Business Unit

FACTORS AFFECTING THE LOCATION OF BUSINESS •

Transport Facilities: The production unit must be located in an area where there are cheap, adequate and efficient transport facilities such as good roads and railways to bring the raw materials and to take the finished goods for distribution.

•

Cheap Source of Power: Production units are usually set up in or near urban areas, which are adequately supplied with electrical power.

•

Presence of Skilled and Unskilled Labour: This is an important factor to be considered while setting up a production unit. Units are usually set up in areas where labour is cheap and the labourers are skilled.

•

Nearness to Markets: If the unit is producing goods for export, then it should be located near a port. If it is producing goods for the domestic market, it should be located near its consumers.

•

Government Policy: The government may provide certain incentives for factories to be located in certain areas.

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Commerce – Students’ Guide Department of Business and Computing

DIFFERENCES BETWEEN PRIVATE AND PUBLIC SECTOR: PRIVATE SECTOR

PUBLIC SECTOR

•

Meaning: Industries that are Industries that are owned and controlled owned and controlled by private by the government are found in the individuals are found in the private public sector. sector.

•

Formation: These industries are These industries are formed by an Act of formed by agreement or by Parliament. registration with the Registrar of Companies.

•

Finance: Finance is provided by Finance is provided by the government, the owner, by issuing shares or by issuing securities or by borrowing debentures, or by borrowing from from financial institutions. banks.

•

Management: These industries are managed by the owner, or a board of directors or by a managing committee. Objectives: Profit is the main aim of the private sector.

•

These industries are controlled by a minister who is helped by a managing committee. Service is the main aim of the public sector.

•

Personal Interest: Profit makes There is no personal interest as there is the private sector to have more no profit motive. Hence there is no personal interest, which results in efficiency. efficiency.

•

Flexibility: Private enterprises are In public enterprises, the policies cannot more flexible and can change be changed but can be amended. their business tactics very easily.

•

Profits: The profits of the private sector are enjoyed by the owners of the business and it is used for the expansion of their business.

•

Losses: The loss of the private The loss of one public corporation is industries are borne or shared by compensated for by the profits of other public corporations. the owners of the business.

•

Uncertainty: The death, insolvency or insanity of the owner or the loss in business will bring the business to a temporary end.

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The profits of the public corporations are used for the general expenses of the government and the economic development of the country.

Even if a corporation is earning a continuous loss, the business will not stop. And moreover the corporation will not be affected by the members of the corporation.

The Business Unit

MAIN FORMS OF BUSINESS ORGANIZATION IN PRIVATE SECTOR SOLE TRADER: Features: •

Ownership: This is a business unit, which is owned and controlled by a single person.

•

Capital: The capital is provided by the sole trader himself. It is small and so his business is also small. He may get capital by borrowing from his family members, friends or from the bank.

•

Management: The sole trader manages all the affairs of his business. It becomes difficult especially if his business expands. He is helped by his family members.

•

Profit and Loss: The sole trader enjoys all the profits and suffers all the losses himself. He does not have to share it with anyone.

•

Objective: The main aim of the sole trader is to make maximum profit.

•

Liability: The sole trader has unlimited liability. Even his personal assets can be taken for business debts.

•

Flexibility: The sole trader’s business is very flexible. He can change his business tactics easily as he is the only person who makes all the decisions.

•

Legal Entity: The sole trader has no separate legal entity. The sole trader and his business are one and the same. Anything the sole trader does will affect his business.

Advantages of sole trader •

Formation: It is very easy to form. There are no complex legal procedures. The business only has to be registered.

•

Personal Interest: With the profit motive, the sole trader has personal interest in his business and works very hard in order to increase his profit. As a result there is efficiency.

•

Decision Making: The sole trader makes all his decisions. He does not have to waste time discussing ideas with others.

•

Profits: The sole trader enjoys all the profits himself. He does not have to share his profits with anyone.

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Commerce – Students’ Guide Department of Business and Computing

Control and management: The sole trader controls the business himself.

