Types of Business Organisations

Business Organisations

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Key Learning Outcomes


  1. Recognise the types of business organisations.
  2. Be able to compare and contrast the different types of business organisations.
  3. Explain why businesses change their organisational structure over time.
  4. Explain the regulations for the forming a private limited company

Introduction: Relevant example/s to illustrate the key learning points

1. How would you recognise the different types of Business Organisations?

There are six ownership structures that a business may use: sole trader, partnership, private limited companies (LTD and DAC), public limited companies, co-operatives and state-owned enterprises. Expanding businesses may alter their organisation structure by engaging in alliances and/or franchising its business model. Business Organisations may also be classified by their main location(s) of operations: indigenous and transnational firms.

Types_of_BO_01

Types_of_BO_022. Compare a Co-operative and a Private Limited Company as forms of business ownership using the headings: Finance; Control; Liability.

Finance: One of the main attractions of the private limited company structure is the ability to raise capital by selling shares up to a maximum of 149 shareholders. Profits are distributed to shareholders in the form of dividends. Co-operatives in Ireland may find it difficult to access funding. Because each member has an equal say, there is less incentive for members to contribute more capital to the co-operative. Members receive a share of the profits in proportion to their turnover with the co-operative (producer co-operative) or as a percentage of the savings (credit union).

Control: A private limited company is controlled by the shareholders based on the rule “one share one vote”. The shareholders elect a board of directors who are responsible for the running of the company. The board of directors elect a Managing Director (MD) or a Chief Executive Officer (CEO) who is responsible for managing the company on a day-to-day basis. The original shareholders can maintain control of the company as long as they continue to hold 51% of the ordinary share capital. Co-operatives have a democratic structure, where each member has one vote, “one member one vote”, with majority decision making. Members have an equal say in the running of the co-op regardless of the number of shares held. An elected management committee are responsible for the running of the co-operative.

Liability: The shareholders of a private limited company have limited liability. This means that the shareholders are not personally liable and can only lose the amount of their original investment if the business fails.  Just like private limited companies, the members of co-operatives have the protection of limited liability. This means their liability is limited to the amount invested in the co-operative.

3. Contract Business Alliances and Franchising as different types of business organisations.

Business Alliance is an agreement between two or more businesses to pool resources and expertise to work together over a specified period of time or to complete a specified project, while all parties maintain their separate identities. Usually alliances result in cost reductions and/or improved services for the customer. Marketing alliances with businesses on the home and foreign markets are quite common, e.g. one enterprise may agree to sell or distribute another enterprise’s products or services. Pricing alliances are used to share the other enterprise’s customers using discounts. Example: Aer Lingus is a member of the Oneworld Alliance.

Franchising involves the granting of a licence (permission) by a franchisor (franchise creator) to the franchisee entitling the franchisee to sell the product or service but under its name. The franchisor would have a well-established name in the marketplace and an established reputation. Entrepreneurs (franchisee) can set up their own businesses and be their own boss enjoying reduced risk because of the pre-designed format of the enterprise. Examples: McDonald’s, Starbucks.

4. Discuss reasons why a business enterprise would change its organisation structure over time.

Limited Liability: The desire for the protection of limited liability is a reason for changing structure.  A business person may wish to protect family members from business risks and ensure a secure future for them. Personal assets must be protected to do this. The move from a sole trader or a partnership to a private limited company would be suitable for this purpose

Finance: If more capital is needed for the development of the business, then a move from being a co-operative or a private limited company to being a public limited company might be necessary.

Marketing: The expansion of markets may be better served by joining a business alliance with another enterprise, either abroad or in Ireland, e.g. for the distribution of the firm’s goods.

Opportunity: A new business opportunity, the opportunity to diversify into another line of business or enhance the existing businesses products may offer itself in the form of a franchise agreement.

Privatisation/Nationalisation: The state may wish to free itself of business that can be owned and managed successfully by the private sector.  It could therefore change its state owned enterprise into a public limited company to enable the sale to take place effectively and offer the opportunity to the public to invest and become the new owners. During the recent recession the government gave billions of euro to financial institutions to help them survive in return for shares, this resulted in the nationalising (state ownership) of a number of public limited companies.

Expansion/Economies of Scale:  The business enterprise may wish to grow larger. With size comes the burden of extra specialisation where one individual simply cannot do all things and more people and expertise are needed, e.g. specialists in finance, marketing, production. The move from a sole trader to a private limited company may be suitable for this purpose.

5. Describe the steps involved in the formation of a Private Limited Company (both an LTD and DAC).

The procedures for establishing a private limited company are set out in the Companies Acts 2014. There are two types of private limited company, a company limited by shares (LTD) and a designed activity company limited by shares (DAC).

Step 1: Certain legal documents must be prepared.

Form A1:  This gives details of the company name, its registered office, details of secretary and director(s), their consent to acting as such, the subscribers and details of their shares.

Constitution:  Every company must have a constitution which is printed and signed by each subscriber. The constitution of a company sets out the basic legal limits under which the company operates, such as activity, capacity, finance and internal rules. The constitution of the company must state the company’s name; the type of company to be registered (LTD, DAC); the liability of members; details of where the company proposes to conduct its business and the company’s Registered Office.

The constitution of an LTD. comprises a single document (Articles of Association, without an objects clause), whereas a DAC must also have a Memorandum of Association.

