Types of Organizations

Unit 1.2
Resources: Paul Hoang 5th edition & Attached Resources

I- Distinction between the private sector and public sector (Paul Hoang, p 21)

Private sector :
- Controlled by private individuals/ groups of individuals.
- Example :
- Tesla’s shares are owned by Elon Musk. This means it's a private sector.
- IKNS
- Charities
- Main objective of businesses is commonly to gain profit. Although there are a lot of
sectors thats main objective is not to gain profit. They make a profit and cloud it back
into the business to achieve the purpose of the business, to provide products/services

Public sector :
- Organizations belonging to the public sector means the government owns these sectors
- Public sector provide public services for people who can not afford private services
- Provide essential services the communities need

- Purpose/reasons/advantages for the public sector

1. To ensure basic services are being provided
2. To protect business and institutions such as the courts, police, and army in order
to protect its citizens
3. Government interferes in the market so that they can stabilize the market to avoid
the destruction of the economy/bankruptcy/declination of the economy : to
stabilize the economy
4. To control vital industries. Such as the central bank, it should not be in the hand
of people but should be in the hands of the government to protect the citizens
5. Protection of national security : no vital industries should be in the hands of the
private sector
6. Control of natural monopolies : Monopoly is a business in the market with no
competitors. A natural monopoly is a natural resource business that should be a
monopoly in order to survive. Difficult for businesses/industries to survive if there
are too many competitors.
a. Big businesses have economies of scale : the cost per unit of that
business goes down.
b. If small businesses provide tap water then the price will go up and we
would have to pay high prices. If there is one big business that provides
water then the prices go down. This is why you would want it to be in
control of the public sector.
 c. Prevent duplication of resources
7. To help the survival of unprofitable industries :
a. Examples :
i. Ship building
ii. Coal mining
iii. Gulf Air
iv. Oil and Gas
b. This is because they are unprofitable business but essential services so
the government provides them
8. To help redistribute the income and share it across the public. All the wealth of
the country should not be in the hands of individuals. They take this money and
reinvest it into the economy of the country

- Disadvantages of the public sector

1. Quality of services isn't as good as the private sector. The object of the public
sector is to provide for the citizens. Quality improvement if you have competition.
Public sectors are the only ones in the market.
2. Government does not know how to manage its resources like the private sector.
3. Resources are not like the private sector. Instead of conducting its own
businesses and creating its own products, the businesses create partnerships
with companies and create things like the highway, roads, buildings etc…
4. Disadvantages of the tax received, they are meant to build things to help the
country improve and allow the economy to grow, but if a building is built wrong
then the the government loses the money and behind to struggle
5. A lot of bureaucracy and red tape
a. Red tape : It takes them a lot of time to make a decision. A lot of
paperwork and tasks to be done. The government takes a long time to
return paperwork because they need to get approval from their
supervisor.
b. Bureaucracy : A system of the government that structures complex rules
and procedures in order to make a decision. Similar to red tape

- Objectives of public sector and private sector

Public sector Private sector

Provide necessity services Maximize the profit

Break even whenever possible - no profit and Sales maximization

no loss. Even if they make losses, they don't
stop
 Stabilize the economy Increase their market share

Redistribute the income - try to balance out Social and ethical objectives - things like
the private sector reducing pollution

- What are merit goods?

Try to increase the use of merit goods and reduce the use of de merit goods - if they are left on
their own, they are being underused, even if they are beneficial to the society. It's the better
option but is not the option they would choose, the government forces them usually. Such as
public schools, they are made in order for people to get an education

- What are de-merit goods?

Harmful to individuals and society. Such as cigarettes, alcohol, unhealthy food, gambling, etc…
The taxes that they put onto the product in order for the government to prevent people from
buying it is called sintax.

