different forms - non-incorporated and incorporated business organisations -
determine legal responsibilities and regulation and associated law. They also
influence the legal forms and characterise the scope of ownership, management
responsibility and control - power and authority i.e. the governance of
business and managerial behaviour and practice (as well as along with a lot
of other things). They have major implications for society, democracy,
owners, managers, employees, customers and stakeholders.
Non-incorporated Forms of
Non-incorporated forms of business ownership and organisation
include; sole proprietorship and partnerships each of which in their nature
have benefits and disadvantages.
Often but not always, this is a single person in business on their
own, running a small operation. Sole proprietors are self-employed yet can
employ many staff. They may be:
carpenters, builders, stall holders, management consultants etc
retailers; Pizza restaurants, butchers, computer shops etc
craft or cottage
workshops; picture frame makers, engine re-conditioning businesses etc
A sole proprietor is the
business . They trade under their own name or under a trade name that
describes the business or attracts customers. But their own name must appear
on letterheads and in the shop or office if they have a trade name that is
not their own.
The "Business" is not a legal entity as such.
To set up a sole proprietorship all that is needed is the capital
and the "entrepreneurial spirit, courage and energy" to start
transacting business with customers.
There is no legal requirement to keep audited accounts books but
the proprietor must still pay income tax on profits received from the
business and account for VAT if registered. Records are thus needed to
communicate taxable earnings to the Inland Revenue and inputs/outputs to the
Customs and Excise.
Advantages and Disadvantages
quick to set up. No legal procedures. Begin trading immediately.
earnings go to the autonomous, independent proprietor who can decide and act
quickly. Annual accounts do not have to be submitted to Companies House so
saving on bookkeeping/auditing charges i.e. he/she need not publicly disclose
the business’s financial affairs except to the tax people.
There is a problem
of "one-man/woman band".
All tasks such as selling, accounting, tax records etc are frequently
undertaken by the proprietor. If he/she is weak in any area of knowledge,
expertise and acumen - the business will suffer. He/she may be a good painter
and decorator but is poor at administering paperwork or marketing goods and
a sole proprietor
‘s work is usually intensive. When he/she is not working, no money comes
in. Holidays and time-off are difficult and economies of scale e.g. in
buying, are often elusive. Unit costs are often higher e.g. purchase price
per ream of photocopying paper, quantity of packaging materials etc.
The sole trader is
personally liable for the debts of the business. If their business fails
their personal belongings can be sold to meet the debts of the business. The
proprietor enjoys the profits but accepts personal responsibility for losses
for which they have unlimited
liability. He/she is the business and not an employee of it. If a
customer sues for damages arising from work done, then this must be settled
from the proprietor’s own personal resources. The risk of losing a home and
personal wealth/savings is clear albeit that insurance polices can be taken
out against certain losses.
losses in the first
few years of business can be offset against income from the three years
before the business was begun (tax refund).
the sole proprietor
has no access to equity capital (from selling shares in the business).
Sole proprietorship is a successful, and popular form of business.
Probably about 1 million such businesses exist and new sole proprietorships
are created (and die) every day..
a ..... "relationship which subsists between persons carrying
on a business with a view to profit"
Partnership Act 1890
There have been several interpretations of partnerships. A
partnership is not incorporated and has unlimited liability, but can be
legally acknowledged organisation where two or more and often not more than
fifteen join together to carry out a business. The partners' names must be on
all business stationery and displayed on the premises.
Partnerships are common amongst professionals such as accountants,
solicitors/barristers. Trades-person partnerships (e.g. Mary and Jim’s
Shirt Ironing Service) are also evident.
Professional partnerships give clients some assurance in that, say,
their solicitor is one of a partnership who share accountability. Losses must
be borne by all partners, even if caused by one only.
More than one
person invests in the business and there is still no need to submit accounts.
Yet partners divide profits between themselves
together skills and abilities (specialisation) to benefit the business. The
burden of work can be shared and so relieving pressure.
are shared between partners, reducing personal bankruptcy risks.
(more complex than for a sole proprietor).
Set up costs. Legal
agreements are needed to e.g. constrain partner(s) who may want to take
flight if the business is in difficulty. Profit distribution between partners
must be defined.
The sole proprietor
is no longer independent. Decisions require consultation between partners if
the partnership is to work effectively. One partner cannot act unilaterally
e.g. over investments, holidays, contracts to accept etc. Decision-making
processes can be slowed with the potential for argument.
Partners, as for
sole proprietors, are the business (not employees). If one dies or cannot
continue with the business, then the partnership is dissolved (partnership
agreements need to provide for this) and then reformed.
