Lecture 2 Introduction to Organisations

Sole proprietorship
Advantages of sole proprietorships
Disadvantages of sole proprietorships
Partnership
Advantages of partnerships
Disadvantages of partnerships
 Assessment criteria
1.1 Analyse the key objectives of three business organisations.

1.2 Discuss how each business organisation may achieve their objectives

2.1 Analyse the differences between sole

traders; partnerships, limited companies;
companies limited by guarantee; community
interest company

2.2 Explain the key features of a franchise

2
 Three basic forms of business
ownership
Your choice depends on your needs &
goals
•Sole proprietorship

•Partnership

•Corporation
Sole proprietorship

•A business owned
and operated by one
person.
 Advantages of sole proprietorships
•Easy and inexpensive to create.
• Unless you need certification or local permits,
government intervention is minimal
•Owner makes all business decisions & has control over
all aspects of the business.
•Flexibility in scheduling to meet
owner’s needs
Advantages of sole proprietorships cont.

•Owner receives all profits.

•Privacy – owner is the only one who
knows details of the business
• Secret ideas, formulas, or recipes
•Ability to act quickly in making
decisions – no checking with others
 Advantages of sole proprietorships cont.

•Tax advantages
• Business itself pays no taxes
• Taxes are paid as personal income of owner which
is usually lower than corporate taxes
• Many business expenses are deductible

•Easy to close/dissolve
• Pay employees and creditors
• Sell your equipment
• Notify customers if possible
 Disadvantages of sole proprietorships
•Owner has unlimited liability for all debts and

actions of the business.

• Unlimited liability: The debts of the business may be paid from
the personal assets of the owner.
• If you cannot pay business debt with business income, bill
collectors can take your personal assets (home, car)
•Difficult to raise capital.
• Banks/lenders consider sole proprietorships to be a high-risk
investment
• Needs include paying employees, purchasing equipment &
inventory, & running the business
 Disadvantages of sole proprietorships

•Sole proprietorship is limited by his/her

skills and abilities.
•Uncertain life
• illness or injury that prevents you from working may
cause you to close
• Bankruptcy or incarceration will dissolve your
business
• The death of the owner automatically dissolves the
business.
Partnership

A form of business
ownership in which two
or more people share
the assets, liabilities,
and profits.
 Advantages of partnerships
•Fairly easy & inexpensive to start
• May pay attorney if you develop a partnership agreement
•Combined resources
• Team with partners with different skills, experience, contacts, &
capital
• Sharing responsibilities makes business run more efficiently &
smoothly
• Increase the amount of capital to run the business. Lenders may be
more willing to lend or extend credit
•Decreased Competition
• Combining like businesses will decrease or eliminate competition
Advantages of partnerships cont.
•Reduced expenses
• When two or more businesses combine expenses are no longer being
duplicated
• Ex. promotion, office space, supplies, utilities
•Business losses are shared by all partners.
•The partnership does not pay income tax on profits.
• Each partner pays income tax on her/his individual share of the profit
Disadvantages of partnerships
•Unlimited liability
• Each owner in a general partnership has unlimited liability.
• Each partner can lose personal assets to pay business debt
• In a limited partnership, the liability is limited to the amount invested in
the business
•Limited Capital
• Although partners may bring more capital to the business than sole
proprietors, it is still limited to what each can contribute
• Some lenders may still be reluctant to lend large amounts
•Difficulty in ending
• Withdrawing can be complicated if there is no written partnership
agreement
• By law profits must be divided equally if no agreement
Disadvantages of partnerships cont.
•Partnerships may lead to disagreements.
• May disagree on business goals, finances, responsibilities, & division of
profits
• Can affect the efficiency of the business, morale of employees, &
success or failure of the venture

•Developing a detailed partnership agreement often helps

resolve the conflict because it addresses many issues that
cause potential disagreements
Disadvantages of partnerships cont.

•Uncertain life/Transferability
• Unless specified in a detailed
partnership agreement, bankruptcy,
death & the withdrawal or
admittance of a new partner
dissolves the partnership
• Remaining partners may start a new
partnership if they have the money
to buy the former partner’s share
 Corporation
 A business that is chartered by a
state and legally operates apart
from its owners.
 Owned by stockholders who have
purchased units or shares of the
company
Types of corporations
Nonprofit corporation: Legal entities that make
money for reasons other than the owner’s profit.