II- Reasons for public sector activities (Paul Hoang, p 22 and Attached note )

III- Problems associated with the public sector business activities (Attached notes)
IV- Profit based organizations (Paul Hoang pages 23 -30)

Profit based organizations are segregated into :

1- Sole trader
- Sole proprietorship is the businesses that are owned by one person.
Opening a small restaurant, opening a 3abaya shop, and a retail outlet (barada).
- They do not need a large amount of capital.
- It is an unincorporated business meaning that the business’s owner and the
business are one. You sue the business, you are suing the owner.
- The owner is personally liable to all the debts of the business, bankruptcy means
the owner has to deal with it
- Unlimited liability

Advantages and disadvantages of a sole trader

Advantage Disadvantage

Few legal requirements or formalities - easy Unlimited liability ‫يصكون عليك‬

to start up a small business, Start up costs Owner and the business are not separate
are very low, from each other. Loss is not limited in the
amount invested. Owner is personally liable
to all the amounts in the business.

Profit taking - the owner is the only one who Limited source of finance - money comes
receives the profit. from one person. To make the business grow
you need to think of partnership, and
cooperation. The company or owner doesn't
have enough collateral (item of value to
secure a loan) to secure a loan (if the owner
defaults on loan, they can seize the
collateral).

The owner is his/her own boss High risk - Face severe competition from
established businesses, economy of scale
(bigger business can provide for cheaper).
Small businesses have a high economy of
scale. They also likely fail due to the fact that
they are not serious.

Personalized services - small business, small Large amount of stress - they do all their own
number of customers, this makes it easier to work, too much workload and stress. Not
be in contact with customers : provide a enough money/capital. They need to do all
personal service to the customers. While their work by themselves.
services in big businesses are generic.

Privacy - All financial statements do not need Limited economy of scale - cost per unit is
to be provided to the general public, you can high
keep your own reports. But the government
still has access to it. Cash load is not
available to the general public.

Quick decision making - No delay in decision Lack of continuity - if the owner dies, the
making because owner is in control business will not continue. This doesn't mean
it will not continue, but the family needs to go
through legal procedure to continue the
business (in their name) - legally
discontinued.

2- Partnership

- Partnership definition : when two or more people (up to 20 people) join together to
start up a business. When more people join the business it becomes a
corporation/company.
- Ordinary partnership
- Unincorporated business : Business can not be a separate entity by itself. The
business and the owners are one. If you sue the business you sue the owners. To sign a
contract all the owners must sign the contract.
- All partnerships are considered to have Unlimited liability : If the business goes bankrupt
all owners are personally liable to all the debts of the business. Unless it's a limited
partnership.
- Limited partnership : Some of the partners might have limited liability. Meaning they
are only responsible for the amount they invested. They have less say in the business.
They are called sleeping partners. They don't have much of a say in the business. They
don't share in the decision making, but they are there for the profit. They put their money
in and gain money.
- But in a partnership, at least one partner must have unlimited partnership. Those who
have unlimited liability gain more profit
- To avoid problems that may occur in a partnership they go through an optional binding
agreement (DEED OF PARTNERSHIP) . This is where they figure out how they will deal
with each other in a partnership. So if any problems may occur in a partnership they
refer back to the optional binding agreement.
- Whatever conflicts they feel may occur in the future they write it from before.
- Roles and responsibilities of each partner
 - How to determinate a partnership
- Procedures of adding a new partner
- Procedures of withdrawing as a partner
- How much profit is allocated to each partner, considering if you have
limited liability or a unlimited liability

Advantages and Disadvantages of a partnership

Advantages Disadvantages

Financial strength - money comes from Unlimited liability - at least one person
several investors. should have it

Share expertees - each person is in Lack of continuity - if one owner dies, the
control of a different sector business does not discontinue, although
the remaining partners should register the
business again.

Partners do not have to publicize their Conflicts - although they are solved
financial records, but they could be through the deed.
scrutinized by the government. The Lack of harmony
partners know each other, but you don't
have to reveal it to the general public.

Cost effective - producing without a lot of Prolong decision making

money. Because of the deficiency of
labor.

