4.
Need of establishing and maintaining different types of business organizations
formally.
Organization
A social unit made up with a group of individuals joining together
having a common goal is known as an organization.
Examples
: School, temple, church, shop
Some common characteristics of a formal
organization are
·
Has a goal
·
Involves individuals
·
Has an organizational structure.
Business organizations are the enterprises
engaged in production, distribution and selling of goods and services with the
objective of earning profits or achieving social well being. Business organizations
can be categorised as private sector businesses and public sector businesses
based on the ownership.
Classification
of businesses based on ownership
Sole proprietorship
Where
the ownership of the business is held by a single individual it is called a
sole proprietorship,
Examples:
Chanuli Super centre ,Dasatha Book shop,
Imalka saloon
The characteristics of a sole proprietorship
1. The
owner provides the capital required on his own,
2. All
managerial decisions are made by the owner
3. The
unlimited liability of the owner
4. Not
a legal entity.
5. Registration
is not compulsory.
6. Enjoy
profits and losses alone.
7. Faces
risks alone
8. No
continuity
9. Accounting
is not compulsory.
10. Not
liable for the taxes in the name of the business.
Some advantages and disadvantages of a sole proprietorship business
|
Advantages
|
Disadvantages
|
|
·
Easy to initiate
·
All the profits belong to the
owner.
·
Ability of independent decision
making.
·
Fewer rules and regulations are
applicable.
·
The ability of keeping the
business information confidentially.
·
Termination of the business is
convenient.
·
Possibility of maintaining direct
relations with the customers
·
Control is convenient.
|
·
The unlimited liability of the
owner.
·
The problems/ difficulties will
increase when needed the additional capital.
·
Possibility of the decisions,
made by the owner himself being unsuccessful.
·
Not a legal entity
·
No continuity
·
Management being inconvenient
with the expansion of the business.
·
Bearing losses alone.
|
If a sole proprietorship business is carried
on in a name other than the full name of the owner, then it’s compulsory to
register the business name in the provincial council’s provincial Business name
registrar under the business name ordinance No 6 of 1918. On the practical note
this registration can be performed at the relevant divisional secretariat
office of the area. If the registration is done, the following procedure should
be followed.
Obtaining an application form for the
registration of business names of a sole
Proprietorship business from the divisional
secretariat office of the area
·
Obtaining report for the registration of
a business name from the relevant Grama Niladari.
·
Submission of the completed registration
form, the report obtained from the Grama Niladari and relevant registration fee
to the divisional secretary.
·
Issue the certificate of registration of
the business name by the divisional secretary after having examined the
relevant documents above.
Partnership
In
the Partnership Ordinance 1890 the partnership is defined as follows :
The
relationship between the individuals who carry out a business with a profit
motive is partnership. According to the above definition the following
characteristics must be there in a partnership,
·
Profit generating objectives.
·
The existence of the business activity
·
Existence of individuals
·
Having a mutual relationship.
Example – Gonewardana & Sons, Don Carolis & Sons
Characteristics of the partnerships
1. There
should be a minimum of two partners and a maximum of twenty partners.
2. There
must be an agreement between the partners
3. Having
an agreement on profit sharing.
4. Every
partner is an agent and a head of himself and other partners.
5. The
existence of any kind of a business affair.
Partnership agreement is the terms and conditions agreed on by
the partners at the beginning of a partnership regarding its initiation and
succession. A partnership agreement can be oral or written or implied. The
written agreement between the partners is known as the partnership deed or the
partnership constitution.
A partnership deed is important for the
following reasons.
1. The
ability to solve any disagreement or conflict which may arise among the
partners.
2. Convenience
in carrying out the partnership activities.
3. A
partnership deed will include the following information.
4. Basic
information about the business. E.g.: Business name, Names and addresses of the
partners, nature of the business, time duration of the business.
5. Details
about the investment of capital
6. Information
on sharing profits and losses.
7. The
objective of the partnership
8. Limitations
on partners’ drawings
9. Information
about interest on capital and drawings.
10. Conditions
on the dissolution of the partnership.
11. Conditions
on the investment of the additional capital
12. The
action to be taken in the event of an admission of a partner, retirement of an
existing partner or the death of a partner.
