HIGHER BUSINESS MANAGEMENT

1. HIGHER BUSINESS MANAGEMENT UNDERSTANDING BUSINESS UNIT Types of Business Organisation

2. SECTORS OF THE ECONOMY As well as operating in a particular sector of industry, businesses and organisations also operate within a particular sector of the economy: the private, public and third sector. The public sector of the economy is owned and controlled by the government and local councils. It provides services such as schools, hospitals, the armed forces and social services. They are funded by taxes. They are usually referred to as organisations or public bodies rather than businesses. The private sector of the economy is owned and controlled by private individuals and is made up of types of businesses such as sole traders, partnerships, limited companies and franchises. These types of businesses are funded by private individuals and shareholders. The third sector is made up of charities and other community organisations that aim to raise money for good causes and to help people in need. It also includes social enterprises and co-operatives. They are not ‘owned’ by anyone: they raise money from donations, fundraising activities and grants from the lottery.

3. TYPES OF BUSINESS ORGANISATIONS PRIVATE SECTOR ORGANISATIONS These organisations are owned and controlled by private individuals and investors. The following are the main types of business organisations: Sole Trader Partnerships Limited Companies Franchises SOLE TRADER A sole trader is a person who starts to work for themselves. There are no legal procedures required to start the business. Sole traders only have one owner who invested and organised all of the start-up capital for the organisation. The business owner has the authority (power) to make all decisions themselves.

4. ADVANTAGES AND DISADVANTAGES OF BEING A SOLE TRADER ADVANTAGES Quick decisions can be made in the business because they are all made by the single owner without interference. This can allow the business to respond to situations that might need dealt with quickly e.g. chance to invest in an idea. There are few laws or rules that have to be followed when setting up as a sole trader. This means sole trader businesses are easier for people with little business experience to set up and operate. All of the profits from the business can be kept by the single owner. This means that a successful sole trader can make the owner lots of money quickly. Money taken out of the business by the owner is known as drawings. Sole traders do not have to share information about their business with anyone (except the Government for paying taxes). This means they can keep their information about performance and profits private.

5. DISADVANTAGES It is difficult to raise finance to start the business – the individual may have to rely on their own savings or loans from friends/family. Banks may be reluctant to lend if there is no ‘track record’ of business performance. A sole trader has unlimited liability. All losses in the business will have to be accepted by the owner alone – this means that if the business is not successful the owner could not only lose the business but also his/her home, car and possessions to pay off the business debts. As if this was not enough, they could be made bankrupt by the courts. This could mean they end up with far less money than they once had. There may be no one else to share the decision-making and work of the business and so this can be stressful for the owner, working long hours with few holidays and problems may arise if they fall ill (even for a short time). The skills of the owner might limit what the business is able to do. It can be difficult to obtain economies of scale – which is one of the benefits of being a big business e.g. Discounts for bulk-buying.

6. PARTNERSHIPS Partnerships are usually small to medium-sized businesses. A partnership usually has between 2-20 owners who have each invested some of the start-up capital for the organisation. Each of these owners is called a “partner”. They should draw up a partnership agreement , which is a legal document setting out the terms of their partnership. A Partnership Agreement sets out: • How much money each person puts into the business. • How much money each person can take out of the business. • How much salary each person will get. • How the profits (losses) will be split. • What each person’s responsibilities are.

7. ADVANTAGES AND DISADVANTAGES OF FORMING A PARTNERSHIP • ADVANTAGES • Partners can bring different areas of expertise into the business. • Workload, responsibility and decision making can be shared among the partners – it isn’t down to one person. • Finance can be raised more easily compared to a sole trader. • Partners are in a stronger position than a sole trader to raise finance from lenders. • Customers and suppliers might see a partnership as being less of a risk to deal with compared to a sole trader. • If one partner is off ill or on holiday there will be someone else to cover for them. DISADVANTAGES • Partners have unlimited liability. • Profits have to be shared between partners. • Arguments between partners might happen and could slow down decision making. • If one partner dies or leaves, a new Partnership Agreement needs to be set up.

