International.

Question 10

Partnerships

Answer 10

Partnerships are a type of private sector business owned by 2-20 people (known as partners). They share the responsibilities and burdens of running and owning the business.

Question 11

private limited company

Answer 11

A private limited company is a business owned by shareholders with limited liability but whose shares cannot be bought by or sold to the general public.

Question 12

The private sector

Answer 12

The private sector is the part of the economy run by private individuals and businesses, rather than by the government,e.g. sole traders, partnerships, companies and cooperatives.

Question 13

public limited company

Answer 13

A public limited company is an incorporated business that allows the general public to buy and sell shares in the company via a stock exchange. All shareholders enjoy limited liability.

Question 14

Public-private partnership (PPP)

Answer 14

Public-private partnerships occur when the government works together with the private sector to jointly provide certain goods or services.

Question 15

The public sector

Answer 15

The public sector is the part of the economy controlled by the government. Examples include state health and education services, the emergency services and national defence.

Question 16

A sole trader

Answer 16

A sole trader is a self-employed person who runs and controls the business and is the sole person held responsible for its success (profits) or failure (unlimited liability).

An important legal point about sole traders is that the business isunincorporated.

Question 17

Social enterprises and the 3 types AO3

Answer 17

Social enterprises are revenue-generating business with social objectives at the core of their operations. They can be for-profit or non-profit businesses, but all profits or surpluses are reinvested for that social purpose rather than being distributed
to shareholders and owners.

1. cooperatives
2. microfinance providers
3. public-private partnerships (PPP)

Question 18

State-owned enterprises

Answer 18

State-owned enterprises are organizations wholly owned by the government.
e.g. BBC, USPS

Question 19

stock exchange

Answer 19

A stock exchange is a market place for trading stocks and shares of public limited companies. Examples include the London Stock Exchange (LSE) and the New York Stock Exchange (NYSE).

Question 20

Unlimited liability

Answer 20

Unlimited liability is a feature of sole traders and ordinary partnerships who are legally liable for all monies owed to their creditors, even if this means that they have to sell their personal possessions to pay for their debts.

Question 21

What 2 documents must be produced and submitted to the appropriate authorities?

Answer 21

Articles of Association and Memorandum of association

Question 22

Articles of Association

Answer 22

The longer of the two documents, stipulating the internal regulations and procedures of the company, e.g. the rights, roles and power of the BOD and shareholders. Administrative issues are also covered, such as procedures of the Annual General Meeting (AGM), the processes for the appointment of directors and how profits will be distributed.

Question 23

Memorandum of association

Answer 23

A relatively brief document outlining the fundamental details of the company, e.g. its name, its main purpose, the registered address and the amount of share capital invested.

Question 24

Divorce of ownership and control

Answer 24

The so-called “divorce between ownership and control” happens when the owners of a business do not control the day-to-day decisions made in the business.

E.G. the majority of shareholders in public companies are not involved in any way with operational decision-making by the companies in which they have invested.

Question 25

Mixed economy

Answer 25

An economic system combining private and state enterprise.

Question 26

Non-profit social enterprises and the 2 types (AO3)

Answer 26

Non-profit social enterprises are businesses run in a commercial like manner but without profit being the main goal. Instead, non-profit organizations (NPOs) use their surplus revenues to achieve their social goals rather than distributing the surplus as profits or dividends.

1. NGOs
2. Charities

Question 27

Sole traders AO3

Answer 27

1. E.G. self-employed decorators, plumbers, mechanics, restaurateurs
2. May work alone or employ other people to help run the business.
3. Sole proprietorships are often small family-run businesses
4. Can be set up with relatively little capital.
5. Start-up capital is usually obtained from personal savings and borrowing.

Question 28

Partnerships AO3

Answer 28

1. Like sole traders, partnerships are financed mainly from the personal funds of each owner. However, partners can pool their funds together to raise more finance than sole traders.
2. They can also raise money from owners who do not actively take part in the running of the partnership but have a financial stake in it. These investors are called silent partners (or sleeping partners) and are eligible for a portion of the profits

Question 29

Cooperatives and three types (4p) (social entreprise AO3)

Answer 29

1. All employees (member of the cooperative) have a vote, thus contribute to decision-making. Cooperatives share any profits earned between their members.
2. Consumer cooperatives are owned by the customers who buy the goods and/or services for personal use. Examples include food, credit unions (financial services), child care, housing, and health-care cooperatives. In most cases, members get access to goods and services at lower prices than those charged by traditional commercial businesses.
3. Worker cooperatives are set up, owned and organized by their employee members. Examples include cooperatives involved in production and manufacturing, cafes, printers and tourism and communications. By operating as an enterprise, members are provided with work.
4. Producer cooperatives are cooperatives that join and support each other to process or market their products.
   E.G. a farmer cooperative might unite to buy equipment, fertilizers and seeds collectively, by pooling
   their funds, thus benefiting from bulk purchase discounts. Farmer cooperatives are the most common example of producer cooperatives.

