Forms of Business Organization

A business organization is frequently referred to as a business entity. A business entity is any business organization that exists as an economic unit. The business entity concept applies to all forms of businesses, single proprietorship, a partnership, and a corporation.

A sole proprietorship is a business owned and usually operated by a single individual. Its major characteristic is that the owner and the business are one and the same. In other words, the revenues, expenses, assets and liabilities of the sole proprietorship are also the revenues, expenses, assets, liabilities of the owner.

Advantages

A sole proprietorship is the easiest form of business to organize. The only legal requirements for starting such a business are a municipal licence to operate a business and a registration licence to ensure that two firms do not use the same name. A sole proprietorship can be dissolved as easily as it can be started. A sole proprietorship offers the owner freedom and flexibility in making decisions. Major policies can be changed according to the owner's wishes because the firm does not operate under a rigid charter.

Disadvantages

The financial condition of the firm is the same as the financial condition of the owner. Because of this situation, the owner is legally liable for all debts of the company. If the assets of the firm cannot cover all the liabilities, the sole proprietor must pay these debts from his or her own pocket. A sole proprietorship, dependent on its size and provision for succession, may have difficulty in obtaining capital because lenders are leery of giving money to only one person who is pledged to repay. A proprietorship has a limited life, being terminated on the death, bankruptcy, insanity, imprisonment, retirement, or whim of the owner.

A partnershipis an unincorporated enterprise owned by two or more individuals. A partnership agreement, oral or written, expresses the rights and obligations of each partner. There are three types of partnerships: general partnerships, limited partnerships, and joint ventures. The most common form is the general partnership, often used by lawyers, doctors, dentists, and chartered accountants.

Advantages

Partnerships, like sole proprietorships, are easy to start up. Partners' interests can be protected by formulation of an “Agreement of Partnership”. This agreement specifies all the details of the partnership. Complementary management skills are a major advantage of partnerships. Consequently partnerships are a stronger entity and can attract new employees more easily than proprietorships.

The stronger entity also makes it easier for partnerships to raise additional capital. Lenders are often more willing to advance money to partnerships than to proprietorships because all of the partners are subject to unlimited financial liability.

Disadvantages

The major disadvantage of partnerships is that partners, like sole proprietors, are legally liable for all debts of the firm. In partnerships, the unlimited liability is both joint and personal. This means that the partners together are responsible for all the firm's liabilities. If one of the partners cannot meet his or her share of the debts the other partner(s) must pay all debts.

Partnerships are not as easy to dissolve as sole proprietorships.

Limited companies, unlike proprietorships or partnerships, are created by law and are separate from the people who own and manage them. Limited companies are also referred to as corporations. In limited companies, ownership is represented by shares of stock. The owners, at an annual meeting, elect a board of directors which has the responsibility of appointing company officers and setting the enterprise's objectives.

Advantages

Limited companies are the least risky from an owner's point of view. Shareholders of corporations can only lose the amount of money they have invested in company stock. If an incorporated business goes bankrupt, owners do not have to meet the liabilities with their own personal holdings. orporations can raise larger amounts of capital than proprietorships or partnerships through the addition of new investors or through better borrowing power.

Disadvantages

Limited companies are subject to federal and provincial income taxes. Dividends to shareholders are also taxed on an individual basis. Thus, limited companies are taxed twice: on the profits they earn and on the dividends which come out of the profits. In proprietorships and partnerships earnings are only taxed once – as the personal income of the individuals involved.

With diverse ownerships, corporations do not enjoy the secrecy that proprietorships and partnerships have. A company must send each shareholder an annual report detailing the financial condition of the firm.

Vocabulary Focus

Ex. 1. Study the meaning of the following words agency; branch; enterprise; subsidiary, then use them to fill in the gaps:

agency – a business or place of business providing a service

branch – a local office belonging to a national firm or organization

subsidiary – firm owned by a parent company

enterprise – new commercial activity, often a small one.

1. Coca-Cola has a(n)… in more countries than there are in the United States.

2. A travel… can organize business trips as well as holidays.

3. A(n) … is a company of which more than half the share capital is owned by the holding company.

4. The major banks have at least one… in all large cites.

5. There are plenty of small industrial … .

Ex. 2. Fill in the missing words from the text.