•

So there is direct relationship between the employees and the sole trader. Personal attention: The sole trader is able to have personal contact with his

•

customers. This ensures a better employer-customer relationship. Flexibility: The sole trader can change his business tactics at any time. He

•

does not have to rely on anyone. Privacy: The sole trader can keep all the business secrets to himself. He

•

does not have to share it with others. Disadvantages of sole trader Limited Capital: The sole trader is the only person who provides capital. It

•

is limited and so expansion is not possible. Unlimited liability: The sole trader has unlimited liability. Even his personal

•

assets can be taken for business debts. Uncertainty: The death, insolvency or insanity of the sole trader will bring

•

his business to an end. •

Losses: The sole trader has to suffer all the losses himself.

•

Hasty decisions: As there is no one to advise the sole trader, his decisions may sometimes be fatal for his business. Control: It will be very difficult for the sole trader to control all the affairs of

•

his business especially if it expands. Lack of specialization: As the sole trader business is small and he does all

•

the work himself, he cannot have experts to work for him. Legal entity: The sole trader has no separate legal entity. Anything the sole

•

trader does will affect his business. PARTNERSHIP Features: Definition: The relationship between persons who have agreed to share

•

the profits of a business carried on by all or any of them acting for all. Formation: It is formed by agreement among persons to do a business

•

and to share the profits and losses of the business. Number of members: It can be owned by two to twenty persons in

•

ordinary partnership business. There is no limit to the number of partners in a professional partnership business. 4

Prepared By: Emmanuel George|

The Business Unit •

Capital: The partners provide capital for the business. They may provide their own resources or they may take loans.

•

Profits and losses: The profits and losses are shared among the partners in an agreed ratio according to the terms of agreement.

•

Unlimited liability: The partners also have unlimited liability. Even their personal assets can be taken for business debts.

•

Control and Management: All the partners can control the affairs of the business and have a right to access books of accounts at any time. However one or more partners may manage the business on behalf of all the partners.

•

Agency relationship: One or more partners can act on behalf of all the partners. This is possible only in partnership business.

Advantages of partnership •

Easy formation: Partnership is formed by agreement. There are no legal complications in forming a partnership business.

•

Large capital: All the partners contribute capital. It is large and so the business can be large. There are more chances of expansion.

•

Management: As all the partners play an active role in the management of the business, it becomes much easier to control the business.

•

Sharing of losses: The losses are borne by all the partners. Hence the burden of loss is not as great as in sole proprietorship business.

•

Better decisions: Ideas are discussed by all the partners and the best decisions are taken. So business dealings are more efficient.

•

Flexibility: By agreement the partners can change their business tactics very easily. There are no legal complications in changing business tactics.

•

Pooling of expertise: All the partners contribute towards the management of the business. So each partner contributes his expertise and there will be better efficiency in the management of the business.

Disadvantages of partnership •

Lack of continuity: The death, insolvency or insanity of any partner brings the business to a temporary halt.

•

Future conflicts: Partnership is based on agreement. So if there is any disagreement between partners it could be fatal for the business. 5

Commerce – Students’ Guide Department of Business and Computing

Small capital: As there is a limit to the number of partners in a partnership

•

business, capital can be raised only from the 20 partners. It is small when compared to the capital of a limited company. Unlimited liability: The partners have unlimited liability. Even their

•

personal assets can be taken for business debts. No separate entity: there is any separate legal entity. Anything the

•

partners do will affect the business. Danger of implied authority: As there is agency relationship, there is a

•

danger of implied authority. A dishonest partner might cheat the other partners. SIMILARITIES BETWEEN SOLE PROPRIETORSHIP AND PARTNERSHIP •

Objectives: Both have profit motives.

•

Liability: Sole traders and partners have unlimited liability. Even their personal assets can be taken for business debts. Legal Entity: Sole traders and partners have no separate legal entity. The

•

business and the owners are one and the same. Anything the owners do will affect the business. Uncertainty: The death, insolvency or insanity of the sole trader or a

•

partner will bring their business to an end. Private Sector: Both the business units are found in the private sector.