The Articles of Association: This document sets out the internal rules and regulations of the company. It describes, for example, the voting procedures for meetings and it sets down the quorum necessary for a valid meeting. The standard internal rules of a company are now set out in the Companies Act 2014 which eliminates the need to have extensive articles in the constitution.

The Memorandum of Association: This document sets out the relationship between the company and the general public.  It includes the name of the company with DAC after it, indicating limited liability and the objectives of the company.  It includes the signatures of the people who formed the company and the authorised share capital clause.

Step 2: These two documents are then sent to the Registrar of Companies at the Companies Registration Office with the appropriate fee.

Step 3: The Registrar will not register a constitution unless he or she is satisfied that all the requirements in relation to the form of the constitution under the Companies Act have been complied with. If the Registrar is satisfied that all is in order, he or she will then certify in writing that the company is incorporated and issue a certificate of incorporation. The certificate of incorporation is conclusive evidence that the Company is registered under the Companies Act 2014. This in effect is the business birth certificate or licence to begin trading as a private limited company. The business is now incorporated and a separate legal identity in the eyes of the law, meaning that it can sue or be sued in its own name.

(Note: The other manner in which a company can be set up is to purchase a pre-incorporated company from a company formation agent. Company formation agents incorporate companies in bulk which they then sell to the public off the shelf.)

Sample Exam Q&A


Question 1 

Franchising continues to be an important contributor to the Irish Economy. In 2018, the Irish Franchise Association reported that the Franchising sector in Ireland is worth an estimated 2.5 billion euro and employs approximately 43,000 people in full-time jobs.

Source: www.franchisedirect.ie

(A) Analyse the reasons why a business start-up might choose the franchise model of business organisation.

(B) Outline the advantages for an existing business of choosing franchising as a method of business expansion.

(? Marks)

Sample Answer 1A

  • Less risk of business failure: Franchising provides a person who wishes to open a business with the opportunity of replicating a proven, well established business model (tried and tested formula). The franchisee (person setting up the business) pays the franchisor (existing business) for the right to use the franchisors trade name and business system, therefore, they benefit from brand recognition giving access to an existing customer base which results in guaranteed sales.
  • Reduce Costs: Centralised or group purchasing power can result in cost saving, for example costs of a nationwide marketing campaign can be shared between all franchisees. The new franchisee can benefit from economies of scale generated by the franchisor. Bulk discounts, gained by the franchisor as a result of bulk purchasing are passed onto individual franchisees, allowing them to charge lower prices and generate larger profits.
  • Training and on-going support is provided in the start-up and development of the business by the franchisor. Managerial training is provided by the franchisor, the franchisees have access to the experience and systems of the franchisor. New product development is undertaken by the franchisor, business start-up advice and staff training programmes will help the new franchisees in their businesses.
  • Banks are more likely to lend money. Failure rates for franchises are far lower than the failure rates for new independent businesses and for that reason banks are more willing to lend money.  

Sample Answer 1B

  • It is a form of expansion which requires low capital investment by the franchisor, as the capital used to expand the business comes from franchisees. Buildings, equipment and all other resources needed for the new business are supplied by the franchisee. In fact, the franchisor is paid an initial franchise fee plus royalties based on a percentage of turnover (sales).
  • Franchising permits a more rapid expansion. By using the franchisees’ capital, the franchisor is able to establish a large number of outlets in a short period of time. Rapid expansion can be achieved without incurring the overheads and costs associated with opening company-owned restaurants.
  • An owner will be more attentive than a manager. By franchising the business, the franchisor places the expansion of his/her business in the hands of people who are motivated to make it work and are therefore more likely to succeed. The franchisor can be assured that the person operating its restaurant will be “attending to business” as much as they would.
  • Economies of scale There is strength in numbers. The successful franchisor can command deals with various suppliers and can control supplies to various franchisees. The cost savings can increase the franchisor’s profits. 

Student Activity


Q1 Explain the term “transnational company” and give one example.

(i) Transnational Company:

(ii) Example:

Q2 Name one State-owned enterprise/ agency in each of the following areas:

Transport:

Training:

Marketing:

Q3 Distinguish between a ‘Strategic Alliance’ and a ‘Franchise’ as methods of business expansion.

Strategic Alliance:

Franchise:

Q4 Complete the table of the features of the two types of private limited company.

Company Limited by Shares Designed Activity Company
Name must end with (suffix)
Number of Shareholders

1-149

Minimum of Director(s)

2

Q5 Outline two differences between a sole trader and a partnership.

(i)

(ii)

Q6 Column 1 is a list of Business Organisations. Column 2 is a list of possible explanations of these terms.

(One explanation does not refer to any of the business organisations listed)

Column 1: Terms

Column 2: Explanations
1. Public Limited Company (PLC) A. Has unlimited liability.
2. Franchise B. Is owned by between two and twenty people generally and is common in the accountancy and legal professions.
3. Co-operative C. Owned, financed and controlled by the Government.
4. Sole Trader D. A licence granted by a business to another to sell its products or services in return for a fee.
5. State-owned enterprise E. Shares are quoted/traded on the Stock Exchange.
F. Democratically controlled and jointly owned by its members.

Match the two lists by placing the letter of the correct explanation under the relevant number below:

1 2 3 4 5
Q7 In the box below name two examples of each type of business organisation.
Examples

Business Organisation
Indigenous Company (i)

(ii)

Franchise (i)

(ii)

Co-operative (i)

(ii)

Public Limited Company (i)

(ii)

Q8 Outline two reasons why a sole trader may change its organisation structure to a private limited company.

(i)

(ii)