20. Business Organisations
Learning Outcomes from this chapter
On completion, you should be able to:
- Identify different types of business organisations
- Compare and contrast the different types of business organisations
- Outline the steps needed to form a limited company
- Discuss the advantages and disadvantages of different types of business organisations
- Evaluate the advantages and disadvantages of semi-state enterprises and of privatising them
- Analyse the benefits and drawbacks of franchising as a business start-up
- Illustrate your understanding of indigenous firms and their benefits for the Irish economy
- Explain why businesses change their organisational structure over time
- Discuss the changing trends in business organisations in Ireland recently
Types of business organisations
Sole Trader
| Formation | Start straight away in own name or register name with CRO |
| Liability | Unlimited liability - All debts can be recovered from personal belongings |
| Finance | Limited to their savings or their ability to access loans, which can be difficult if they are a new business with no history - LEO (Local Enterprise Office) can give grants |
| Control | Owner maintains total control and makes all decisions |
Advantages:
- Easy/quick to set up
- Total decision-making
- Keeps all profits
- Maintains privacy on accounts
Disadvantages:
- Takes on all risks (personal and financial)
- Unlimited liability
- May lack adequate capital
- High workload/stress of being the sole owner/decision-maker
Sole Trader (From Teacher)
- Unlimited liability
- Easy to set up
- Usually 1 person starting a business
- Owner maintains full control
- All profit goes to owner
Partnership
| Formation | Form LP1 must be completed by CRO - a deed of partnership is signed |
| Liability | Unlimited Liability |
| Finance | Between 2 and 20 partners can invest their savings, plus loans |
| Control | Decisions are shared by partners - Have to be agreed to in writing |
Advantages:
- Risks and decisions shared
- Benefits from a range of experience/skills
- Access to more capital than sole trader
- Maintains privacy on accounts
Disadvantages:
- Unlimited Liability
- Slower decision-making (disagreements/conflicts)
- Partnership dissolved on death of a partner
- Profits shared between partners
Partnership (From Teacher)
- Unlimited liability
- 2 - 20 people to start up
- Shared decision - making equal votes per partner
- Equal shares of profits
- More access to skills + capital
A partnership is automatically dissolved when a single partner dies
Private Limited Company (Ltd/CLS)
| Formation | Must create a constitution, then CRO issues a certificate of incorporation |
| Liability | Shareholders of a private limited company have limited liability - on bankruptcy, only lose the value of their investment |
| Finance | Shares can be sold up to a maximum of 149 shareholders |
| Control | One share, one vote: shareholders elect a board of directors, board of directors appoints a CEO who answers to the board |
Advantages:
- Access to capital
- Limited liability
- “One share, one vote”
- Establishes a separate legal entity
- Continues to existence on death of a shareholder
Disadvantages:
- Slower and more expensive to set up
- Accounts need to be filed
Private Limited Company (From Teacher)
- Create a constitution (set out laws/rules, relevant info of founders)
- Certificate of incorporation
- Limited liability
- Shares sold to select people/groups
- Up to 149 stakeholders
- One share = one vote
- CEO is elected/chosen by the board of directors
Private limited company: Ltd/CLS vs DAC
Private company limited by shares (CLS)
- Title ‘Ltd’ after its name
- Requires only one director
- Single-document constitution
- No limit to what activities the business can do
- Can have up to 149 shareholders
- Shareholders can decide not to hold an AGM by passing a written resolution
- No authorised share capital needed: no limit on the number of shares issued
- Title ‘DAC’ applies to each company
- Requires a minimum of two directors
- Uses an Articles of Association and Memorandum of Association as its constitution
- Established for a very specific purpose – restricted to operating only that activity
- Legal obligation to hold an AGM each year
- Must have an authorised share capital
- All financial companies must register as DACs (e.g. Ulster Bank DAC)
Co-operative
| Formation | At least seven members apply to the Registrar of Friendly Societies |
| Liability | Members of co-ops have the protection of limited liability |
| Finance | Members receive a share of the profits in proportion to turnover |
| Control | Democratic structure, ‘one member, one vote’ |
Advantages:
- Limited liability
- Members have a say in the running of the business
- Often based on a common bond
- May not be purely profit-driven
Disadvantages:
- Limited access to capital
- Disagreement between members
- Longer decision making time
Co-operative (From Teacher)
- At least 7 members
- Democratic structure (One vote per member)
- Receive equal profit shape
- Limited liability
- All members have equal voting rights
- Register of friendly societies
Public limited company (PLC)
- Must have minimum of seven shareholders, no upper limit
- Shares sold on a stock exchange
- Stock exchange listing can boost exposure for the brand and can help attract top staff
- Businesses that have grown may seek to float on the stock exchange; this is a very expensive process that requires huge preparation and a forensic look at the company’s finances
- Easier targets for takeover bids from rivals – share price impacts the value of the company, which can be out of the control of the owners (e.g. stock prices fell drastically during the COVID-19 pandemic)
Semi-state bodies
Semi-state bodies are state-owned (government) enterprises that are technically commercially run, which benefits the Irish government (e.g. Dublin Bus, An Post, RTÉ, Bord Gáis)
Advantages of state-owned enterprises
- Increased government revenue (sale)
- Improved efficiency/standard
- More finance to expand/develop
- Increased competition (deregulation)
Disadvantages of state-owned enterprises
- Loss of state assets
- Loss of control over services
- Increased unemployment
- Consumers may face higher prices
Semi-state bodies: privatisation/nationalisation
Privatisation
Privatisation is the selling of a state-owned company to private investors. The sale raises money for the government, but they then lose control over the service.
Advantages:
- More efficient
- More access to finance
- May lead to increased competition
Disadvantages:
- Loss of control over the service
- May lead to job losses
- Business may reduce services (now profit-driven)
Nationalisation
Nationalisation is when a privately run business is taken over and run by the state. This happens when a business/industry cannot support itself, and the government deems it an essential service for citizens. The government buys to save the business/industry so that services can be maintained.
Franchises
Franchisor grants a licence for a franchisee to sell its products or use its business idea in return for a fee and a percentage of turnover/profits
Advantages of being a franchisee
- Use a proven/successful business idea
- Existing customer base, loyalty, data on market
- Benefit from economies of scale (advertising, raw materials)
- Support/training/mentoring offered by franchisor
Disadvantages of being a franchisee
- More expensive: one-off payment of fee, then percentage of sales/profits
- Restricted innovation, limited range of offerings
- Restricted sales territories
- Risk of damage to brand’s reputation by other franchisees
Indigenous business
Irish-owned, locally based business that are established, owned and managed by Irish residents
Importance of indigenous firms for Ireland
- Firms have a high loyalty to Ireland
- Provide local benefits (e.g. purchase raw materials locally)
- Create entrepreneurial role models for young Irish residents
- Reduce our reliance on FDI (Foreign Direct Investment)
- Increase Ireland’s export levels, if the companies sell abroad (improve our balance of payments)
| Liability | Move from unlimited to limited liability (e.g. sole trader to Ltd/CLS) |
| Continuity | Company ceases to exist on death of owner in sole trader or partnership, but not in Ltd/CLS |
| Expansion | Access to capital (e.g. partnership can have 2–20 investors, but Ltd/CLS can have up to 149 investors) |
| Tax benefits | Ltd/CLS pays 12.5% tax on profits, whereas sole traders pay the same rates as a PAYE employee (20–40%) |
| Expertise | More owners bring more skills/experience/expertise; changing the structure allows this |