8. PUBLIC LIMITED COMPANY (PLC) There is no limit to the number of shareholders. All members of the company have limited liability – they are only liable for the debts of the company to the extent of the capital they have invested. A Board of Directors run the company on behalf of the shareholders but they employ a hierarchy of Managers specialising in the different areas of the business. Shareholders have no say in the day-to-day running of the company. The Board of Directors are accountable to the shareholders and can be voted out at the AGM if the company’s performance is not as they expected.

9. ADVANTAGES AND DISADVANTAGES OF BECOMING A PUBLIC LIMITED COMPANY • ADVANTAGES • Huge amounts of finance can be raised. • PLCs often dominate their markets. • It is relatively easy to borrow money from lenders due to their large size. • DISADVANTAGES • Set-up costs may be high e.g. they may have to produce top quality, detailed prospectus. • They must abide by the Companies Act. • No control over who buys shares. • Must publish annual accounts.

10. PRIVATE LIMITED COMPANIES (Ltd) • This is a business organisation which is owned by shareholders. They can have between 2 and 50 shareholders. Shares can only be sold privately and new investors (shareholders) are invited to join the company. Normally shareholders would receive a return on the money they have invested in the business called a dividend. Even though shareholders own it, the responsibility for running the business is delegated to a Board of Directors who have the job of managing the company. • ADVANTAGES AND DISADVANTAGES OF BECOMING A PRIVATE LIMITED COMPANY • ADVANTAGES • Shareholders have limited liability, so they can only lose the money they have invested in the business and not their personal possessions. • Control of the company is not lost to outsiders. • Finance can be raised by selling more shares to existing shareholders or inviting new people to buy. • Significant experience and expertise can be gained through having a number of shareholders and directors.

11. DISADVANTAGES • Profits have to be split amongst the shareholders. • It can be difficult for a shareholder to sell their shares if they want to. • There is, as with a Partnership, a legal process in setting up the company. • Shares cannot be sold to the public. Therefore raising finance is more difficult than for a public limited company. • Each year, financial accounts showing the financial position of the company have to be published. • The cost of setting up a Ltd company can be high.

12. FRANCHISING • A franchise is a business agreement that allows one business (the franchisee) • to use another business’s name and sell the other business’s products or services e.g. The Body Shop, MacDonalds. • The franchisee pays the franchiser (the business whose name is used) a percentage of the annual turnover or a set royalty each year to use its name and sell its products/services. • ADVANTAGES TO THE FRANCHISER • It allows them to increase their market share without having to invest heavily in the business. • It provides a reliable source of revenue. • Risks and uncertainty are shared between the franchiser and the franchisee. • DISADVANTAGES TO THE FRANCHISER • The franchiser only receives a share of the profits. • Profits are dependent on the ability of the franchisees. • The reputation of the whole franchise is dependent on individual franchisees.

13. ADVANTAGES TO THE FRANCHISEE • The franchiser may advertise nationally, therefore littler advertising needs to be done by the franchisee. • The risk of business failure is reduced as the business already has an established trading record and presence in the market. • DISADVANTAGES TO THE FRANCHISEE • Products, selling prices and store layout may be dictated, stifling franchisee initiative. • A royalty payment or percentage of revenue raised has to be paid to the franchiser. • It can be costly to purchase a successful franchise.

14. PUBLIC SECTOR ORGANISATIONS Public sector organisations are owned by the government on behalf of the taxpayer and aim to provide a service to the general public. They are funded by taxes that individuals and businesses have to pay. Different types of taxes exist including income tax, road tax and council tax. Westminster and the Scottish Parliament provide important national services. Services are provided by government departments such as the Treasury, Defence, Trade and Industry, Health and Transport. The UK Parliament has overall responsibility for what happens in the UK. It is made up of Members of Parliament (MPs), who are elected by the public. The Scottish Government has delegated responsibility for issues such as education, health and transport. It is run by Member of the Scottish Parliament (MSPs), who are also elected by the public.