•

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The Business Unit

DIFFERENCES BETWEEN SOLE PROPRIETORSHIP AND PARTNERSHIP SOLE PROPRIETORSHIP PARTNERSHIP • Meaning: A business, which is A business, where two or more than two owned and controlled by a single join and agree to share the profits and losses of the business.

person. •

Formation:

When

person It

a

is

formed

by

agreement

among

decides to start the business. It is persons to do a business and share the very easy as there are no complex profits and losses of the business. legal formalities. •

Members: There is a single owner.

There are 2-20 partners for ordinary partnerships and there is no limit for professional partnerships.

•

Capital: Capital is provided by the The

partners

provide

the

capital

sole trader. It is small and so his themselves or they may borrow from business is also small. He may banks. As there are many partners the raise the capital by himself or by capital is large and so their business is borrowing

from

his

relatives, also large.

friends or from banks. •

Management:

The

sole

trader The partners manage all the affairs of

manages all the affairs of his their business. Sometimes one partner business. He is helped by his may manage the business on behalf of all the partners.

family members. •

Profits and Losses: The sole trader The partners share the profits and losses enjoys all the profits and suffers all in an agreed ratio. the losses.

•

Decision Making: The sole trader All the partners discuss and make the makes all the decisions himself. It best decisions. is quick but sometimes hasty.

•

trader’s Unless all the partners agree, they can business is more flexible. He can change their business tactics. Flexibility:

The

sole

change his business tactics at anytime. •

Agency Relationship: There is no There is agency relationship. One partner agency relationship. The sole can act on behalf of all the other trader acts for himself.

partners.

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Commerce – Students’ Guide Department of Business and Computing

LIMITED COMPANIES Features: •

Formation: A company is formed by registration under the Company Act.

•

Ownership: A company is owned by its shareholders as they provide capital for the business. Capital: A company can raise capital by issuing shares or debentures and

•

by borrowing from other financial institutions. Management: A company is managed by a board of directors, who are

•

elected by the shareholders by the principle of “One man-One vote”. Control: A company is controlled by its shareholders as they elect the

•

board of directors. So a person having more shares has more control over the company. Liability: The shareholders have limited liability. They are liable for

•

business debts up to the nominal value of shares they hold in the company. Their personal assets cannot be taken for business debts. Legal Entity: A company is recognized as a separate legal entity. It can

•

enter into contracts, sue and be sued in its own name. Anything the shareholders do will not affect the company and vice versa. •

Objectives: The main aim of a limited company is to make profit.

•

Perpetual Succession: The death, insolvency or insanity of a shareholder will not affect the business. Profits: When a company earns a profit, part of the profit is kept for future

•

use and the remaining profit is distributed to the shareholders as dividend. Privacy: A company does not have any privacy. The accounts of a

•

company must be filed annually with the registrar of companies. The accounts of a public limited company must also be published in the newspapers.

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The Business Unit

FORMATION OF A LIMITED COMPANY: A company is formed by filing the following documents with the registrar of companies and by following the rules under the Company Act: 1.

Memorandum of Association: The Memorandum of Association contains the following:

2.

•

Name of the company.

•

Registered office

•

Objectives of the company.

•

Statement of limited liability.

•

Amount of share capital.

•

Number of shares to be taken by each director.

•

Statement of intent to form a limited company.

Articles of Association: This document contains the internal rules of the company and:

3.

•

The rights and obligations of the directors.

•

Procedure for calling a general meeting of the company.

•

Procedure for electing the directors.

•

Borrowing powers of the company.

Statutory Declaration: This document confirms that all necessary legal requirements have been complied with. It also contains a signed statement from each director, signifying willingness to serve.

4.

Certificate of Incorporation: This is issued by the Registrar of Companies. It establishes the company as a separate legal body. The company can enter into contracts, sue and be sued in its own name. Anything the shareholders do will not affect the business.

5.

Certificate of Trading: A private company can now collect money from shareholders and start business. A public limited company must first certify that it has collected money for its shares. The Registrar will then issue the

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Commerce – Students’ Guide Department of Business and Computing

Certificate of Trading so that the public limited company can start its business.

CAPITAL OF LIMITED COMPANIES: A company can raise capital in the following ways: •

By issuing shares.

•

By issuing debentures.

•

By borrowing from financial institutions.

1.

