Business Organisations
The Private Sector is made up of different business structures owned exclusively
by individuals seeking to make profit.
1. THE SOLE TRADER. One person
Private clinic dentists, and doctors, farmers, grocers, car mechanics and
fishermen are usual examples.
owns and controls this business
Advantages
Decisions are his alone, so they are taken fast
He is very highly motivated because there is personal gain.
Good decisions will render profit which goes to him alone.
Disadvantages
Bad decisions result in losses which he alone must bear.
He CAN employ others to help manage the business but he remains
the sole risk bearer.
He must be flexible enough to do many jobs (Accounts, Sales,
Production, Purchasing, Marketing etc) A jack-of-all-trades!
If he takes time off the business can stop functioning.
Finance must come from his personal savings, loans from the bank or
from friends.
Decisions are limited because it is good to have various ideas.
A sole trader HAS UNLIMITED LIABILITY - if his business runs into debts
first the business assets are forced into liquidation and then his own
personal property) He is “personally liable”.
2. THE PARTNERSHIP.
This is set up with anything between 2 and 20 partners who draw up a
Partnership Deed which specifies the rules according to which the
partners shall own, manage and distribute profits.
A partner can choose to be active in the business or dormant, a
“sleeping” partner
A Partnership can be “en commandit”- one or more partners are silent
only involved in investing or “en nom collectif”- all partners are liable.
Ownership need not be equal but it must be specified in the
Partnership Deed who owns how much and who will get what part of
profits.
Each partner can focus on one aspect of the business. In this way each
can become a specialist in his/her area (Accounts, Sales, Production,
Marketing etc or TVs, cameras, mobiles, computers etc.)
Being more owners, there is a wider source of finance than the sole
trader. Each can draw on his own savings, make loans etc.
Some Partnerships can be granted “limited liability” provided that at
least one partner still keeps unlimited liability putting his/her personal
property at stake. Of course, in exchange for the risk there would be a
higher return.
Disadvantages
Decisions now take longer as there are more people wanting to have
their voice heard. The partner without protection will always have the
final say or can even take decisions without consultation.
When a partner dies the business stops existing and legally a new
business or partnership must be formed.
3. THE JOINT STOCK COMPANY.
A Company which has some features of a corporation (state-owned and
controlled by a Board of Directors) and some features of a Partnership.
The ‘ownership’ of the company is split into shares. It sells shares the
which are transferable to either existing shareholders (Private Ltd Co.)
or to anyone else interested in buying them (Plcs).
All shareholders have limited liability.
Shareholders can receive a share of the profits called a dividend
Joint Stock Companies can be Private Limited or Public Limited
Private Limited Companies
A Board of Directors is appointed by the shareholders to establish
company policies. The day to day running of the company can be
delegated to managers. Directors can also choose to manage.
Shareholders are determined and cannot increase in number or change.
The original shareholders will remain such and no new owners can buy
part of the business.
Share “issue” is a share sold for the very first time. Should the company
need more funds in the future it can issue more shares but these can
only be bought out by the existing shareholders.
Shareholders have a right to attend the AGM to listen to future plans and
to elect or re-elect directors. They also approve the final accounts.
Public Limited Companies (plc)
o A Board decides on policies and a Chairman or Chief Executive Officer leads
the Board.
o Anyone can buy a share or even re-sell it to anyone else, so the shares register
changes with the sale of each share. Whenever more funds are needed this
company can just sell additional shares. Shares can be traded on the Stock
Exchange and this is what is meant by “going public”.
o The AGM is open to all and accounts must be made public.
o There is continuity in this business since shares are transferable to heirs.
Preference and Ordinary Shares
Preference Shareholders are the first to get paid out of the profits of a
company and the DIVIDEND payable is agreed so if the company does
exceedingly well they cannot expect anything more, they therefore run a
low risk.
Ordinary Shareholders elect the Board of Directors. They carry the
most risk because the preference shares are the first to get paid out of
profits and only if there is any left do the ordinary shares get anything.
However, here is no limit to the amount they get so if preference shares
are paid and there is a lot left, the ordinary shareholders can take it all.
This is because they have run a greater risk than the preference
shareholders.
MULTINATIONALS
These are companies which branch out overseas.
These have between them 1/3 of the total amount of goods produced in
the whole world.
They take advantage of cheap labour and profitable resources in
different countries.
They can grow into monopolies easily since they are so powerful.
They bring advantages to a country. They create jobs, introduce new
methods of production which can be adopted by other firms in the
receiving country, and they can keep their prices low since they don't
need to export their goods.
They also pay tax to the governments of these countries, so they are
usually welcome.
HOLDING COMPANIES
o This is when a Company is in control of other companies because it
owns the majority of the shares of these companies.
o The companies being controlled are called the "SUBSIDIARIES".
o The major advantage of a holding company is that when one company
is too small to gain economies of scale on its own it can now do so as
part of a group.
CO-OPERATIVES
Eg: Koptaco, Bakers’ cooperative, agri-cooperative.
These can either be an association of workers PRODUCER COOPERATIVE or
an association of retailers CONSUMER COOPERATIVE.
Employees in a company hold votes in that same company so there is a
direct interest in working hard. Since each owner-worker has a vote it is
run very efficiently.
It requires a minimum of 5 members.
It is run by a management committee.
Co-operatives are becoming more successful in Malta.
Retail co-operatives are growing too.
Shares cannot be sold to anyone outside the co-operative so they
certainly cannot be sold on the Stock Exchange, and no matter what the
size of the business is everyone has only one vote. If members wish to
sell their share they have to sell it back to the company.
The advantage of this company is that it is run in a democratic way and
members become very loyal to the company
BUT the management committee is made up of workers who may not
have management expertise so it may be run unprofessionally and
inefficiently.
PUBLIC CORPORATIONS
Eg. Water Services Corporation.
These are NOT to be confused with public limited companies.
The latter are owned by households but a public corporation is the
property of the state.
They are Nationalized. A minister is usually appointed as being
responsible for such a corporation but the daily running of the business
is in the hands of a Board of Directors who are accountable to
government.
Funding comes from the state and the good or service is usually
strategic to the country.
NB
The general administration of the country is carried out by the different
government departments which fall under the responsibility of a minister who
is in turn accountable to parliament.
PQs are parliamentary questions which may arise regarding doubtful decisions
taken in various departments.
In Malta we have a system of local councils in each electoral district.
A local council is responsible for the administration of street works, collection of
fines and fees etc and a mayor is elected as authority over the other council
members.
FRANCHISES
o A business (franchisee) pays for the privilege to be granted the license
to use the name and logo of the mother company (franchisor), and to
sell its already well-established product.
E.g. Burger King, Pizza Hut and McDonalds
o The franchisor will get a share of the profits but will also supply the
franchisee with raw materials, machinery, shop fittings and decorative
designs and even the uniform and training of staff, so that the franchisor
is assured of the identical product or service being provided.
o The agreement (contract) between franchisor and franchisee will
stipulate the life of the franchise, the initial amount to be invested, the
suppliers and expertise to be provided, royalties to be paid (approx 10%
on each sale) and the procedure to be followed should a hand over be
necessary.
o The franchisee in this way launches an already well-known product and
finds the banks more willing to lend money since the risk level is low.
There will also be continuous support from the franchisor since there is
self-interest.
o BUT the franchisee does not have a free hand to run his business in his
own way. He may be forced to buy his supplies from the franchisor
directly, even if this means at a higher price. Finally, the profits he
generates are not all his own! We must realize also that the franchisor is
running a big risk – the franchisee could ruin the good reputation that
the mother company enjoys if he does not provide the good or service at
the same good standard.