Any decision made by one of the

partners, is legally binding to all the
partners. Wrong decisions made by one
partner, all partners deal with the
consequences.
 3. Limited companies
- Company/cooperation - COMPANIES ARE CORPORATIONS IN IB!
- Limited companies are Incorporated businesses : (Incorporated businesses are
businesses that have limited liabilities). Legal entities. Separate from its owners, it can
sue and be sued on its own, owners have limited liability. Meaning that if the business
goes bankrupt the owners will not be affected.
- Owners can be upto thousands. This is why there is limited liability so when you sue
the business you can't sue the thousands of people.
- Source of finance : (applies for all types of companies)
- 1 : By selling shares : stocks. They sell the stock and receive the money. The
share is a percentage of the company in which you own. A share is a certificate
called a stock that is worth, for example, 5BD. You then pay 5BD for that stock so
that the business can use the money to get the resource. A stock is a certificate
that shows your ownership right in the company. When you own a stock you
receive a part of the profit of the company (a share of the profit) : this is called
dividends. If the company grows, the value of the stock increases : this is called
capital growth. Stocks are transferable, meaning you can sell it from one person
to another for a higher price. Stocks pay dividends forever. Stocks can not be
redeemed, and can not be turned back into the company. Stockholders get
dividends.
- 2 : Bond holder : It is a certificate that shows that you are the creditor of the
company, meaning you gave the company a loan, and the company will pay you
back that loan. It is a promise that the company will pay you back the nominal
(actual value on paper) value of the bond when it expires. The bond is
redeemed. The creditor/bond holder gets interest that is paid periodically Bond
holders get interest. They are the first ones to be paid back.

- People who manage the company are called the board of directors (applies for all
types of companies).
- Board of directors are responsible for running the company. They are responsible in front
of the shareholders who elected them. Each stock/share is a vote, the more shares, the
more votes you have.
- AGM : Every year there is a set annual general meeting. This is where the board of
directors and shareholders go into this annual meeting and vote on
resolutions/declarations. You need to get the acceptance of the shareholders. Whenever
the time comes they elect the new board of directors and discuss a lot of issues. They
ask questions to the CEO. A company needs to publish its financial reports to the public,
but first the shareholders approve the financial statements. This drags people to
purchase more stocks, and invest in the business.
- The documents needed for a company to start its operations (you must show to the
government) :
a. Memorandum of association :
 1. This document includes the name of the company, the address of the suggestive office,
its original incorporator, the main line of business, its mission statements, its vision, its
objectives, the amount of capital they are intending to raise.
b. The article of association :
1. The rights of the shareholders, depending on the right of the share they hold. The two
types of shares are :
a. Common/ordinary shares : you have the right to elect the board of
directors and vote. They receive more dividends than the
preferred shareholders. You make decisions which is why they
receive more dividends. They receive what is left when the
business goes bankrupt.
b. Preferred shares : you don't have the right to vote. Receive less
dividends and are at a lower risk. They are the owners and receive
the right amount of money back when the business goes bankrupt.
The procedures of appointing directors
2. The procedures of appointing directors and defining their responsibilities
3. The timing and frequency of the board of directors meeting.
4. They assign auditors that check whether the accounts are authentic or not.

They then provide this document to the authorities, and if the government agrees and approves
these documents, they then give them the certificate of incorporation. It is a certificate that they
can start trading, and if it's a public limited company, they can start trading in the stock
exchange.

1. Bondholders receive the money first then the preferred shareholders receive what they
put into the business, then the common shareholders receive what is left.
2. The common shareholders hold the most amount of risk, then the preferred
shareholders, then the bond holders.

Private limited company Public limited company

The shares are sold to family members and The shares are sold to the public through
friends - only people they know. stock exchange

When a public limited company shares its shares in the stock market for the first time, it is called
flotation. This process is called IPO, initial public offering. Anyone can buy and sell these shares
in the public. Anyone can buy and sell the shares.

In a private limited company all family members must approve. Shares can be sold to other
family members and friends.
Corporations can be things like multinational businesses.
Advantages of corporation Disadvantages of corporation

Raising finance - the more shares you sell the Communication - when a company becomes
more finance you get. You must comply with too big it becomes difficult to communicate.
certain rules and regulations, you can't just go Relations become impersonal.
into the stock market. Public receives more
finance.

They are interested in the stock market - they Compliance cost - not every company can go
can issue more shares and be listed in the stock market. If the
business wants to be listed in the stock
market they must follow the regulations and
meet standards. For example you have to
pay a certain fee to be part of the stock
market.

