Chapter 1 Flashcards
3 things that define organisation
Social Arrangement
Collective Goals
Controlled Performance
The need for organisations (7)
Overcome individuals’ limitations (synergy)
Enable individuals to specialise, save time through joint effort
Pool knowledge and ideas
Pool expertise
Enable synergy to be gained
Satisfy social needs
Types of organisations (6)
Public Limited Companies Co-Operatives Sole Traders Partnerships Limited Liability Companies Private Limited Companies
Sole Trader Advantages (4)
No need to share profits with anyone else
Self-sufficiency and independence
Little or no regulation
Operating on a low-cost base
Sole Trader Disadvantages (6)
The sole trader carries unlimited liability and is personally responsible for business obligations incurred
High risk - about 75% of small businesses cease trading in the first 4 years
Problems raising finance - many sole traders resort to private borrowings from family and friends. Banks are reluctant to lend without security, so the sole trader may have to raise funds by offering their own home as security
Lacking economies of scale they are at a disadvantage when buying in stock or negotiating on price
Potential operating difficulties, for example, ill for prolonged periods
Often over-reliant on key customers
Partnership Advantages (5)
Like a sole trader, a partnership has few regulatory obligations
A greater range of skill and experience can be drawn upon
More owners to put finances into the business
Some partnerships take advantage of inviting in ‘sleeping partners’ - these are individuals who put funds into the business and draw profits but otherwise have little business input
There is also less likelihood of business failure due to illness or other inability to work, as other partners may be prepared to take on more work temporarily to avert crisis
Partnership disadvantages (4)
Unlimited liability
Unlikely to amass any significant economies of scale
Potential disagreements between partners
Limited scope for rasing finance other than that generated from investments from personal contacts and bankers.
Limited Companies Advantages (4)
Liability of shareholders to business debts is limited, the most they can lose is their initial investment in shares
Ownership can be transferred easily by selling shares
More sources of finance.
Can raise equity from existing shareholders, can attract new shareholders by new share issues. Loan capital can be raised by long-term borrowing (long-term bank loans by issuing debentures and bonds)
As a company becomes bigger, it is likely to reap economics of scale. Also able to employ specialists in management service functions
Limited Companies disadvantages (3)
Increased legal burdens (Companies Act 1985, the need for an audit, etc)
Quoted companies can suffer from short-termism pressure from City investors
The company can become too large and suffer from diseconomies of scale
The Sole Trader
A sole trader operates as an individual and is the single owner of a business. Legally there is no distinction between the sole trader and the business. Income tax is payable on net profit.
Partnerships
Partnerships in the UK are usually made up of between two and twenty individuals trading towards a common objective. May be verbally agreed or set in a partnership agreement.
Individual partners’ business affairs are indistinguishable from their personal finances.
Limited Companies
Eg. Ltd or plc
Separate legal entity from the individuals who own it.
Constitution set out in the memorandum and articles of association.
Regulated by Companies Act 1985.
Profits are subject to corporation tax.
Owned by their shareholders.
Board of directors runs the company.
Not for profit
Non-commercial organisation, where the primary object is not to make a profit.
Schools Hospitals Clubs Some charities Councils
Co-operatives
Business owned by their workers or customers, who share the profits. They also have a single vote on key decisions.
Organisation sectors (5)
Finance sector - banks, and investment companies
Retail sector - clothes shops
Service sector - call centres
Transportation - a boat company
Agriculture - farm shops
