Types of Business Units
Business Organization
An organization which uses resources to produce goods and services to satisfy human needs and wants.
Private Sector Organization
- Which are owned and controlled by private people.
- Finances are provided by personal sources of owner.
- Generally are run to earn profit.
Public Sector Organization
- Which are owned and controlled by the government.
- Finances are provided by the government.
- Generally run to provide people with basic necessities, at a affordable price.
Limited and Unlimited Liability
Unlimited Liability: Creditors can claim a owner's personal assets to pay off any debts. Even if the debts are caused by other partners.
Limited Liability: This means the company's finances are separate from the personal finances of their owners.
Types of Private Sector Organizations
Sole Trader
Owner: One, with or without assistance of employs.
Capital: Limited and provided by loans or personal savings.
Liability: Unlimited.
Status: No legal entity.
Scale of operation: Very small.
Registration: No legal formalities.
Tax Burdon: Low.
Examples: Food stall, laundry and tailor.
Advantages:
- Simple formation.
- Easy management.
- Owner is his own boss.
- All profit is retained by the owner.
- Low taxes.
- Labour intensive.
Disadvantages:
- Unlimited liability.
- Uncertain life.
- Resourcefully not very strong.
- All burden of management is on the owner.
Partnership
Owner: One to twenty.
Capital: Small to medium.
Liability: Unlimited in case of ordinary partnership. Limited in case of limited partnership but at least one partner should be with unlimited liability.
Control: Owners with limited liability are called Dormant partners/sleeping partners/ inactive partners/ passive partners, they have no role in business management and their share in profit is less.
Scale of operation: Small to medium.
Examples: Common in professional practices like doctors.
Investment of capital: Cash (money), Kind (providing asset to the company), Expertise (skill).
Advantages:
- More capital as there are more than one owner.
- Responsibilities can be shared.
- New ideas can come into business.
- Low taxes.
Disadvantages:
- Unlimited liability of some owners.
- Uncertain life.
- Unwise decision of one partner becomes obligations of other partners.
- Bad reputation of one partner can damage the business.
- There can be disputes in decision making.
Private Limited Company
Owner: Two to fifty.
Capital: Medium to large. Obtained by selling shares to limited number of people.
Liability: Limited to its registered capital.
Status: Separate legal entity.
Scale of operation: Medium to large.
Formation: Complex done under company law.
Tax: High Tax rate. Cooperate tax on declared profit of business and on dividends to the shareholders.
Life: Certain, long.
Advantages:
- More capital as there are more than one owner.
- Responsibilities can be shared.
- Limited liability.
- Long and certain life.
Disadvantages:
- Difficult formation.
- Can not issue shares to general public.
- Difficult management.
- Double taxation.
- High Tax rate.
Public Limited Company
Owner: Seven to unlimited.
Capital: Large (raised by selling shares to general public).
Liability: Limited.
Formation: Complex done under company law.
Scale of operation: Large.
Life: Long and certain.
Management: Complex.
Tax: High tax rate.
Formation of Limited Companies
Documents required before getting the status of a company
- Memorandum of Associations
i. Name of business.
ii. Objectives.
iii. Registered address.
iv. Authorized share capital (the maximum amount of capital a business is allowed to raise)
v. List of directors.
- Articles of Association
i. Internal management of the company.
ii. Rights and responsibilities of Directors and Shareholders. iii. Appointment of legal advisors and auditors.
iv. Quorum of Annual General Meeting. v. Profit sharing.
- Certificate of incorporation
A certificate issued to business to act as a limited company.
Capital of Public Limited Company
- Shares
Are issued by public limited company to general pubic. Holder of share becomes owner of the business.
- Debenture
Are issued by public limited company to general pubic. Holder of debenture becomes the lender to the business.
| Ordinary Shares | Debenture | |
|---|---|---|
| 1. | Normally are non redeemable. | Redeemable over a time upto 20-25 years. |
| 2. | Can attend the AGO and hence take part in management by electing BOD. | Holders can not attend the AGO. |
| 3. | Holders get share of profit by getting dividends. | Holders get interest on their investments. |
| 4. | Rate of dividend is not fixed and is decided each year at AGO. | Rate of interest is fixed and is written on debenture certificate. |
| 5. | Dividend depends on profit earned. | Interest is not related to profit earned. |
| 6. | In case of liquidation, holder get share after debenture holders are paid. | In case of liquidation, debenture holders are paid in full before ordinary share holders. |
| AGO= Annual General Meeting | ||
| BOD= Board of Directors | ||
| Ordinary Shares | Preference Shares | |
|---|---|---|
| 1. | True owners of business, can take part in AGO. | Just investors, can not take part in AGO. |
| 2. | Rate of dividend is higher. | Rate of dividend is lower. |
| 3. | Rate depends on profit earned. Called Risk Capital. | Fixed rate of dividend, irrespective of the profit earned. |
| 4. | Entitled to dividends after preference share holders have been paid. | Paid first of all. |
| 5. | Rank last of distribution of assets in liquidation. | I case of liquidation, ranks after debenture holders. |
Calculations of Dividend
Face value of shares X No. of shares issued X Rate of dividend
Difference between Private and Public Limited Companies
| Private | Public | |
|---|---|---|
| 1. | Owners: 2-50 | Owners:7- Unlimited |
| 2. | Capital: Medium to Large | Capital: Large |
| 3. | Shares issued to selected people. | Shares issued to general people. |
| 4. | All share holders can become directors. | All share holders can not become directors. |
| 5. | Financial data can be kept secret. | Financial data has to be publicized (prospectus). |
| 6. | Share holders can run the business. | Management and owners are different. |
Cooperative
Owner: Unlimited
Capital: Large, with shares.
Return on capital: Members are given fixed rate of interest on their share whether profits are earned or not.
Liability: Limited
Status: Separate legal entry.
Scale or operation: Large.
Formation: Complex. Registered under Cooperative Ordinance.
Management: Difficult.
Aim: Profit is not the main aim.
Advantages:
- More capital.
- Professional management.
- Limited liability.
- Separate legal entry.
Disadvantages:
- Inefficient control.
- Inability to compete.
- Limited return on capital.
- Ownership of shares is limited to certain amount.
Public Sector Organization
Public Utility Corporation
Owner: Government
Capital: Financed by the government.
Function: Generate items of utility at a very low rate. These organizations do not aim for
profits, and sometimes run on loss financed by the government. Large scale business organizations.
Advantages:
- Promotion of public interest.
- Government has a control over essential goods and services.
Disadvantages:
- Non Profitable business.
- Difficult management.
Multinational/Transnational/Supernatural Companies
- Normally work in form of private limited companies.
- A business which has its branches in a number of countries.
Advantages:
- Saves international freight charges.
- Making products according to desires of host country.
- Bigger market means more sales.
- Cheap labor.
- Lesser chances of competition from host country.
Disadvantages:
- Difficult to manage.
- Host government can change its policies. Nationalization.
- People of third world countries normally have hostile attitude towards multinational companies.
- Requires lot of direct investments.