Question 30

Microfinance providers (2p) (social entreprise AO3)

Answer 30

1. Microfinance is a type of financial service aimed at entrepreneurs of small businesses, especially females and those on low incomes.
2. As a social enterprise, microfinance providers enable the disadvantaged members of society to gain access to essential financial services to help eradicate poverty.

Question 31

Public-private partnerships (PPP) (social entreprise AO3)

Answer 31

1. It is argued that a public-private partnership can benefit from the dynamics, finance and efficiency of the private sector alongside the benefits of public sector funding and support.

2.

Question 32

Charities AO3

Answer 32

Although charities are not-for-profit social enterprises,
this does not mean that they do not strive to make a
surplus. The surplus is not classed as ‘profit’ because it
does not get distributed to the owners or taxed by the
government but is reinvested in the charity.

Question 33

Advantages of sole proprietorships AO3 (5p)

Answer 33

1. Few legal formalities
   Quite easy to set up and start-up costs are usually much lower in comparison to starting other types of business organizations.
2. Profit taking
   Sole trader is the only owner and therefore receives all of any profits. This gives the sole trader an incentive to work hard and to become successful.
3. Being your own boss
   They don’t take orders from anyone, have flexibility in decision-making (such as working hours), and self-esteem from being successful. Decisions are also made quicker.
4. Personalised service
   Can provide a personalised service to customers. Larger firms might not have the time to get to know all their customers so their services often become impersonal.
5. Privacy
   Unlike other types of business ownership, sole
   traders enjoy privacy as they do not have to make their
   financial records available to the public, i.e. the owner enjoys confidentiality (although the accounts can be scrutinised by the tax authorities).

Question 34

Disadvantages of sole proprietorships AO3 (6p)

Answer 34

1. Unlimited liability
   As an unincorporated business, there is no limit to the amount of debts that a sole trader is legally responsible for if the business fails.
2. Limited sources of finance
   Often find it difficult to secure any funds beyond their personal savings. Trying to expand can also be problematic; lack of sources of finance available to sole traders.
3. High risks
   Statistically, they have the largest risk of failure. The presence of larger and more established firms creates a huge threat to the profits and survival of smaller businesses.
4. Workload and stress
   Owners often have to do their own accounts, marketing and human resource management. The sole trader is unlikely to be equally effective in these different roles; added workload and stress.
5. Limited economies of scale
   They are not able to exploit the benefits of large scale production, so their prices might be less competitive compared with those of larger rivals. Tends to reduce the competitiveness and profits for the business.
6. Lack of continuity
   The running of a business can be jeopardised if the owner is not present. If the owner decides to go on holiday, or becomes iII, or dies, then the business might have problems in continuing.

Question 35

Advantages of partnerships AO3 (4p)

Answer 35

1. Financial strength
   More financial strength than sole proprietorships because more owners who can invest in the business; still easy to set up. In general, also easier to secure external sources of finance in partnerships than sole proprietorships due to lower risks.
2. Specialisation and division of labour
   Unlike sole traders, partners can benefit from shared expertise, shared workload and moral support. E.G. a law firm might have partners who specialise in corporate law, divorce law and criminal law. As a result, its client base is likely to be much larger.
3. Financial privacy
   Like sole proprietorships, partnerships do not have to publicise their financial records. Therefore, they can enjoy a fair degree of financial privacy.
4. Cost-effective
   Can be more cost-effective than sole traders as each partner specialises in certain aspects of their business, thus raising productivity.