By issuing shares: A company can raise capital by issuing shares. There are two types of shares – ordinary or equity shares and preference shares.

Features of Ordinary Shares or Equities: •

The money given for shares is never returned to the shareholders.

•

The ordinary shareholders get dividend out of profit and only if there is sufficient profit.

•

The ordinary shareholders are paid dividend after the preference shareholders are paid.

•

The ordinary shareholders can attend the Annual General Meeting and elect the board of directors.

•

The ordinary shareholders are the owners of the company.

•

The ordinary shareholders have more control over the company as they elect the board of directors by the principle of “one share – one vote”.

•

When a company closes down, the ordinary shareholders are paid last.

Features of Preference shares: •

The money given for shares is never returned to the shareholders.

•

The preference shareholders get fixed rate of dividend in return.

•

The preference shareholders are paid dividend before the ordinary shareholders.

•

The preference shareholders can attend the Annual General Meeting and elect the board of directors if they are paid in arrears.

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The Business Unit

•

When a company closes down, the preference shareholders are paid before the ordinary shareholders.

CALCULATION OF SHARE DIVIDEND: A company issued the following shares, which were fully paid up for: 6.5% Preference shares

200,000 @ $0.50

Ordinary shares

200,000 @ $1.00

The company also issued debentures worth $150,000, which carried an interest of 8%. The net profit available for distribution before paying the debenture interest was $45,000. The company decides to distribute three fourths of the net profit to the shareholders and to keep the balance as ploughed back profit. Calculate:

i. Debenture interest; ii. ploughed back profit;

iii. Preference dividend; iv. Rate of dividend per ordinary share. Profit

$ 45,000

Debenture interest (150,000x8/100) =

$ 12,000

Balance Net profit

$ 33,000

Profit to be distributed to shareholders: $ 33,000x3/4= Preference share dividend

$ 24,750 $100,000x6.5/100= $ 6,500

Profit to be given to ordinary shareholders

$ 18,250

Dividend per ordinary share ($18,250/200,000) =

$ 0.09

Rate of dividend per ordinary share= Dividend per ordinary share x 100 Value per ordinary share $ 0.09 x 100

= 9%

$1.00 11

Commerce – Students’ Guide Department of Business and Computing

Plough back profit = 33000 – 24750 = 8250 2.

By issuing Debentures: A company can also raise capital by issuing debentures. The following are the features of debentures:

Features of Debentures: •

These are like stock or long-term loans given to the company.

•

The debentures carry a fixed rate of interest and are repayable on a fixed day.

•

The debenture holders are paid interest every year whether the company makes a profit or loss.

•

The debenture holders are secured against the property of the company.

•

The debenture holders are the creditors of the company.

•

The debenture holders can sell their claims on the stock exchange.

•

When a company closes down, the debenture holders are paid first.

3.

By borrowing from Financial Institutions: A company can also borrow money from banks and other financial institutions.

DIFFERENCES BETWEEN SHARES AND DEBENTURES: SHARES

DEBENTURES

1. Share capital is an investment.

Debenture capital is a loan.

2. Shareholders are the owners of the company. 3. Shareholders

the company. earn

dividend,

which is paid out of profits. 4. Shareholders have voting rights and hence have control over the

Debenture holders earn fixed rate of interest, whether profits are made or not. Debenture holders have no voting

company. 5. Shareholders

Debenture holders are the creditors of

cannot

company into liquidation.

face

a rights and hence have no control over the company.

6. Shareholders are not secured Debenture holders can against the property of the company into liquidation company. 12

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force on

a non

The Business Unit

7. When a company closes down payment of interest, the shareholders are paid after the debenture holders.

Debenture holders are secured against the property of the company. When a company closes down the debenture holders are paid first.

PRIVATE LIMITED COMPANY Features: •

It is registered under the Companies Act with the word ‘Ltd’ as part of its name.

•

The business is a separate legal entity from its shareholders. The company can enter into contracts, sue and be sued in its own name.

•

All the shareholders have limited liability. They are liable for business debts up to the nominal value of shares they hold in the company.

•

The company is controlled by a board of directors, elected by the shareholders by the principle of ‘one share-one vote’.