1. A business organization is frequently referred to as a business…

2. A single proprietorship is business … by an individual and often … by the same individual.

3. The major disadvantage of partnerships is that partners are legally liable for all … of the firm.

4. The partners together are … for all the firm’s liabilities.

5. Partnerships are not as easy to … as sole proprietorship.

6. In limited companies, ownership is represented by….

7. A board of directors has the responsibility of setting the enterprise’s …

8. If an incorporated business goes …, owners do not have to meet the liabilities with their own personal holdings.

9. Limited companies are … to federal and provincial income taxes.

10. Limited companies are … twice.

Ex. 3. Match the words in column A with their antonyms in column B.

Ex. 4. Match the words in column A with their English equivalents in column B.

Ex. 5. Fill in the missing word(s) in each of the following sentences. Choose from the alternatives beneath each sentence. The first has been done for you.

1. The Board of Directors is responsible for deciding on and controlling the strategy of a corporation or company.

a. workers; b. directors; c. cooperative.

2. Small businesses depend on investors providing .................capital.

a. venture; b. individual; c. cooperative.

3. Investors are influenced by the projected ………….. on their capital.

a. market; b. return; c. rate.

4. Thecapital needed to run a business is provided by .................... .

a. a gain; b. risk ; с. investment.

5. Rent and rates, which do not change as turnover volume changes, make up the ............. costs of a company.

a. fixed; b. contribution; с. variable.

6. Materials and direct labour costs, which change as turnover volume changes, make up the …………….. costs of a company.

a. fixed; b. marginal; с. variable.

7. Every company must watch its …………… carefully if it is to avoid bankruptcy.

a. market manager; b. cash flow; с. production line.

8. The.................. account above whether the company is profitable or not.

a. profit and loss; b. volume; с. shareholder.

9. Banks, require ................. to guarantee а lоаn.

a. account; b. shares; c. securities.

10. The Stock Exchange deals with the purchase and sale of ................... .

a. stocks and shares; b. bulls and bears; c. statements and invoices.

Ex. 6.Express in one word.

1. Having a responsibility or an obligation to do something, e.g. to pay a debt;

2. a person or organization to whom money is owed (for goods or services rendered, or as repayment of a loan);

3. to be insolvent: unable to pay debts;

4. everything of value owned by a business that can be used to produce goods, pay liabilities and so on;

5. to sell all the possessions of a bankrupt business;

6. money that a company will have to pay to someone else (bills, taxes, debts, interest and mortgage payments, etc.);

7. money invested in a possibly risky new business;

8. the place in which a company does business: an office, shop, workshop, factory, warehouse, and so on;

9. to guarantee to buy an entire new share issue, if no one else wants it;

10. a proportion of the annual profits of a limited company, paid to shareholders.

Words for reference: dividend; premises; underwrite; liabilities; venture capital; liquidate; bankrupt; liability; creditor; assets.

Comprehension

Ex. 1. Read the information about four companies below and say which matches each of the following terms: a sole trader/sole proprietor; a partnership; a limited company; a plc.

1. Mike Gobb set up an art gallery last year. He owns the gallery and managers it by himself.

2. Craftplay is a medium-sized firm whose shares are available on the stock market.

3. Ovenclean went bankrupt last year, but its shareholders were not made responsible for all the money it owed.

4. Brothers Gianfranco and Giancarlo Belew recently set up an import-export company. They run the business together.

Ex. 2. Complete the sentences using information from the text.

1. Business entities can be grouped according to …

2. A single proprietorship is a business….

3. A sole proprietor often has to rely on….

4. The major disadvantage of partnerships is ….

5. If one of the partners cannot meet his share of the debts….

6. Complementary management skills are ….

7. Shareholders of corporations can only lose….

8. If an incorporated business goes bankrupt, owners….

9. Limited companies are subject to….

10. Limited companies are taxed twice: ….

Ex. 3. Say if the statements are true or false:

1. The revenues, expenses, assets and liabilities of the sole proprietorship are also the revenues, expenses, assets and liabilities of the owner.

2. A sole proprietorship cannot be dissolved as easily as it can be started.

3. The major advantage of partnerships is that partners are legally liable for all debts of the firm.

4. Partnerships are as easy to dissolve as sole proprietorships.

5. Limited companies are the most risky from an owner’s point of view.

6. If an incorporated business goes bankrupt, owners have to meet the liabilities with their own personal holdings.

Ex. 4. Dwell on the following questions.

1. What are three most common types of business firm?

2. What factors affect the decision to choose a legal form of business?

3. What kind of firm is a sole proprietorship?

4. What is the proprietor solely responsible for?

5. How does a partnership differ from a proprietorship?

6. What is the procedure of starting a business as a limited company?

7. What are the advantages of doing business as a limited company?

8. What are the advantages and disadvantages of each type of business firm?

9. What is the most risky form of ownership? Why?

Ex. 5. Speak on three main forms of business organizations, their advantages and disadvantages.