Question 36

Disadvantages of partnerships AO3 (4p)

Answer 36

1. Unlimited liability
   Legally, partnerships are responsible for their debts ‘wholly or severally’ meaning the debts can be repaid by either one partner (wholly) or shared among the partners (severally). The rare exception is with limited liability partners who have been elected to have limited liability.
2. A lack of continuity
   Problems might still exist if a partner dies or leaves the firm as the partnership deed becomes invalid, i.e. It must be set up again. It is possible to accommodate some changes in a partnership deed, although solicitors will spend time (and money) on drafting the new contract.
3. Prolonged decision-making
   In comparison to sole traders, decision-making is likely to take longer as there are more owners involved. Disagreements and conflict might also occur.
4. Lack of harmony
   Disagreements and conflict within partnerships is common, but there must also be mutual trust. Each partner is legally and financially answerable to the others, so a mistake made by one person can reduce the profits for all other partners.

Question 37

Annual General Meeting (AGM) and its 3 main processes

Answer 37

All companies must hold an AGM to allow the owners to have a say (or vote) in the running of the business.

Three main processes at an AGM
1. Shareholders vote on (promises or declarations) and
the re-election (or sometimes election) of the board of
directors.

2. Shareholders ask questions of the chief executive officer, directors and chairperson about various aspects of the company.
3. Shareholders approve the previous year’s financial accounts after the directors present the annual report containing information about the company’s performance.

Question 38

Advantages of company AO3 (6p)

Answer 38

1. Raising
   Can raise large amounts of capital by selling shares. There are no interest charges and shareholders are paid only if the company makes a profit.
2. Limited liability
   All companies have this; easier to attract investors as the risks are relatively low for investors.
3. Continuity
   Unlike partnerships and sole traders, the legal difference between the company and its owners means it can continue to operate as a separate entity, even with a change of owners.
4. Economies of scale
   Due to their larger size, companies can benefit from economies of scale (lower unit costs of production as the firms enlarges). For example, it is usually cheaper for a company to borrow money than it is for sole traders or partnerships as limited companies are less of a financial risk.
5. Productivity
   Can hire specialist directors and managers to run the firm as there is no need for the owners to be directly involved in the daily running of the business. They are also more likely to employ specialist staff such as marketers, lawyers and accountants. Therefore, the output and productivity levels of limited companies are generally higher than found in sole proprietorships and partnerships.
6. Tax benefits
   Sole traders and partnerships pay income tax on their profits. By contrast, companies pay corporate tax on their profits. The highest income tax rate tends to be greater than the rate for corporate tax. Companies also benefit from a wider range of allowances and tax-deductible costs.

Question 39

Disadvantages of company AO3 (6p)

Answer 39

1. Communication problems
   Quite often, as a company becomes larger, services and relationships can become more impersonal to both customers and employees.
2. Added complexities
   Running a sole-proprietorship or partnership is cheaper and less bureaucratic than running a corporation.
3. Compliance costs
   For public limited companies, the high costs of complying with the rules and regulations of the stock exchange adds to their running costs.
4. Disclosure of information
   Financial data must be provided to all shareholders; can be a time consuming and expensive task as auditors must be paid and annual reports have to be published and distributed. Privacy no longer exists, in comparison to that enjoyed by sole traders and partners.
5. Bureaucracy
   There is far more bureaucracy involved in setting up and running a company. Solicitors must be hired to ensure that all documentation is legally accurate. Advertising and promoting the company’s IPO adds to the costs. Hosting the AGM is also a huge and expensive task.
6. Loss of control
   Whilst sole traders and partnerships retain control of their businesses, public limited companies face the potential threat of a takeover by a rival company that purchases a majority stake in the business (as shares are openly available for purchase on the stock exchange).

Question 40

Advantages of cooperative AO3 (4p)

Answer 40

1. Incentives to work
   Employees have a key stake in the cooperative so are more interested in how it performs. This can enhance staff motivation and labour productivity.
2. Decision-making power
   Employees also have a say in how the business is run. There is a democratic system of members having equal voting rights. This can also improve the members’ commitment and motivation.
3. Social benefits
   Cooperatives are run on socially responsible principles, leading to gain for other members of society rather than for the owners. Thus, cooperatives create social gains that can be enjoyed by the wider community.
4. Public support
   A key advantage of social enterprises such as cooperatives is that there tends to be public support, i.e. people (including customers) want to help them succeed because they believe in the cause.