Partners are liable for income tax but there is no requirement to
keep audited accounts (potentially less administration) and no need to
disclose publicly the business’s turnover and financial performance except
to the tax people.
Partnerships can grow into big U.K-wide and international
organisations as have some of the accounting firms (partnerships). They may
have many employees.
and Not-for-Profit Organisations
central and local government departments and agencies and charities,
churches, social care establishments, schools, clubs. Even for some of these
the profit motive - or surplus of income over expenses is a significant
You should able to explain limited liability, its importance and
how it works, how ownership (shareholders) occurs and the obligations of
limited liability; how such companies are managed and organised functionally.
You should also appreciate the nature and structure of a holding company and
how holding companies make money.
Forms of Business
19th century legislation was introduced enabling businesses to be recognised
as legal entities - legal personalities. Large amounts of capital was needed
for emergent industries such as engineering and chemicals and the personal
wealth of investors who did not want to be active in managing the business
was at risk with unlimited liability. So a need for new forms of business
other than sole proprietors and partnerships was evident.
who work in companies are employees and continuity of succession is available
in more flexible ways than provided by sole proprietors and partnerships. If
an employee leaves a business’s employment, the company as a legal entity
can re-appoint and go on without having to dissolve as a result.
up the Company
1 of the Companies Act 1985 allows two or more people to form an incorporated
company for any lawful purpose. The business has a legal identify separate
from the shareholders and between shareholders.
company's accounts must be audited annually by a chartered or certified
accountant and records of the company must be filed at Companies House
can start the company with only two shareholders, one a director and the
other the company secretary who keeps the records required by law. Directors
salaries are taxed under PAYE as employees.
buy a ready made company from a
company registration agent (say £250). If you do not like the name offered -
this can be changed for approx. £50.
or set up a tailor-made company
with the help of a solicitor/adviser (costs more, takes longer)
companies pay corporation tax on profits. It has a registered name which is
legally protected and the company has a regulated structure.
investors offer capital to the
company becoming one of the owners. Ownership is shared with other investors.
The amount owned is in units of "a share".
in exchange for injection of
shareholder capital, the company agrees to distribute a portion of the
profits between shareholders. How much this is (the dividend) is decided by
company management. Dividend payments (and growth in the value of shares)
represent shareholders’ return on investment. These can be compared to
other investments such as government bonds or interest from bank accounts.
Shareholders liability is
limited to amount they have invested (the value of their shares and no more).
If company fails, business assets e.g. land, equipment, stocks, bad debts etc
are liquidated and losses are paid. Creditors can only claim back as much
money as the business owns (personal possessions cannot be claimed).
This is known a limited liability.
employees contract to do work
for a reward package. They may suffer job loss, but employees cannot be
pursued for company debts.
in reality liability may not be
limited. If a company is new, small or has problems, financial institutions
(the bank) may be unwilling to lend money without personal guarantees.
Ownership of companies
When a non-incorporated business develops into a limited company the
entrepreneurs who injected capital to fund the business and can retain
control (via a majority shareholding). Shares can be transferred when others
pay the "owners" for a number of shares at a given value. Thus the
original owners can raise money for the company or to liquidate some of the
funds they injected into the company. The shares reflect the value of the
firm which may be greater than the actual sums thus invested.
the Horse’s chain of betting shops is valued at, say £1 million. This
value is divided up into shares typically £1 or 25p. So at 25p, 4 million
shares are created and taken up by private investors. With a handful of
shares (large or small hand), the shareholder part owns the business and can
vote on policies at annual general meetings. Voting rights are pro-rata to
size of share-holding, therefore large shareholdings offer more voting power.
of some limited companies may be held by one person and have a total nominal
share value of a few hundred pounds only. Share values of £ billions are
common to large public limited companies and shares are held by tens of
thousands (but maybe the majority by a few, large, other companies - the
Distribution of share ownership
distribution of share ownership influences how the business is controlled. If
a shareholder has enough shares (51%), then he/she effectively controls the
company. He/she can veto the motions of other shareholders at AGMs and so
determine company policies and management.
There is more than one type of company
Private company (ltd)
limited by shares the
company’s capital is limited to the amount of share capital its members
have agreed to pay
shares are not available to the
general public, but are held usually by those involved in the business or by
family and friends
limited company (Plc)
must have a share capital of at
least £50,000 (authorised minimum) at the time of incorporation
Shares can be bought by the
general public via a flotation and then via a share exchange (e.g., stock
companies, both ltd and plc are bound by legal conditions. Failure to comply
puts the company in breach of the law. All companies must submit the
following all of which can be inspected by the public:
Memorandum of association
This is filed at Companies
House when the company is founded. It gives
the company name and purposes,
the address of the company’s office
a declaration of association
(members intention to form a company and take shares in it)
a statement that the members
are claiming limited liability at law, the value of the share capital
how the shares are distributed
type each member holds (e.g.