When there is no written agreement or when there is a dispute
which is not related todisputes stated in the agreement, it is necessary to
follow Section 24 of the Partnership Ordinance 1890 which becomes effective,
The points are included in Section 24 of the
Partnership Ordinance.
1. While
the profits and losses are shared equally among the partners, in the event of the dissolution of the partnership, the
partners have a right to get an equal share of the capital.
2. Any
expenditure incurred by the partner personally on behalf of the partnership, it
has to be reimbursed to the partner.
3. Partners
are entitled for a 5% interest for the money invested in addition to the agreed
capital.
4. No
partner is entitled to an interest on capital
5. Every
partner has the right to participate in the management of the business.
6. No
partner has the right to receive a salary for the services rendered to the
partnership.
7. A
new partner cannot be admitted to the partnership without the consent of the
existing partners.
8. The
regular disagreement which occurs in the partnership can be solved by taking
the decisions made by the majority. Anything which changes the íture of the partnership
can be put into effect only if there is an agreement among all the partners.
9. While
the books of accounts of the partnership should be kept at the head office, a partner
has the right to inspect them at any time and take copies of the accounts,
The
registration process of the partnership is similar to the registration process
of the sole proprietorship.
Several
advantages and limitations of
partnership business are given below :
|
Advantages
|
Limitations
|
|
·
Easy to commence.
·
Can be dissolved easily
·
Possibility of gathering immense
capital
·
Ability to make use of multiple
skills and talents of people.
·
The liabilities will be
distributed among many partners.
·
Through collective liability,
enthusiasm and efficiency will be enhanced.
·
Through collective liability,
enthusiasm and efficiency will be enhanced
|
·
The liability of the partners are
unlimited.
·
The disagreement and disputes
between the partners can adversely affect the business.
·
There is no continuity.
·
All the partners are liable to
the conduct of a single partner.
|
A
sole proprietorship and a partnership can be compared as follows :
|
Criteria
|
Sole proprietorship
|
Partnership
|
|
No of members
|
Single individual
|
Minimum 2 maximum 20
|
|
Capital investment
|
Invest by the owner alone
|
Invested by the partner
|
|
Management
|
Is performed by the owner
|
Performed by the partners
|
|
Liability
|
Solely responsible
|
Collectively responsible
|
|
Profits/losses
|
Enjoys alone
|
Shared collectively
|
|
Decision making
|
Independently
|
Collective decision making
|
|
Dissolution of business
|
There no dissolution termination of
the business can be done as desired
|
Dissolution may be voluntary or as a
result of a court order.
|
Incorporated companies
A
collection of individuals incorporated under the companies act No. 7 of 2007
can be introduced as a company.E.g. –
Aralia company Ltd ,Pratheeba Company (Pvt.) Ltd
Characteristics of incorporated companies.
1. Being
an independent entity incorporated under the Company Act.
2. Becoming
an independent legal entity that is distinct from its shareholders.
3. Continuous
existence or ability to have perpetual succession.
4. The
liability of members / shareholders being limited.
5. Accumulation
of the capital, through share issues.
6. Ability
of transferring shares.
7. The
management being carried out by the board of directors.
Some advantages and limitations of limited
companies are given below:
|
Advantages
|
Limitations
|
|
1.
The possibility of beginning
large scale businesses.
2.
Ability of recruiting a smart
management team to carry out its business affairs.
3.
Ability to attract new investors
because of the limited liability of shareholders.
4.
The death or resignation of a
shareholder does not have any adverse effect on the business.
5.
Ability to assemble qualified and
skillful human resources.
6.
The business having a legality.
7.
Ability to raise a large amount
of capital
|
1.
Legal impacts being strict.
2.
Procedure of establishment being
complicated and expensive.
3.
Since the voting power is based
on the number of shares held by each shareholder
4.
(1 vote for 1 share), minority
shareholders are not being strong enough in influencing management decisions.
5.
Profit is subjected to double
taxation because tax is levied on the profit of the company as well as on
dividends paid to the shareholders.
6.
Even the procedure of dissolution
being complicated.
|
The
incorporation of a company should take place according to the companies act of a
particular country, while in Srilanka the incorporation of a company is
exercised in accordance with company act No.7 of 2007 and registered with
company registrar at the department of company registrar.