Question 41

Disadvantages of cooperative AO3 (4p)

Answer 41

1. Disincentive effects
   There might be inefficient managers and employees as cooperatives do not pay high salaries and bonuses as incentives to work.
2. Limited sources of finance
   Cooperatives might suffer from a lack of finance as most of them cannot raise funds through a stock exchange. Sources of finance can be limited to the amount contributed by their members.
3. Slower decision-making
   Decisions are likely to be slowed down (delayed) as all members of the cooperative work in a democratic way and are involved in the decision-making process.
4. Limited promotional opportunities
   Cooperatives tend to have flatter organizational structures (see Unit 2.2), so there are fewer opportunities for employees to progress in their professional careers.

Question 42

Advantages of Microfinance providers AO3 (3p)

Answer 42

1. Accessibility
   Microfinance helps those in poverty to become financially independent, whereas banks do not typically lend such small amounts and to this particular market segment.
2. Job creation
   The effective use of microfinance can help create new job opportunities, with beneficial effects on society.
3. Social wellbeing
   Successful applicants who receive microfinance are less likely to take their children out of school. It also allows recipients better access to health-care services for their families.

Question 43

Disadvantages of Microfinance providers AO3 (3p)

Answer 43

1. Immorality
   Critics claim that microfinance is an unethical operation of lenders as the providers are for-profit organizations, so profit from the poor and the unemployed.
2. Limited finance
   Microfinance schemes only offer small amounts of money to borrowers given the high risk of default (failure to repay loans).
3. Limited eligibility
   Not all poor individuals qualify for microfinance. As a for-profit organization, microfinance providers have to minimise their own risks by ensuring borrowers have the ability to repay their loans.

Question 44

Advantages of charities (5p)

Answer 44

1. Social benefits
   Charities provide financial support for the welfare of society, whether domestically (such as Age Concern) or internationally (such as Friends of the Earth). Many charities help to raise funds for medical research and other worthy causes including the protection of children and the prevention of cruelty to animals.
2. Tax exemptions for NPOs
   As non-profit organizations, charities are exempt from corporate tax. There are also concessions for other taxes such as business rates, stamp duty (land taxes), capital gains tax and inheritance tax on gifts made in a will.
3. Tax incentives for donors
   Donors, be they private individuals or organizations, can get income tax allowances on the funds that are donated to charity. This raises the incentive for donors to give money to charities.
4. Limited liability
   Charities can register to be limited companies to protect the interest of employees and managers who have limited liability.
5. Public recognition and trust
   Once registered with the authorities as a charity, the social enterprise can raise funds for its cause(s), with the general public and corporate donors being more confident in donating money to the charity.

Question 45

Disadvantages of charities (5p)

Answer 45

1. Bureaucracy
   Charities must be registered before they can operate. UK charities must register with the Charity Commission (www.charity-commission.gov.uk).These governing bodies also place restrictions on what charities can and cannot do.
2. Disincentive effects
   The lack of a profit motive can cause problems, e.g. most volunteers cannot offer their services for extended periods of time. Even salaried workers are likely to be paid far less than what they could earn in for-profit organizations.
3. Charity fraud
   Financial activities must be recorded and reported to a governing body. This is to protect the interest of donors and to prevent charity fraud (the misuse of charitable donations.
4. Inefficiencies
   Although limited liability charities offer protection to the owners, it also means that those who run the charity are not personally held liable for any debts incurred.
5. Limited sources of finance
   Most charities survive solely on one source of finance - donations. With the huge number of rival charities and limited funds from donors, especially during an economic downturn, they have to constantly compete for donations.

Question 46

6 factors that affect the choice of business organisation

Answer 46

1. Amount of finance
   Sole traders need less capital than a public limited company to set up. A change in the legal status of a firm will usually require more finance.

2.Size
The larger the business operation, the more likely it is to be a company (corporation). Sole traders, for instance, find it unnecessary or unaffordable to hire lots of workers.

3. Limited liability
   The desire to have limited liability, in order to protect the personal possessions of the owners, can affect the choice of legal status of a business.
4. Degree of ownership and control
   Those who wish to retain control and ownership of a business may prefer to stay as sole traders or even as private limited companies.
5. The type of business activity
   The nature and scale of business activity can influence the legal status of a firm, e.g. mainstream aircraft and motor vehicle manufacturers rely on external sources of finance (see Unit 3.1), so are likely to be formed as public limited companies.
6. Change
   As a business grows and evolves (see Unit 1.6), it may need additional sources of finance and human resources. Thus, the type of organization is likely to
   change.