Articles of association
are bye-laws regulating internal arrangements and rules of the company:
identity of shareholders
regulations for issue and
transfer of shares
rules for shareholder meetings
appointed directors, their
powers and responsibilities
the company secretary
the auditors of the company’s
annual general meeting (AGM) must be held each year and not more than 15
months after the holding of the preceding one.
year the company must report the following to the Registrar of Companies.
of its office, share capital, members and their shareholding, security,
directors and total debts secured by a charge on assets.
addition to the accounts the company must keep
a minute book
a register of directors and
a book of share certificates
a register of debenture holders
Annual audited accounts
company must have a proper set of books and records. The following must be
submitted to Companies House
the profit and loss statement
the balance sheet
a directors report
and (2) must be audited by an accredited accounting organisation. At
Companies House the statements are open to public inspection. Certain
exemptions from audit are possible.
Anyone can become a director provided they are not an undischarged
bankrupt and have not been disqualified by a court from holding a
directorship. A company when incorporated must have at least one director and
a company secretary. The same person cannot be the sole director and company
Directors are typically chosen by shareholders at the AGM and are
responsible to them for the operation control and maintenance of the
business: company assets and resources. They must, to the best of their
ability, provide the shareholders with a suitable return on investment.
The articles of association set out the scope and duties of
directors. Typically medium to large companies have a group e.g. four to
eight, each Director having an area of functional responsibility for
operations. One is typically appointed as the Managing Director or Chief
Executive who oversees and co-ordinates all operations. The Chairman chairs
Board meetings and ensures that full reporting to shareholders is undertaken.
Directors are company agents and can make contracts on the
company’s behalf. Legal
accounts that satisfy accounting standards on time
in company assets and company investments
legal compliance in
Directors may be:
directors who work
full time for the company have functional management responsibility for an
area of the company’s operations e.g. Managing Director, Marketing,
Operations, Finance, Human Resources.
directors are usually
engaged in a part-time or advisory capacity. Often specialists, they may be
former executive directors or well regarded people who bring expertise or
external influence to the company/Board e.g. Nigel Lawson (a national bank).
must have at least one Director and a company secretary (usually appointed by
the Board) who may or may not be a Director. The company secretary usually
reports to the MD. This is a professional role as the responsibilities
involve important administrative functions often of a legal nature. The
company secretary is responsible for submitting the audited accounts to the
Registrar of Companies and has the legal authority as a company agent to make
contracts on the company’s behalf.
Executive directors take responsibility for the running of designated
functional areas of a company. In sizeable companies, the process of
delegation enables directors to appoint others. Delegation means devolving
responsibilities to subordinates. Sub-ordinate staff are accountable for
carrying out delegated roles and duties but the primary responsibility rests
with the Directors. The formal processes of job appointments and definition
enable the Directors to authorise staff reporting to them to take action on
Ownership of 51% of shares gives majority voting rights at an AGM
and on the payment of dividends the largest share of profits. 51% gives as
much control as a 100% holding.
Individuals or other organisations (e.g. pension funds, insurance
companies, banks) can own shares. Unit and Investment Trust companies for
example exist by owning shares of other companies.
Some companies (holding companies) may seek to own sufficient
shares (51%) to control other companies. Holding companies themselves do not
make goods or provide services, the companies they own with 51% will do this.
The owned companies may be:
The holding company owns more than 50% thus giving control.
The parent company owns 20-50%. This is a large shareholding should provide
considerable influence (but not control) over the associated company. How
much influence will depend on ownership of the other shares. Owning 49% and
wanting control when a rival company has a 51% stake may be a less than
appropriate strategy. Related companies as similar to Associated companies.
They typically own fewer than 20% of shares in another company. This holding
may be held because good dividends may be expected or the two companies are
co-operating with each other in some area of business. Small shareholdings
may be held by banks or Unit or Investment Trust companies as ingredients in
their portfolio of ownership.
