1. Unit 1.2 – Types of Organizations
IB Business
Lincoln High School

2. In this chapter you will learn . . .
Difference between the private and public sector
The main features of sole traders, partnerships and corporation
The main features of cooperatives, microfinance providers and public- private partnerships
The main features of non-governmental organizations and charities

4. Main features of profit-based (commercial) organizations
Profit-making businesses can be organized many ways. Most common are:
Sole traders
Partnerships
Companies or corporations
For-profit social enterprises
Cooperatives
Micro-financers
Public-private partnerships (PPPs)
Common Feature – to generate a profit

5. Profits
Profits = Total Revenues – Total Costs
Revenue – aka Sales

6. Sole trader or sole proprietor
Features:
The sole trader owns & runs the business
No legal distinction between the business and the owner
Finance is usually limited
Business is close to the customer
Sole trader has privacy and limited accountability
Registering the business is relatively easy & inexpensive and quick

7. Advantages & Disadvantages
All profits stay with the owner
Success depends on drive, health & enthusiasm of sole trader
Complete control over important decisions
Competing against established businesses
Privacy
Unlimited Liability
Minimal legal formalities
Limited capital
Close ties to customers
Lack of continuity in event of accident or owner’s death
Limited scope for expansion
Majority remain small; typically business comes to an end if the owner dies.
Sole traders often have a “niche” in the market;

8. Partnerships – 2 or more people
Features:
Decisions are made jointly by the partners; owned and managed by more than one person
No legal distinction between business and partners;
Usually more financing available
Business can offer more varied service; more stable
Some partners may be “sleeping partners”
Typically a greater degree of accountability – partnership agreements
Partners do not necessarily share all the profits
Depends on what is agreed to

9. Advantages & Disadvantages
Varied skills & qualities; more efficient production
Each partner has UNLIMITED liability** An exception is a “limited partner” in some countries
More partners = more expertise
Compared to corporations less access to loans
Perceived as having greater stability
Each partner must rely on the other; one doesn’t have complete control
Partners can help in emergency situations
Profits must be shared
Greater chance of continuity
Disagreements can happen!!
Safer than sole traders; more complex organizations

10. Companies or Corporations
Look at corporation abbreviations from the US and other countries – page 23
The business is a joint stock or limited company
Businesses can become corporations by a simple, powerful process - Incorporation
Legal difference between company and owners
Liability of the company is separated from liability of owners
Multiple owners, each owning a fraction
Shares

11. Corporation Business has legal existence in its own right
Managers handle day-to-day operation
Has responsibilities in the community – paying taxes, etc.
Companies keep the profits unless they declare a dividend
Dividends – at the discretion of the company
If issued, profit divided by number of shares to get a dividend per share.
Usually many shareholders, especially in a large company
Small companies or family-owned companies
Someone may own all the shares

12. How are shareholders rewarded
Price Increases
If the company does well, in theory the price per share should increase
Dividends
Amount each shareholder receives varies
Dependent on whether a dividend is issued, size of company, etc.
Limited Liability
Single most important feature and benefit of a corporation
Shareholder can only use the money they have put into the corporation

13. Cost to shareholders Price of the shares they hold may decrease
Company may NOT issue dividends
As “owners” of only a fraction of the company, may not have a say in how the company operates

14. Reasons to organize as a corporation
Limited liability
Enhanced status
Selling shares is a good way to raise capital
Increased stability of the company
Better chance of obtaining financing

15. Public v. private limited company
Privately held corporation or private limited company
Usually family owned
Public Limited Company
Going public
IPO – Initial public offering

16. Main features of company
Shareholders own but don’t run the business
Business and owners are divisible –
Not liable for business debts
Legal existence a matter of public record
Memorandum of association
Articles of Association
Greater finance is available
Company held to a higher degree of accountability
Companies have greater stability and higher chance of continuity

17. Corporations Board of Directors Limited Companies
Elected by Shareholders
Limited Companies
In U.S. LLC – limited liability company
Private Limited Company
Shares sold to family members
Private corporation in the U.S.
Not publicly traded
Easier to establish than publicly traded company

18. Corporations Public Limited Company
In the U.K. PLC after its name
Sells shares to the general public
Examples of private and public corporations
Table 1.2a page 31
Memorandum of Association
Articles of Association (Incorporation)

19. Why buy shares? Dividends Capital Growth Voting Power
Risks associated with investing
Annual Meeting must be held
Auditor must examine accounts

20. Advantages of Corporation
Companies can raise large amount of capital
Companies have limited liability
Continuity in the company
Benefits from Economies of scale
Can hire specialists to run the firm

21. Disadvantages
Financial information must be provided to all shareholders
Far more bureaucracy
Dividends only paid out if business makes a profit
Large corporations can suffer from communication problems

22. Non-Profit Organizations
Definition
Organization run like a business; but profit isn’t the objective.
Examples:
Libraries, schools, museums, social services, community organizations, etc.

23. Non-Governmental Organizations
Operate in the private sector
Not controlled by government
Include environmental protection groups, etc.
Unicef
Amnesty International;

24. Charities Registered not-for profit; Advantages
Collect donations to support a cause
Advantages
Provide financial support to help a cause
Usually exempt from corporate tax
Donors get a tax deduction
Can register to be limited companies to protect interest of investors.

25. Charities - disadvantages
Lack of profit may cause problems; motivation may be lacking
Must go through the process of registering
Charities survive solely on the giving of donations
Financial activities must be reported to the government

26. Type of business depends upon ..
Amount of finance
Size
Limited liability
Degree of ownership of control
Type of business activity

27. Unit 1.2
Question
Question 1.2.2
Question 1.2.4