15. Local government organisations (or local authorities) get funding from the Scottish government to deliver specific services in a specific area of Scotland. These include running schools, providing leisure facilities and emptying our bins. Local councils are set up by central government and are run on its behalf by locally elected councillors. The day-to-day running of services is organised by managers and employees of the council. A local council aims to meet local needs. It provides services that might be unprofitable if provided by private firms e.g. Library services. Public corporations are companies that are owned by central government. A government minister appoints a chairperson and board of directors to run the company on the government’s behalf. Public corporations include the BBC and Royal Mail Group.

16. THIRD SECTOR • These organisations are ‘not-for-profit’ and very often their reason for existing is to • help a charitable cause in some way. Any proceeds they do make is ploughed back • into the charity. Thus profitability is not their main aim but raising funds is a way • of achieving their objective of helping certain causes or groups of people. • The government regulates the activities of charities and keeps a Register of • Charities. Once they are recognised as a charity they are given ‘charitable status’ • which means they do not have to pay some taxes such as VAT. • Charities are often set up as trusts with no individual owner, where the overall • control and management is dealt with by a Board of Trustees. Trustees are unpaid • for their work in the charity. Volunteers often conduct much of the day-to-day • fundraising. Examples of charities include Oxfam, RSPCA, Cancer Research UK. • To be recognised as a charity they have to have one or more of the following • objectives: • To relieve poverty • To advance education • To advance religion • To carry out activities beneficial to the community

17. Social Enterprises have a main social or environmental aim rather than to make a profit for owners or shareholders but they are run in a business-like way. People know what social enterprises try to do and who they are trying to help. At least half of the profit that social enterprises make, through selling goods/services must be invested into meeting the stated aim of the social enterprise. Unlike some charities, they don’t rely on grants and donations but some social enterprises do become charities. The main difference between a social enterprise and a charity is its legal structure and the fact that social enterprises are less regulated by the government. Examples include Ness Soap (based in Inverness) or the Wise Group (based in Glasgow).Voluntary organisations are run and staffed by volunteers. Examples include the Scouts, youth clubs and some sports clubs. They bring together people with similar interests. They are run by a committee of elected volunteers.These organisations can raise finance by applying for grants from the Lottery, Sports Council or local authorities. They may also charge a fee to become a member of their organisation or to use their facilities.

18. BUSINESS ETHICS AND SOCIAL/CORPORATE RESPONSIBILITY Business ethics can be described as a set of values and principles that influence how organisations behave. Company ethics help with decisions such as should a product which could be harmful to consumers be withdrawn from the market? Social responsibility is where companies act in a way that takes into account the obligations they have to society as a whole e.g. the employment of older people in the DIY chain B&Q. The revival of interest in social responsibilities has occurred for a number of reasons e.g. growing environmental awareness, corruption and fraud in the business sector, stakeholder empowerment and the development of equal opportunities. Corporate responsibility is the idea that a company has obligations to all those connected to it and should attempt to address the needs of all its different stakeholders – both internal and external. Ethics, social responsibility and corporate responsibility are closely related. The ethics of a company are likely to influence the extent to which it behaves in a socially responsible way and how far it demonstrates corporate responsibility.

19. BENEFITS TO A BUSINESS OF SOCIALLY RESPONSIBLE BEHAVIOUR Businesses which adopt socially responsible policies often make use of them in their advertising and promotion. e.g. Anita Roddick of the Body Shop has over the years gathered a lot of favourable publicity for its ethical stance on the production and testing of cosmetics. DISADVANTAGES TO A BUSINESS OF SOCIALLY RESPONSIBLE BEHAVIOUR A decrease in profit may occur is a company has to turn down a business opportunity which could be financially lucrative. Costs to the business could increase e.g. buying raw materials from a country with a bad human rights record might be cheaper than buying from elsewhere. Business practices such as policies on recruitment and career advancement would have to be reviewed to ensure they complied with equal opportunities, environmental policies and consumer protection. There is a danger that businesses could be thought to be trying to take over the role of government.