PLCs are often holding companies. The parent or holding company’s
profits arise from the profits from other companies it owns (its corporate
portfolio). Parent companies may have a corporate head office and will employ
corporate executives/managers, accountants, legal staff,and other
administrators. Unilever, British Petroleum Plc, United Biscuits, Kingfisher
are all holding companies which control many other companies whose products
and services are household names (Persil, Selfridges, , Tetley Tea)
Holding companies make profits and returns for their shareholders
by buying, running and selling other companies. They do this via:
the profits of
companies they own
companies and selling at a profit; Such acquisition may include buying
another holding company, splitting up the held companies and selling some or
all of these to redeem all or part of the initial purchase cost. Some of the
acquisitions may be retained in the holding company's (purchasers) portfolio.
Benefits of a Holding
the parent has a
portfolio of market interests. A company that operates in only one market,
such as hotels is subject to the economic and competitive health of that
industry. A holding company spreads risk and has more opportunities. With a
down-turn one of its market sectors, it can switch its interests and
concentrate more on other sectors or divesting and entering other markets.
Each subsidiary is
separate a legal entity, they are not all absorbed in one company and any
given subsidiary can be readily sold off (portfolio divestment). A holding
company is a convenient structure for this.
the rules of
majority shareholding mean that a holding company controls by owning only 51%
of shares in a subsidiary. This is a cheaper option than buying the company
it is difficult to
control very large organisations. In a holding company, the Directors of
member companies, can be given degrees of autonomy to manage their companies
effectively. A holding company aids the devolving of responsibility,
authority and action.
companies maintained as distinct entities in holding companies further
businesses can be acquired by merger or take-over and added to the group
and Public-sector Firm
economy can be divided into the private and public sectors. The private
sector is made up of members of the general public and firms owned
by the general public. These firms include sole traders, partnerships,
limited companies (owned by private shareholders) and Public Limited
Companies (Plcs) (also owned by private shareholders).
Public Sector is made up of the central government in London, various
local councils, and firms owned by the government (nationalised industries)
such as the Post Office.
of Private-sector Firm
5.1 summarises the main types of firm owned by members of the general
little capital. Incentive to work hard. Regular customers known. Owner
Can make quick business decisions.
liability. Difficult to find capital. Long hours worked. Holidays or
illness cause problems.
equally between partners
partner contributes capital. Each partner specialises. Regular customers
liability. One partner's mistake affects all partners. Partners may
limited company (Ltd)
elected by shareholders
liability. Shareholders contribute capital. Protected from takeovers.
limited capital for expansion. Limited economies of scale.
limited company (plc)
elected by shareholders
liability. Large amount of capital can be raised. Economies of scale.
takeover possible. Can be remote from customers. Potential diseconomies
returned to customers. Democratic.
may lack business experience.
owners are liable or
responsible for the debts of a company.
liability means the owner may
have to sell some or all of his personal possessions to help pay off the
liability means that the owner
loses only the money he has put into the company and no more. He does
not have to sell personal belongings.
a Limited Company
companies have their own legal identity. They can sue people and other
companies and be sued themselves. Anyone wanting to establish a limited
company must issue:
of association stating
the name, aims and address of the company and the amount of capital to
of association stating the
internal organisation of the company.
Registrar of Companies then issues a certificate
of incorporation which permits the company to trade.
limited company then prepares a prospectus
describing the history and prospects of the firm and inviting
individuals to buy their shares. Only a public limited company can
advertise its prospectus.
share allows one vote and pays one dividend
(profit payment). Each year the shareholders elect a chairman and a
board of directors who control the everyday running of the firm.
of Public-sector Firm
nationalised industry (or public
corporation) has its own Act of Parliament and its own government
minister. Firms owned by the government aim to operate in the public
interest and do not necessarily try to make maximum profits.
Limited Companies and Public Corporations
are compared in Table 5.2
Table 5.2 Differences
between public limited companies and public corporations
elected by shareholders
selected by the government
by issuing shares
by issuing stocks
to the shareholders
to the government
a large profit
the public interest
Thatcher administration followed a course of selling state-owned firms
such as British Telecom back to the private sector. This is called privatisation.
Firms operate more
efficiently in the private sector because they are trying to maximise
Money can be raised to
increase government services or to pay for tax cuts.
Ordinary people become
shareholders and take a greater interest in economic matters ('peoples's
Public monopolies simply
become private monopolies.
Socially necessary but
unprofitable services may not now be provided.
are already owned indirectly by the general public.
multinational corporation is a very large firm with a head office in one country
and several branches operating overseas.
multinationals creates jobs for the host country.
The multinational will
introduce new production techniques and managerial skills.
New or better goods may
now become available in the host country.
Profits are returned to
the overseas head office.
The multinational may
operate against the interest of the host country.
The multinational may
force its overseas branches to buy supplies from the head office.