In the previous topic we looked at the types/structure of business organisations. We also looked at advantages of each type of business organisations. What we need to understand here is that a business organisation may not stay as the same type of organisation forever. It can change its structure to get the advantages that could be available by changing. The following are possible changes to structure of a business organisation:
There are various limitations of a sole proprietorship. Therefore, a sole proprietor may choose to join up with another sole proprietor to form a partnership which has many advantages, for example:
– A partnership can raise a bigger capital compared to a sole trader. Therefore expansion is possible.
– It is possible to have more skill in the business through pooling of ideas and expertise.
– Partnerships can get loans easily compared to sole traders, even though it may not be as good as a limited company.
– There is a greater possibility of division of labour, larger scale business and therefore economies of scale.
– Risk is greatly reduced since any loss will be shared by the partners.
– Business secrecy can still be kept since partnerships do not need to disclose financial reports.
A sole proprietor may even decide to form a private limited company to gain certain advantages like:
– Share holders have limited liability. While sole traders and partnerships are at disadvantage because of unlimited liability, private and public limited companies are at an advantage due to their liability being limited.
– Share holders have no management worries. The owners and the management of the company is usually different. Share holders can elect a board of Management at the Annual General Meeting. Each share has one voting power.
– One of the reasons why companies are preferred is because they are separate legal entities. The owners have no worries over the debts and if there is any problem, it is the company which is taken to the court, not the owners.
– Bank are more willing to give loans to private limited companies compared to partnerships and sole traders
However, there are consequences of becoming a limited company:
– The companies have to disclose their business information:The companies are required to submit annual reports to the Ministry of Economic Development and all the details of profits and losses need to be disclosed to all the stake holders as well. Therefore business secrecy is lost.
– AGM: The Annual General Meeting is held with shareholders for the purpose of electing board of directors. This sometimes is a big expense.
– Private limited companies have advantages over sole traders in terms of size and capital. However it is still not as good as a public limited company. Private limited companies cannot sell shares on the stock exchange.
Partnerships are bigger then sole traders. A partnership choosing to become a limited company will have the same advantages and disadvantages mentioned above. A partnership may even have to be dissolved altogether and the partners sometimes start their own sole trader businesses.
Private Limited Companies
We know that sole traders and partnerships sometimes opt to become private limited companies. Even though becoming a private limited company gives many advantages, the company may still need a larger capital and may need to grow further in which case they can opt to become a public limited company.
The main difference between private and public limited companies are that public limited companies can sell shares to the general public, while private limited companies cannot. Therefore public limited companies are larger in size.
Shares are offered for sale on the Stock Exchange. Any member of the general public can buy and sell shares.
The main advantage of being able to sell their shares to public is that the company will be able to raise a bigger capital needed for expansion.
There are also consequences of this. The original owners of the company may lose the control of the management positions. This is because there may be thousands of share holders each having voting rights and they can vote and elect new board of directors and thus the original owners could lose their positions.
Some public limited companies have become so large that they become difficult to manage too. The more people there are in a business, the more people that are needed to be consulted with when making a decision.
Public Limited Companies
A government can nationalize a public limited company if that company is a sole supplier of vital goods that are best provided by the government, especially if the company is unable to manage itself. There could be various arguments for and against nationalization.
Advantages of nationalization
1 · They benefit from economies of scale (Bigger is better) which means that the prices to consumers is relatively lower than if we had a number of small firms.
2 · A monopoly owned, run and controlled by the government will stop the consumers being exploited.
3 · The government can manage the economy by controlling the important industries.
4 · The government can invest money and make their service more efficient.
5 · Companies owned and run by the people for the people take social costs (pollution etc.) into account and the profit goes back to the people.
The disadvantages of nationalization
1. Low performance
When the ownership is in public sector, the employs do not work for profit and do not there performance and efficiency of the employs remains poor.
2. Lack of competition:
Competition is necessary for development and increasing the production. Nationalization has decreased the spirit of competition.
The management of nationalize will provide jobs to there favored persons because the political leaders have influence upon the state authorities.
A public corporation may be privatized for a number of reasons. The recent trend is to privatize rather than nationalize.
Privatization occurs when the business sector takes over previously public services, such as roads, health care, prisons and energy. The idea behind privatization holds that the private sector, through competition, can provide better services at a lower price. Many opponents argue that privatization leads to less accountability and deterioration in services.
There are various arguments for and against privatization too:
Advantages of privatization:
1. Competition – if the industries are forced to compete for profit, they will become more competitive, improve their product quality and lower prices.
2. Sales of shares in these industries rise revenue for the government which can be used to lower taxes.
3. The government does not have to worry about running of these industries once they are privatized.
Disadvantages of privatization
1. Many privatized industries still dominate the market they supply and have been able to raise prices and cut services.
2. Private sector organizations may not protect public services.
Most of the shares in privatized organizations have been bought by large financial organizations who are interested only in making profits.
Next topic: Determinants of demand for factors of production