BUSINESS AND MANAGEMENT

NEED & NATURE OF BUSINESS

What is business

business (also known as enterprise or firm) is an

organization engaged in the trade of goods, services, or both to consumers. An organization or economic system where goods and services are exchanged for one another or for money

What is business activity

Business activities are those which are concerned with seeking to meet the needs of customers by providing a product or service that they require with the help of four factors of production ( land , labor , capital and organization)

The Private and Public Sectors of the Economy

The Private Sector comprises businesses owned and controlled

by individuals or groups of individuals. In every country, most business activity is in the private sector.

The Public Sector comprises Organizations accountable to and

controlled by central or local government. These usually include: Health and education services Defense Law and order Some strategic industries.

The Private Sector Legal Structure

Private Sector Businesses

Sole Trader

Partnership

Limited Companies

Cooperatives

Private LTD

Public LTD

The Sole Trader/Proprietor

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

The Sole Trader/Proprietor

Advantages
Easy to set up-no legal formalities. Owner has complete control not

Disadvantages
Unlimited liability all of the owners a

assets are potentially at risk.

answerable to anybody else. Owner keeps all profits. of working.

Often faces intense competition from

bigger firms, for example, food retailing.

Able to choose times and patterns Able to establish close personal

Owner is unable to specialise in areas

of the business that are most interesting it is responsible for all aspects of management.

relationships with staff (if any are employed) and customers. interest and skills of the owner rather than working as an employee for a larger business.

Difficult to raise additional capital. Long hours often necessary to make

The business can be based on the

business pay.

Lack of continuity- as the business does

not have separate legal status, when the owner dies, the business ends too.

Partnership

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.

Partnership
Advantages
Partners may specialise in different

Disadvantages
Unlimited Liability for all partners. Profits are shared. There is, as with sole traders, no

areas of business management.

Shared decision making. Additional capital injected by each

partner.

continuity and the partnership will have to be reformed in the event of the death of one partner. any one of them. shares.

Business losses shared between the

Al partners are bound by the decision of

partners.

Greater privacy and fewer legal

Not possible to raise capital from selling

formalities that corporate Organisations (companies)

A sole trader, taking on partners will

loose independence of decision making.

Limited Companies
Characteristics of Limited Companies
Limited Liability Legal personality Continuity Capital is divided into shares Companies are run by directors

How Limited Companies are Formed

Memorandum of Association + Article of Association

Registrar of Companies

Certificate of Incorporation

Trading Begins

The Memorandum of Association

Name of the company Name and address of the companys registered office The objectives of the company and scope of its activities The liability of members The amount of capital to be raised and the number of

shares to be issued

Note: A limited company must have a minimum of two members.

Article of Association

The rights of shareholders The procedure for appointing directors and scope of their

powers The length of time directors should serve before reelection The timing and frequency of company meetings The arrangement for auditing company accounts

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. Many manufacturing firms are Private Limited Companies rather than Sole Traders or Partnerships

Private Limited Companies

Advantages

Disadvantages

Shareholders have limited liability. 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

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 This restricts the amount of capital that can be raised. Financial information filed with the Registrar can be inspected by any member of the public. Competitors could use this to their advantage.

Formation of Public Limited Companies

Memorandum of Association + Article of Association + Statutory Declaration

Registrar of Companies

Certificate of Incorporation Publish of Prospectus FLOTATION

Public Limited Companies

A plc cannot begin trading until it has completed these tasks and has

received at least 25% payment for the value of shares.

It will then receive a Trading Certificate and can begin operating. The shares will be quoted on the Stock Exchange or the Alternative

Investment Market (AIM).

The Stock Exchange is a market where second hand shares are bought and sold. A full Stock Exchange listing means that the company must comply with the rules and regulations laid down by the Stock Exchange. The Alternative Investment Market (AIM) is designed for companies which want to avoid some of the high costs of a full listing.

Going Public is Expensive

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.

Exiting the Stock Market

Sometimes a business operating as a Public Limited Company is taken back into private ownership. Why does this happen?

Exiting the Stock Market

Sometimes the business lose favour with the stock market.

The business may be bought outright by a private individual.

The people running the business might no longer be willing to tolerate

interference from the external shareholders.

Public Limited Companies

Advantages
Huge amounts of money can be raised from

Disadvantages
Setting up costs can be very expensive. Since anyone can buy shares, its possible for an

the sale of shares to the public.

Production costs may be lower as firms gain

outside interest to take control of the company.

All company accounts can be inspected by member of

economies scale.
Because of their size, plc can often dominate

the public.
Because of their size they cannot deal with customers

the market.
It becomes easier to raise finance as financial

at a personal level.

institutions are more willing l to lend to plcs.

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 inflexible due to their size.

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.

Cooperatives
Advantages
Buying in bulk. Working together to solve

Disadvantages
Poor management skills unless

professionals are employed.

Capital shortages because no sale of

problems and make decisions.

Good motivation of all members to

shares to the non-member general public is allowed.

Slow decision making if all members

work hard as they will benefit from shared profits.

are to be consulted

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. The franchisee can separately, then decide which form of legal structure to adopt.

Factors Affecting the choice of Organisations

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. the business is a Limited Liability company. important.

Limited Liability: Owners can protect their own personal financial position if

Degree of control: Owners may consider retaining control of the business as

The Nature of the Business: The type of business activity may influence the

choice of legal status.

Public Sector Organisations

The Public Sector is made up or organizations which are owned and controlled by central or local government or public corporations. They are funded by government and in some cases from their own trading surplus or profit. Public Sector businesses still have important roles to play in certain areas of business activity.

Which Goods and Services Does the Public Sector Provide?

Public Goods

Non- Rivalry

Non- Excludable

Consumption of the good/Service by one individual does not reduce the Amount available for others

It is impossible to exclude others From benefiting from their use

Merit Goods
These are services which people thing should be provided in greater quantities Examples of merit goods are: Education, Health Services, Public Libraries If the individual is left to decide whether or not to pay for these goods, some may choose not to, or may not be able to.