The
following procedure should be followed when incorporating a company.
·
Register the name of the company.
When it is confirmed
that the proposed name of the company is not similar or identical as the name
of an existing company, the following documents have to be submitted for the
registration.
·
Application for the registration of the
company.
·
The articles of association
·
The statement containing the consent of
each founder to act as the director
·
The statement containing the consent of
the founder secretary to act in that company
The
most important document to be submitted to the registrar of companies is the
Articles of Association which contains the objectives of company, the rights
and responsibilities of the shareholders, information about the management and
administration etc.
After the Registrar of Companies has satisfied
himself that all documents are in order and that the relevant fees have been
paid, he will issue the Certificate of
Incorporation.
As
per the Companies Act No.7 of 2007, the following types of
companies can be incorporated.
Limited
Companies
A
company where the liability of the shareholders is limited to the amount paid
or agreed to pay, in respect of the
shares purchased, can be introduced as a limited company. There are three types
of limited companies.
Private limited company
Companies that do not have the authority of
issuing shares or other securities to the public and having a minimum of 1 and a maximum
of 50 shareholders are known as private limited companies.
Characteristics
of a private limited company
1. The minimum number of shareholders is one
and the maximum is 50. This maximum does not include the shareholding staff
members of the company.
2. The minimum number of directors is 1.
3. The shares of the company cannot be sold in
public.
4. Without assuring the credit rating of the
company, the profits can be distributed as per the desire of all shareholders.
Some examples of private limited companies
·
Central depository (Private) Ltd
·
Lanka clear (PVT) Ltd
·
Srilanka Electricity (Private) Co.Ltd
Public limited companies
Companies having the authority of issuing
shares and debentures to the public and having a minimum of one share holder
with a maximum of unlimited shareholders can be identified as public limited
companies.
Characteristics of Public limited companies
1. Having a minimum of 1 shareholder and
maximum of unlimited number of shareholders.
2.
The minimum number of directors being two.
3.
The ability of issuing shares or the securities in public.
4.
Insolvency test is required prior to the distribution of dividends to the shareholders.
Listed public companies (Quoted companies)
A company listed in the Colombo Stock Exchange
is known as the ‘Quoted (listed) companies’
E.g.;
DFCC bank PLC, Ceylinco PLC
Unlisted
companies (unquoted companies)
Companies
that are not listed out in the Colombo Stock Exchange are known as unlisted
companies.
E.g.; Ceylon Biscuit company LTD, Maliban
Biscuit Co. LTD
Off shore companies
A company incorporated in a particular country
but carrying on its business activities outside the country are known as
offshore companies. These companies also
should be registered in accordance with the Companies Act of the country where
it is carrying out its activities.
E.g. : For a Sri Lankan company to be able to
carry on its business activities in Singapore it is necessary to be registered
in Singapore as well.
Eg:-
·
Sunrecko Marine Company
·
Asia Pacific Company
Unlimited
companies
The
liability of shareholders is unlimited companies where according to the
articles of association, the liability of the shareholders not being limited to
the value of the shares that have been issued, are known as unlimited
companies.
Companies
limited by Guarantee
Where
an issue of shares does not take place, but the liability of the members is
limited to a guaranteed amount as stated in the Articles of Association, such
companies are known as companies limited by guarantee.
Examples;
Colombo Stock Exchange (GTE) Ltd.
A company limited by Guarantee has the
following characteristics:
1. An
issue of shares not being practised.
2. The
extent of the contribution of each member in the event of winding up the
company has to be specified in the Articles of Association.
3. Minimum
number of members being two and maximum not being limited.
4. Sharing
profits not being performed in such a company,
5. Establishment
of focusing on the public purposes.
Overseas company
A company that has been established in Sri
Lanka but has been incorporated outside Srilanka is known as a foreign company.
A foreign company that has been established in
Sri Lanka must, submit details about itself within a period of a month to the
Registrar of Companies in Sri Lanka. The Registrar of companies will inspect
the documents submitted and if satisfied, during the course of one month its
name will be added to the list of foreign companies as a registered foreign
company.
Example : Hongkong and Shanghai Banking
Corporation (HSBC)
The
following criteria are followed when different types of companies are compared.