Limited liability - if the company goes Other costs - You also need higher lawyers to
bankrupt then the owners will only be liable to draft these documents which add to the cost.
the amount invested. You need auditors to check your accounts.
Marketing and promotion. Paying solicitors.

Continuity - when one of the owners dies a Disclosure of information - you must publicize
family member will take its part. your financial statement which then affects
whether people will be part of stocks.
Competition will also rise and you will be at a
competitive disadvantage.

Economies of scale By the time a decision is made, the

opportunity is lost. Makes it difficult to make
quick decisions and organize. RED TAPE.

Productivity - much higher than a sole Take over - someone who has the most
proprietorship shares can take over/control the company.
Ceo has the most shares. ONLY HAPPENS
TO PUBLIC LIMITED COMPANIES.
Tax benefits - corporate tax is lower than the
highest income tax, the highest income tax is
included with Sole proprietorship.

Privately held companies - NOT PART OF THE STOCKS

Publicly held companies
V- Franchises (Attached notes)
- Method of external growth
- Form of a business ownership where a person or business buys a license to trade using
another firms name, logos, brands and trademarks
- Franchisee - purchaser of a franchise
- Franchisor - parent of the company - buys the lisence of the company to trade using its
name.
- Franchisee pays franchisor
- Franchisee pays a royalty payment (like commission)

Benefits of franchisor Benefits of franchisee

- To get the license you have to - Everyone usually knows the franchise
pay a license fee and royalty - The market research has been
fee (you get a percentage of developed for you as well as
the revenue generated to the promotion
- The franchisee wants the business to
franchisee, its the amount from
be successful. So the franchisor adds
the sale not the profit
added service (financial advice, does
percentage that is provided to not have to start from scratch in the
the franchiser based on the accounting system, don't have to pay
money generated from the for training, any management advice
sale) is given by the franchisor)
- There is expansion, national - Does Not have to pay for the
and international advertisement, the franchisor does an
- Startup cost is paid by the international marketing campaign.
That does not mean all the promotion
franchisee, benefit or the
campaigns are for free, if it is a
franchisor is that he is going
national campaign, the franchisor
international without taking risk makes a contribution to the national
because there is no huge campaign. Funded by franchisee and
outflow of money. getting support by the franchisor.
- The franchisor will benefit - Local franchisee, bigger chance for
more if he allows a the franchise to be successful
entrepreneur to open a outlet because it is being run by the local
rather than a selling manager franchisee who has greater
awareness in the local market then
(does not have the incentive to
the international company.
make the business succeed in
the end) because the
franchisee/entrepreneur has
the characteristics of working
more harder and puts all the
 running costs and becomes
motivated and is efficient for
this business to be successful

Disadvantages for the Franchiser: Disadvantages for the Franchisee:

If one of the franchisees does not provide or - Franchisor fails internationally the
does not meet the standards set it can tarnish franchisee will be affected locally
the reputation of the franchiser. - The franchisee must adhere to rules
and regulations set by the Franchiser.
The franchisee must take permission
from the higher ups and cannot act as
an entrepreneur on his own.
- A significant percentage of revenue
should be paid to the Franchiser, in
fees such as royalty, even while
enduring losses.
VI- Social enterprises (Paul Hoang pages 31 - 35)

Social enterprises are revenue generating businesses with social objectives at the core of their
operations.
- They could be for profit or for non-profit purposes
- Their goals are to achieve social objectives and to earn revenues in excess of their
costs.
- Compared to profit based organizations, want to maximize their profit
For social enterprises their main goal is to work towards a certain social goal, profit
made in a social enterprise is called surplus profit.
The reasons for making a surplus:
They want to be a sustainable business to continually meet their objectives, this profit
will be retained in the business and used in the business to achieve certain social goals. They
want to continuously achieve their social goals and benefits. For non profit social enterprises all
the surplus goes to achieving their social objectives. For profit social enterprises part goes to
their social objectives and part goes to the organizers. What keeps the organizers motivated is
to receive compensation for their work.