Text 2

After reading the text comment:

– on the functions of the board of directors;

– on the company structure.

Shareholders, since they provide the capital, chooose the people who run company for them, i.e. the board of directors. The directors are appointed by the shareholders, normally at the company's annual general meeting, at which the chairman of the board will be expected to account for their stewardship during the previous year. The company's accounts will be presented to the shareholders at that time so they can judge for themselves whether or not the board has been successful.

The board of directors of a limited company is primarily responsible for determining the objectives and policies of a business. It is the directors who determine the direction the business is going to take. They will need to ensure that the necessary funds are available and will appoint key staff to which they will delegate the authority to run the business on a day-to-day basis. They will need to design an effective organisation structure so that there is both a chain of command linking one level of management with another and an effective communication network so that instructions can be passed downward and information passed upward.

Most organisations have a hierachical or pyramidal structure, with one person or a group of people at the top, and an increasing nuber of people below them at each successive level. There is a clear line or chain of command running down the pyramid. All the people in the organization know what decisions they are able to make, who their superior (or boss) is (to whom they report), and who their immediate subordinates are (to whom) they can give instructions. It is the so called line structure.

Some people in an organization have colleagues who help them: for example, there might be an Assistant to the Marketing Manager. This is known as a staff position: its holder has no line authority, and is not integrated into the chain of command, unlike, for example, the Assistant Marketing Manager, who is nuber two in the marketing department.

Today, most large manufacturing organizations have a functional structure, including (among others) production, finance, marketing, sales, and personnel or human resources departments. This means, for example, that the production and marketing departments cannot take financial decisions without consulting the finance department.

If a company has matrix structure work is structured around specific projects, products or customer groups. People with variet backgrounds are assigned together because the expertise is required for the project or to serve the customers. The assigmnets may be temporary or long-term.

Text 3

Read the text and answer the following questions:

1. What is the difference between a limited company and a public limited company?

2. What is flotation?

3. What are the steps of flotation?

4. What details does the company propectus include? What are potential investors supposed to do?

5. What occurs on the day of flotation?

6. What does the underwrite guarantee?

7. What happens to the price of the shares if the share issue was under- or oversubscribed?

Flotation

Companies in the private sector consist of two basic types: public and private. Public companies in general are large scale organizations such as banks, insuarance companies and privatised companies. The nubber of public companies are fewere than that of private companies. Private companies on the wholw are smaller or family-run business.

The difference between public and private firms on paper at least, can be found in their manners the word “limited” (often shortened to “Ltd”) after a company’s name shows that it is private. On the other hand, the status of a public company is shown by the letters “plc” after its name. This is short for “public limited company”. In practice, however, the real difference between the two arises from the fact that private companies cannot raise money by selling shares, in contrast to public companies which can do so by issuing shares and bonds to be offered for sale on the stock Exchange.

A public limited company (plc) is the only type of business organisation whose shares can be traded on the stock market. The process of becoming a public limited company is commonly reffered to as flotation – the shares in the company are “floated” on the stock market.

When a company decides to float on the market it will appoint a financial advisor, usually a merchant bank, to help it through the process. The key role of the advisor will be also to advise on the prise at which shares are to be offered for sale. Once an offer price has been decided, a glossy prospectus will be produced to aid the sale of the firm’s shares. The prospectus will include details of:

– what the firm plans to do with the money it is trying to raise;

– a fully audited financial statement of the firm’s current financial position and history;

– details of where the shares being offered to the market are coming from – they may be newly created shares or alternatively shares that are owned by existing shareholders.

The prospectus will also include an application form, to be filled out by anyone wishing to purchase shares. Those applying will fill out the form, stating how many shares they wish to purchase and send off a cheque to cover the cost of those shares. On the day of flotation, the results of the application process will be announced. The company will declare how many of the shares being offered have been sold, with any unsold shares being purchased by the underwriter.

Each new share will be underwritten, usually by the bank offereing advice to the company floating. The underwriter will charge a fee, which is often set as a percentage of the sum the company hopes to raise by floating. In return, the underwriter will guarantee to buy any shares that are unsold from the original application process.

Immediately the resultts of the isssue have been publicized, trading in shares is likely to start on the market. The original issue price will be the stating price, but this may change dramatically within minutes, particularly if the share issue was under or oversubscribed. An oversubscribed offer will see investors looking to offload their overpriced shares in an attempt to cut their lossses.

WRITING

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