·
No. of members
·
Liabilities
·
The raising of capital
·
Administration and management
Based on the criteria , a private limited
company and a public limited company can be compared as follows :
|
Criteria
|
Private limited companies
|
Public limited companies
|
|
No of members
|
Minimum 1 maximum 50
|
Minimum1 maximum unlimited
|
|
Liabilities
|
Limited to the value of shares
purchased
|
Limited to the value of shares
purchased
|
|
The rising of capital
|
Shares/ securities cannot be issued to
general public
|
Shares / securities can be issued to
general public
|
|
Administration and management
|
Carried out by board of directors
minimum 1 director
|
Carried out by a board of directors.
Minimum 2 directors
|
Co-operative business sector
The
international co-operative alliance has defined the co-operative sector
business as follows :
“A co-operative is an autonomous association
of people united voluntarily in their common economic, social and cultural
needs and aspirations through a jointly owned and democratically controlled
enterprise.”
Examples : Maharagama Multi-purpose
Co-operative society Ltd
Cloth- weavers’ co-operative society Ltd
Fisheries co-operative society Ltd
Characteristics
of a co-operative business
1. An
independent business organisation
2. Consist
of a group of individuals who have got together voluntarily.
3. Collective
ownership of its members.
4. Having
common needs and expectations.
5. Democratically
controlled business.
6. Value
of a share is unchanged (Value of a share is Rs.100)
7. Having
one vote for each member (one man one vote)
8. Any
surplus that is earned will be distributed to the members according to the value
of the transaction each member has performed with the co-operative society.
9. Profit
making is not the initial objective.
The 1995 General Assembly of the International
Co-operative Alliance held in Manchester
has stated its co-operative policies as follows:
·
Voluntary and open membership
·
Democratic control of members
·
Member economic participation
·
Autonomy and independence
·
Co-operative education, training and
provision of information.
·
Co-operation among co-operatives
regionally, Nationally and internationally
·
Concern for the community.
Some
benefits and limitations of a co-operative societies
|
Benefits
|
Limitations
|
|
·
10 persons can get together to
initiate a co-operative society conveniently at a low investment.
·
The existence of democratic
control
·
The provision of goods and
service at a reasonable price.
·
The ability to engage in
different types of business activities in different fields.
·
Engaging in activities with
mutual co-operation
·
Any surplus gained by the society
is distributed among the members. (contributor reimbursement)
|
·
Limited means of fund raising
·
Restricted to the co-operative
policies.
·
Co-operative outlets are opened
for only a limited time in a day.
·
Public sector interference
·
Credit sales don’t take place.
·
Most probably the board of
management will be inefficient, since they are elected by voting.
|
The
procedure to be followed when registering a co-operative society
This is registered under the co-operative
development commissioner of the co-operative development department in
accordance with the co-operatives societies act No 05 of 1972 under the
co-operative development commissioner of the relevant provincial council.
In order to get a co-operative society
registered, any 10 people who are above 18 may apply to the co-operative development
commissioner together with the followings.
·
Application form
·
2 copies of the interim constitution
·
Feasibility report of the proposed
economic activity
·
The minutes of the general meeting at
which the resolution for the registering of the co-operative society was
approved.
·
A certificate ascertaining that all
those who have signed the application form, have paid their membership fee and
that this fees is under the custody of the working committee.
·
A route map giving directions to the
address of the society.
When the co-operative development commissioner
has inspected and confirmed that the documentation supporting the application
for the registration is in order in accordance with the co-operative act, he
will issue a certificate of registration.
Some trends in the co-operative businesses
1. The
commencement of modified self-service outlets. Example : Co-op city, co-op super
2. Approaching
new business fields
3. Examples:
Co-operative insurance, fuel filling stations etc.
4. Usage
of electronic payment system.
5. Opening
of mobile shopping centers.
Some
proposals for the development of co-operative businesses
·
Extending the business hours.
·
Directing attention to the possibility
of selling on credit terms.
·
Selecting experienced effective and
skilful persons to the management board.
·
Usage of various promotional strategies
·
Expansion of self service outlets.
·
Arranging showrooms for consumer
attraction
·
Increasing the benefits of the members
·
Launching a member promotion propaganda
·
Application of modern technology in
provision of consumer service.