Limited Liability Company

(LLC): A form of

business
ownership that provides limited liability and tax
advantages.
Advantages of corporations
•Financial Power
• Can raise money quickly by issuing shares of stock.
• Because it is closely regulated by the government, financial institutions
are more willing to lend larger amounts of capital
•Limited Liability
• Owners are liable only up to the amount of their investments.
Personal assets cannot be used to pay business debt

•Unlimited life
• May exist indefinitely
• The death or withdrawal of an
owner/stockholder does not affect the life
Advantages of corporations cont.

•Easy-to-transfer ownership
• Ownership simply transferred by selling stock to someone else
• New stock certificate is issued in the name of new stockholder.
No permission is required by others
•The business can hire experts to

professionally manage each

aspect of the
Disadvantages of corporations
•Difficulty in forming & operating
• Legal assistance is needed to start a corporation
• Lawyer fees can be very expensive
• Must request approval from the State & register the Articles of Incorporation
• Decisions about value & class of stock & shareholder voting rights

•Corporations are subject to more government regulations

than partnerships or sole proprietorships.
• Reporting & taxation requirements vary from state to state
• Required to keep detailed reports for stockholders & to keep them informed
Disadvantages of corporations
•Dual taxation
• Corporation is taxed on profits from the
company
• Shareholders are taxed on the
dividends they earn on their
investments
•Separate owners & managers
• Stockholders are not generally involved in the day-to-day operation of
the corporation
• Stockholders form a board of directors to make decisions about the
business & managers carry out these decisions
• Separation of ownership & management provides more opportunity for
irregularities or misunderstandings
 Community interest companies (CICs)
 A CIC is a special type of limited company which
exists to benefit the community rather than private
shareholders.
 ‘community interest statement’ when registering
 ‘asset lock’- a legal promise stating that the
company’s assets will only be used for its social
objectives, and setting limits to the money it can pay
to shareholders
 a ‘dividend cap’ must be put in place making sure
that the majority of the profits made are applied for
the community benefit
 About 250 registered in April 2017
 companies limited by guarantee
 A company limited by guarantee does not have any
shares or shareholders (like the more common limited by
shares structure) but is owned by guarantors who agree
to pay a set amount of money towards company debts.

 non-profit organisations such as sports clubs, workers'

co-operatives and membership organisations, whose
owners wish to have the benefit of limited financial
liability.

 no profits distributed to the guarantors as they will

instead be re-invested to help promote the non-profit
objectives of the company
 What is Franchising?

• Franchising
– Franchising is a form of business organization in which a
firm that already has a successful product or service
(franchisor) licenses its trademark and method of doing
business to another business or individual (franchisee) in
exchange for a franchise fee and an ongoing royalty
payment.
– Some franchisors are established firms (like McDonald’s)
while others are first-time enterprises being launched by
entrepreneurs.

©2010 Pearson Education 15-24

 Two Types of Franchise Systems
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• Business Format Franchise

– An arrangement under which the franchisor provides a
formula for doing business to the franchisee along with
training, advertising, and other forms of assistance.
– Fast-food restaurants, convenience stores, and motels are
well-known examples of business format franchises.
• Business format franchises are by far the most popular form of
franchising, particularly for entrepreneurial firms.

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 Types of Franchise Agreements
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Individual Franchise Agreement

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 Types of Franchise Agreements
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Area Franchise Agreement

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 Types of Franchise Agreements
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Master Franchise Agreement

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 Advantages and Disadvantages of Buying a
Franchise
Advantages Disadvantages

• A proven product or service within • Cost of the franchise.

an established market.
• An established trademark or
business system.
• Franchisor’s training, technical
support, and managerial expertise.
• An established marketing
network.
• Restrictions on creativity.
• Duration and nature of commitment.
• Risk of fraud, misunderstandings, or
lack of franchisor commitment.
• Poor performance on the part of other
franchisees.

• Availability of financing (varies). • Potential for failure.

• Potential for business growth.

©2010 Pearson Education 15-29