•

Ownership is opened to private individuals, whose shares are not transferable without the consent of the other shareholders.

•

The company is not allowed to issue shares to the general public.

•

The company can start their business after receiving the Certificate of Incorporation from the registrar.

Advantages: •

The private limited company has independent legal status. It can enter into contracts, sue and be sued in its own name. Anything the shareholders do will not affect the company.

•

The shareholders of a private limited company enjoy limited liability. They are liable for business debts up to the nominal value of shares they hold in the company.

•

With limited liability, the company is able to attract more capital.

•

In a private company, the founders of a business can usually keep control of it by holding majority of the shares.

Disadvantages:

13

Commerce – Students’ Guide Department of Business and Computing

•

The shareholders in a private company can transfer shares only with the consent of the other shareholders.

•

A private company is not allowed to appeal to the public for extra capital.

•

The accounts of the company must be filed annually with the Registrar of Companies.

PUBLIC LIMITED COMPANY Features: •

It is registered under the Companies Act with the word ‘Plc’ as part of its name.

•

The business is a separate legal entity from its shareholders. The company can enter into contracts, sue and be sued in its own name.

•

All the shareholders have limited liability. They are liable for business debts up to the nominal value of shares they hold in the company.

•

The company is controlled by a board of directors, elected by the shareholders by the principle of ‘one share-one vote’.

•

Shares can be issued to the general public and the shares are freely transferable.

•

The company can start their business after the Certificate of Trading is issued.

•

The issued capital of a public limited company must be at least £50,000.

Advantages: The public limited company has independent legal status. It can enter into

•

contracts, sue and be sued in its own name. Anything the shareholders do will not affect the company. •

The shareholders of a public limited company enjoy limited liability. They are liable for business debts up to the nominal value of shares they hold in the company.

•

With limited liability, the company is able to attract more capital.

•

A public limited company is allowed to appeal to the public for extra capital.

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The Business Unit

•

There is no restriction on the transfer of shares.

•

Public limited companies are normally larger than other companies. As such they enjoy economies of scale.

Disadvantages: •

The formalities of forming a public limited company are quite complex.

•

Sometimes a public limited company grows so big that it becomes difficult to manage.

•

Once established, a public limited company has to comply with many regulations.

•

The accounts of a public limited company must be published, so there can be little secrecy about its affairs.

•

The owners of the public limited company can exercise very little control over it.

•

Raising capital can be very expensive as normally a merchant bank is hired to organize the share issue.

DIFFERENCES

BETWEEN

PRIVATE

LIMITED

AND

PUBLIC

LIMITED

COMPANIES: PRIVATE LIMITED COMPANY •

PUBLIC LIMITED COMPANY

The name should end with the The name should end with the word ‘plc’.

word ‘pvt ltd co’. •

Shares are issued to private individuals and family members.

•

Shares can be transferred only with the consent of all the

Shares can be issued to the general public. Shares are freely transferable.

shareholders. •

It is easier and less costly to It is more difficult and expensive to form.

•

The

form. company

can

start

its

business after the Certificate of

The company can start its business after the Certificate of Trading is issued.

Incorporation is issued. •

A director must be a shareholder. 15

Commerce – Students’ Guide Department of Business and Computing

•

A director need not be a shareholder.

It can secure family control.

Control is in the hands of shareholders with the largest shares.

DIFFERENCES BETWEEN PARTNERSHIP AND LIMITED COMPANIES: PARTNERSHIP •

Formation:

It

is

LIMITED COMPANY formed

by It is formed by registration with the Registrar of Companies.

agreement. •

Members: There are 2-20 partners in There is no limit to the number of shareholders in a ordinary partnership business. company.

•

Capital: Capital is provided by the partners themselves or they may borrow from banks.

Company may raise capital by issuing shares or debentures or by borrowing from banks.

•

Management: It is managed by the It is managed by the board of directors, elected by shareholders. partners.