Franchises
The
types of business organizations which is conducted by a particular business
firm involved in provision with a certain goods or service and in order to
assign the authority of selling that good or the service to another business organization
in a specific trade zone are knows as franchises.
Two
main parties are involved in a franchise business.
Franchisor
– This is the franchising company that permits the franchisee company to market the products under its brand name.
Franchisee
– This is the organization that receives permission from the franchisor company.
|
Franchisor
|
Franchisee
|
|
Mc Donald
|
Abans restaurants (pvt) Ltd
|
|
KFC
|
Cargills Ceylon Limited
|
|
Pizza Hut
|
Gamma Pizza Craft Lanka (Pvt)Ltd
|
The
agreement between the franchisor and the franchisee at the commencement of the franchise business is called the “Franchise
Agreement”
Under
this agreement while the franchisee receives permission to use the franchisor’s
trade name, logo and brand, the
agreement includes the rules and regulations of the franchisor, the services provided by the franchisor and
the financial conditions, the initial payment the franchisee should make and details of the
monthly royalty payments.
As per the agreement the franchisor
provides the following support services to the franchisee.
·
Granting permission to use the trade
name.
·
Provide management training
·
Provide marketing assistance
·
Provide financial assistance.
·
Helping in the completion of the layout
of the business.
·
Supplying the products or goods and
equipment.
·
Provide the required technical knowledge.
According
to the agreement the franchisee should fulfil the following.
1. Agree
to act in accordance with the conditions of the franchisor
2. Making
capital investment
3. To
make purchase of goods only from the franchisor or his authorized suppliers.
4. To
make the payments as agreed with the franchisor.
Franchised
businesses can be categorized as follows:
·
Product franchise
·
Manufacturing franchises.
·
Business format franchises.
Product
Franchises
Franchises
such that the franchisee receives authorization to purchase goods from the
franchisor with the brand name and to resale them are known as product
franchises
Examples
: Outlets selling petroleum products ( IOC Fuel stations)
Manufacturing
Franchises
There
are franchises where the franchisee receives the authority of manufacturing and
distributing the products under the franchisor’s brand name.
Examples
: An organisation that bottles and distributes soft drinks like Coca cola,
Pepsi cola etc.
Business
Format Franchises
This
is where the franchisee receives permission to carry on the business following
the franchisor’s procedure and with his brand name. Examples : Outlets similar
to McDonalds, KFC, Pizza Hut where meals are manufactured and supplied.
Some
benefits of the franchise business method
|
To the franchisor
|
To
the franchisee
|
|
Ø Ability
to expand his business without further investment
Ø Ability
to share the costs of advertising with the franchisee
Ø Ability
to obtain returns from the investment of the franchisee
Ø Ability
to obtain spontaneous returns with the franchisee’s efficiency
Ø Being
nourished by the franchisee.
|
Ø Ability
to acquire a large market niche from the goodwill of the franchisor
Ø Declining
the tendency to be unsuccessful
Ø Publicity
being convenient because of a popular trade name
Ø Ability
to get management training from the franchisor
Ø Possibility
of receiving financial support from the franchisor
Ø Ability
of obtaining raw materials at a minimum price.
|
Some limitations of franchise businesses
|
To the franchisor
|
To the franchisee
|
|
Ø The
franchisee’s un-success may affect adversely on profits
Ø Any
unfavorable activities of the franchisee can have an adverse effect on the
goodwill of the franchisor
Ø Retention
of most of the profits earned, by the franchisee himself.
|
Ø Because
the franchisor retains his control, the franchisee does not get perfect
autonomy
Ø Need
of incurring a greater cost to receive a franchise
Ø The
possibility of profitability being an uncertainty
Ø A
certain level of risks is involved because of the dependence on the goodwill
of the franchisor.
Ø The
franchisee facing severe inconvenience because of the need of adherence to
the franchise agreement.
|
Business combinations
It
is a trend in the business field to act as business combinations.
Joining
up of two or more businesses and engaging in business activities can be
introduced as ‘Business Combinations’.
Business
combinations can happen in two ways
·
Mergers (Amalgamation)
·
Acquisitions
Mergers
In a merger two or more companies are converted into a single
business entity.
