The Business Unit

FACTORS AFFECTING THE LOCATION OF BUSINESS

Transport Facilities: The production unit must be 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 in certain
areas.

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DIFFERENCES BETWEEN PRIVATE AND PUBLIC SECTOR:

Private sector Public sector

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

· Formation: These industries are formed by

These industries are formed by an Act of
agreement or by registration with the Registrar
Parliament.
of Companies.
Finance is provided by the government, by
· Finance: Finance is provided by the owner,
issuing securities or by borrowing from
by issuing shares or debentures, or by
financial institutions.
borrowing from banks.
These industries are controlled by a minister
· Management: These industries are managed
who is helped by a managing committee.
by the owner, or a board of directors or by a
managing committee.

· Objectives: Profit is the main aim of the Service is the main aim of the public sector.
private sector.

· Personal Interest: Profit makes the private

There is no personal interest as there is no
sector to have more personal interest, which
profit motive. Hence there is no efficiency.
results in efficiency.

· Flexibility: Private enterprises are more

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

· Profits: The profits of the private sector are The profits of the public corporations are used
enjoyed by the owners of the business and it is for the general expenses of the government and
the economic development of the country

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used for the expansion of their business. .

The loss of one public corporation is

compensated for by the profits of other public
· Losses: The loss of the private industries are
corporations.
borne or shared by the owners of the business.
Even if a corporation is earning a continuous
loss, the business will not stop. And moreover,
· Uncertainty: The death, insolvency or the corporation will not be affected by the
insanity of the owner or the loss in business members of the corporation.
will bring the business to a temporary end

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.

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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
must be registered.

Personal Interest: With the profit motive, the sole trader has personal interest in his business and
works very hard 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.

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 can 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.

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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 must 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.

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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.

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 so
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.

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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.

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 no 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.

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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.

DIFFERENCES BETWEEN SOLE PROPRIETORSHIP AND PARTNERSHIP

SOLE PROPRIETORSHIP PARTNERSHIP

Meaning: A business, which is owned and A business, where two or more than two joins
controlled by a single person. and agree to share the profits and losses of the
business.

It is formed by agreement among persons to do

Formation: When a person decides to start the
a business and share the profits and losses of
business. It is very easy as there are no
the business.
complex legal formalities.

There are 2-20 partners for ordinary

Members: There is a single owner.
partnerships and there is no limit for
professional partnerships.

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

The partners manage all the affairs of their

Management: The sole trader manages all the business. Sometimes one partner may manage
affairs of his business. He is helped by his the business on behalf of all the partners.
family members.

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

All the partners discuss and make the best

decisions.
Decision Making: The sole trader makes all the
decisions himself. It is quick but sometimes
hasty.
Unless all the partners agree, they can change
their business tactics.

Flexibility: The sole trader’s business is more

flexible. He can change his business tactics at
anytime.
There is agency relationship. One partner can
act on behalf of all the other partners
Agency Relationship: There is no agency
relationship. The sole trader acts for himself.

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”.

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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.

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:

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

· Name of the company.

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· 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:

· 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.

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.

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.

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The Registrar will then issue the 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.

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.

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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, 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.

The preference shareholders are the owners of the company.

When a company closes, 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;

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 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= $ 24,750

Preference share dividend $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%

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 $1.00

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, the debenture holders are paid first.

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

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DIFFERENCES BETWEEN SHARES AND DEBENTURES:

SHARES DEBENTURES

1. Share capital is an investment. 1.Debenture capital is a loan.

2. Shareholders are the owners of the 2.Debenture holders are the creditors of the
company. company.

3. Shareholders earn dividend, which is paid 3.Debenture holders earn fixed rate of interest,
out of profits. whether profits are made or not.

4. Shareholders have voting rights and 4.Debenture holders have no voting rights and
hence have control over the company. hence have no control over the company.

5. Shareholders cannot face a company into 5.Debenture holders can force a company into
liquidation. liquidation on non-payment of interest,

6. Shareholders are not secured against the 6.Debenture holders are secured against the
property of the company. property of the company.

7. When a company closes the shareholders 7.When a company closes the debenture,
are paid after the debenture holders. holders are paid first.

PRIVATE LIMITED COMPANY

Features:

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

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· 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 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 effect 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 can attract more capital.

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

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Disadvantages:

· 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 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.

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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 effect 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 can attract more capital.

· A public limited company can appeal to the public for extra capital.

· 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 must comply with many regulations.

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

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· 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

1. The name should end with the word ‘Pvt ltd 1. The name should end with the word ‘plc’.
co’.
2. Shares can be issued to the public.
2. Shares are issued to private individuals and
family members.
3. Shares are freely transferable.
3. Shares can be transferred only with the
consent of all the shareholders.

4. It is easier and less costly to form. 4. It is more difficult and expensive to form.

5. The company can start its business after the 5. The company can start its business after the
Certificate of Incorporation is issued. Certificate of Trading is issued.

6. A director must be a shareholder. 6. A director need not be a shareholder.

7. It can secure family control. 7. Control is in the hands of shareholders with

the largest shares.

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DIFFERENCES BETWEEN PARTNERSHIP AND LIMITED COMPANIES:

PARTNERSHIP LIMITED COMPANY

· Formation: It is formed by agreement. It is formed by registration with the Registrar

of Companies.

There is no limit to the number of shareholders

· Members: There are 2-20 partners in
in a company.
ordinary partnership business.
Company may raise capital by issuing shares
· Capital: Capital is provided by the
or debentures or by borrowing from banks.
partners themselves or they may borrow from
banks.

· Management: It is managed by the It is managed by the board of directors, elected

partners. by shareholders.

· Profit: Profit is shared by all the partners Profit is distributed to the shareholders as
in an agreed ratio. dividend.

· Liability: Partners have unlimited Shareholders have limited liability. They are
liability. Even their personal assets are liable liable up to the nominal value of shares they
for business debts. hold in the company.

· Uncertainty: The death, insolvency or The death, insolvency or insanity of a

insanity of a partner brings the business to an shareholder does not affect the company.
end.

· Legal Entity: Partners have no separate

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

· Flexibility: The partners can change

It is very difficult to change the business in a

21
their business very easily by agreement. company, as there are many legal complex
formalities.

This is absent in the case of a company.

· Agency Relationship: Partners have
agency relationship. One partner can act on
behalf of all the other partners.
The accounts of a company must be filed and
· Privacy: The partners can keep all the published annually with the Registrar of
business secrets to themselves. They do not Companies. So, there is no privacy.
have to publish their accounts

FRANCHI SES

Form of business organization or method of marketing where a large organization makes

an agreement with many small traders to offer them a franchise in a 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 most 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

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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, 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.

One argument put forward in favor 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
large plants at a moment's notice.

2 The balance of payments

The UK has benefited from having many 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 must be imported.

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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 recognized 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 because 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:

¨ paying taxes to boost the country’s revenue employment

¨ transfer of knowledge, skills and technology

¨ bringing foreign exchange

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¨ 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 factories and leave the country as quickly as they have come.

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