•

Profit: Profit is shared by all the

Profit is distributed to the shareholders as dividend.

partners in an agreed ratio. •

Liability:

Partners

have

unlimited

liability. Even their personal assets Shareholders have limited liability. They are liable up to the nominal value of shares they hold in the are liable for business debts. •

Uncertainty: The death, insolvency or company. insanity of a partner brings the The death, insolvency or insanity of a shareholder does not affect the company.

business to an end. •

Legal

Entity:

Partners

have

no

A company has separate legal entity. The company separate legal entity. The business can enter into contracts, sue and be sued in its and the partners are one and the own name. A company has perpetual succession. same person. There is no perpetual succession.

•

Flexibility: The partners can change It is very difficult to change the business in a their

business

very

easily

agreement. •

by company, as there are many legal complex formalities.

Agency Relationship: Partners have This is absent in the case of a company. agency relationship. One partner can 16

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The Business Unit act on behalf of all the other partners. •

Privacy: The partners can keep all

The accounts of a company must be filed and the business secrets to themselves. published annually with the Registrar of They do not have to publish their Companies. So there is no privacy. accounts.

FRANCHISES Form of business organisation or method of marketing where a large organisation makes an agreement with many small traders to offer them a franchise in a particular good/service. The potential entrepreneur or franchisee pays to use the products, techniques or services of the franchiser who receives a lump sum and a share of profits of the business. The franchisee receives the majority of the profits, but must also meet the cost of any loss. In return for the money received, the franchiser allows the use of their name, products, techniques or services, and usually provides extensive marketing back-ups. Fast food giants such as Wimpy, Kentucky Fried Chicken and Burger King are good examples of franchise businesses. MULTINATIONAL COMPANIES Multinational companies are companies that have subsidiaries or branches in more than one country. They are usually large, public limited companies who aim to obtain a large share of the global market. They are controlled from head office where the parent company is located Examples of multinational companies are Nestle, Guinness Stout, Unilever, Shell, Exxon, and IBM. Importance of and reasons for multinationals in the global economy Multinationals: good or bad? There is considerable debate as to whether multinationals and their activities are good or bad for economies and their people. 1. Job creation and employment. 17

Commerce – Students’ Guide Department of Business and Computing

One argument put forward in favour of multinationals is that they create jobs. For example, the establishment of the Toyota plant near Derby created a lot of local jobs and was welcomed by many people in the area. The disadvantage is that multinationals can just as easily pull out of a country as stay in. If they feel that it is more advantageous to set up elsewhere they can close down large plants at a moment's notice.

2 The balance of payments The UK has benefited from having a number of Japanese, American and European car manufacturers operating within its borders. Goods produced by these companies are sold abroad thus creating exports for the UK. However, this also means that many or all the raw materials, parts, etc., which go into the finished products have to be imported. 3 Technology and expertise Foreign multinationals may introduce new technology, production methods and ways of working into an economy and thus help to move it forward. For example, in recent years we have come to talk about the 'Japanisation' of UK industry - i.e. the large-scale adoption of factory robots, just-in-time working practices, teamwork and Total Quality Management. It is widely recognised that this has helped to improve the competitive edge of UK businesses. Technology transfer of this kind from one country to another is particularly effective in bringing less developed countries forward; 4 Social responsibility Multinationals have received the most scathing criticism for the social costs of some of their activities, e.g. destroying local communities, pollution, etc. 5 Government control The size and financial power of multinationals can make it difficult for governments to control them. For example, MNEs may be able to win concessions as a result of their size and influence. Some corporations evade taxation by transferring profits from one country to another, declaring high profits in low-tax countries and low profits in high-tax countries. Multinationals have many advantages for the host country: 18

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The Business Unit

♦ paying taxes to boost the country’s revenue employment ♦ transfer of knowledge, skills and technology ♦ bringing foreign exchange ♦ providing vital goods and services within the country ♦ may improve the infrastructure of the country ♦ may provide useful competition for home industries ♦ may require supplies from local companies

Multinationals also have many disadvantages for the host country: ♦ they may exploit underdeveloped countries ♦ they may bring in their own experts rather than train local people ♦ they often pay higher salaries and so attract employees at the expense of local industries ♦ they may take back all the profits of their business to their own country - drain on foreign exchange ♦ they are centrally controlled and so do not take account of local conditions ♦ They may close down factories and leave the country as quickly as they have come.

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