This
may be practiced as one company purchasing the assets and liabilities of
another company or where the companies will terminate all their business
activities and then join up to form a new company.
Acquisitions
In an acquisition, one
company purchases a majority of the ordinary share capital of the other
company. The company purchasing the shares gains the power of control.
Business combinations through amalgamation or
acquisition can take place in three ways.
Horizontal combinations
Vertical
combinations
Conglomerate combinations
Horizontal
combinations
The
combination of two or more businesses engaged in similar business activities is
known as a horizontal combination.
Examples
:
·
The combination of two footwear
manufacturing companies
·
MBSL Savings Bank Ltd, Merchant Bank of
Sri Lanka PLC and MBSL
·
Financial Services Ltd combined on
2015.01.01 to form the Merchant Bank of Sri Lanka and Finance PLC.
·
Microsoft-a software development
organization purchasing the Computer software unit of Nokia.
·
Opening Fair First Insurance company Ltd
on 28th February 2017 amalgamating with the Union Assurance General company Ltd
and Asian Alliance General company Ltd.
·
DFCC bank and DFCC development bank
combined to form DFCC bank PLC.
Vertical
combinations
Joining
together with business units at different stages in the production/marketing
process in the same industry is known as
vertical combinations.
Examples :
·
A shoe manufacturing company combining
with a leather manufacturing company and a shoe marketing company.
Conglomerate
combination
Joining
together with businesses that are not in the same industry is known as a
Conglomerate combination.
Example :
·
A shoe manufacturing company combination
with a biscuit manufacturing company.
The
methods of business combinations can be depicted in the following manner.
(2)
Horizontal combination
(3)
Conglomerate combination
Public
sector
All
the business entities carried out and controlled by the state or a local
authority are known as state sector or public sector enterprises.
1. Businesses
are carried out by the public sector for the benefit of the general public.
2. The
state sector involves in business activities for the following reasons:
3. To
control the pricing levels in the market that make it impossible for the
private sector to gain unreasonable profits.
4. To
prevent the emergence of monopolistic firms.
5. To
engage in business fields that are required for national defence.
6. To
provide the essential goods and services to the general public at reasonable
prices.
7. To
minimize the wastage of natural resources through proper governmental planning
and control of business.
8. To
maintain non-profit making large scale projects that the private sector does
not wish to engage in.
Different
categories of state sector business organizations are:
·
State corporations / statutory boards
·
Government departments
·
State companies
·
Businesses under the Provincial Councils
and local authorities.
The
following characteristics are obvious in a State Corporation,
·
Being established under a special or
General Act
·
Having a legality
·
Full ownership or major ownership being
with the government possession
·
Being controlled by a Board of Directors
appointed by the government.
·
Capital being generated through
government loans, reinvestment of dividends and contribution of the general
public to debt capital.
·
Having the main objectives of providing
with an efficient service to the public at a minimum price.
Examples
Sri Lanka Transport Board
Mahaweli Authority of Srilanka
Sri Lanka Rupavahini Corporation
Sri Lanka Petroleum Corporation
State corporations are
nominated by various names such as Board, Authority, Institution, Council,
Bureau etc.
The following characteristics can be observed
in a Government department.
·
Being subject to direct government control
through a ministry.
·
All activities are subject to the
establishment code, financial regulations and government policies.
·
Most probably they are organisations
involved in the provision of services.
·
Even though a department does not have a
legality it is necessary to present itself to the law in the official name of
the head of the department.
·
Allocation of necessary funds through
the annual budget of the government.
Examples:
Education Department,
Agriculture Department,
Health Department,
Department of Government railways.
The following characteristics can be observed
in a state company.
·
Being a company incorporated under the
Companies Act as a public limited company.
·
Excess 51% of the total capital belongs
to the state organisations.
Examples:
Srilanka Insurance Company Ltd
Lanka Phosphate Company Ltd
Srilanka Telecom
Litro Gas Ltd
State Trading Company
Companies under the control of a local
authority should have the following characteristics.
·
Maintained under the provincial council,
urban councils and Pradeseya sabha.
·
Ownership being with the respective
local government authority
·
Necessary funds being allocated through
the respective local authority or the central government
·
Being administrated by the local
government authority
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