A- For profit Social enterprises

1) Private sector for profit social enterprises

2) Cooperatives: They are for profit social enterprises “cooperating with each
other”. It is when a group of people with the same interest pool their money together to start a
business that they call a cooperative.
The types of cooperatives:
- Consumer cooperative is a group of customers who pool their money together to open a
business to provide services and goods for their community. Businesses are usually
profit organizations, although cooperatives are social for profit for enterprises. You can
get employees in a consumer cooperative.
- Worker cooperatives : a cooperative where the employees are the owners.
- Producer cooperatives : a group of people join together and pool their money together to
market and process their products collectively.
HELPS GAIN COMPETITIVE ADVANTAGE AND BARGAINING POWER
It is a membership fee not payment. If there is a surplus then they benefit from this profit.
Every member has a democratic type of leadership

Advantages of cooperatives Disadvantages of cooperatives

Helps create a competitive edge for the Flat structure - not as big as corporations,
organization meaning they have a flat organization
structure not a tall one. Employees dont have
 the opportunity for professional
development/progress due to the flat
structure

Because you can be an employee and an Limited source of finance - if the business
owner at the same time, then you get an wants more money they issue more shares
incentive to work.

Creates social benefit Decision making is slow because its a

democratic decision making

Public support Disincentive effect - offer low salaries and this

demotivates the employees

Decision making power - members contribute

to the decision making which motivates them
and makes them more committed

Microfinance providers :
- They provide small financial loans to help the poor start their own small business to help
them support their lifestyle (like their kids, and family). They have to pay back their
money and pay interest. This is between 18-30%.
- You have to tell them and teach them how to startup a business. They have to be
productive and figure out what the family will use the money for.

Advantages of microfinance Disadvantages of microfinance

Accessible by helping poor people who “Some microfinance is immoral” They state
cannot get a loan from the bank this sometimes because of the interest rate
they charge.

They provide social benefit They do not follow up with the business on
how they will use the money. They ended up
defaulting on payment.

Help in job creation, by providing High default on payment - a lot of peop[le

opportunities cant pay back because they are
inexperienced and they dont have the skills to
pay for the business.
Non for Profit social enterprise :
- NPO’s
- They have the function of the business/ run like every other business. But the main
objective is social cause.
- They make profit, but it is surplus meaning it goes back to the business. No money is
pocketed by the members
- NGO : Non governmental organization. They are not run by the government, they are
private businesses. They are private organizations that pursue activities to relieve the
suffering, promote the interests of the poor, protect the environment, and provide social
services to develop the economy. Example : UNESCO, helping the children, team
nasser.
1. Operational NGO : They take action and help the community to relieve them from pain
and poverty. They are not aggressive
2. Advocacy NGO : Boycott, strikes, lobby politicians (gather a lot of people to vote against
them)
3. NGO’S : Charities : They raise money to benefit the general public. They work for the
social benefit of their community. They get their money by providing services/selling
goods. They sell merchandise. They are starting their own for profit businesses

Advantages of Charities (applies a lot on Disadvantage of Charities (applies a lot on

NGOS) NGOS)

Provide social benefit No charity fraud - charities have to be

registered and you can not donate to charities
that are not registered as they might have a
hidden agenda

Their surpluses are not taxed by the Long process to register to authority
government

Tax incentive to donors Disincentive effect - salaries are not very high
as the objective of the charity is for social
benefit so it is a demotivating factor

They have tax allowance Volunteers can not offer support or help for a
long period of time - as you cant leave all
your jobs just to focus on volunteering

Limited liability - if charity goes bankrupt the Inefficiency - all managers who are
members will only lose what they invested employees in a charity have a limited liability,
this can be an advantage or disadvantage
because the more you are responsible for
something, then the more efficient you are to
avoid the mistakes. But because you have
 limited liability, it increases efficiency

Has to be registered with the government Charities have a limited source of finance

They provide social welfare

3) Microfinance providers (Attached notes)

4) Public sector companies and P3’s (Public - Private Partnership)

(Paul Hoang p. 32 and Attached notes
VERY IMPORTANT!!!!)

- Partnership between public sector and private sector. For example the King Fahad
causeway. The government decides to build a causeway between Saudi and Bahrain.
The government needs to set policies, and the private sector provides the services to
build the highway. Operation, design and construction is all done by the private sector.

What is in it for the private sector?

It is a legally binded agreement between the private and public sector. Delivering the risk is the
private sector. With risk comes opportunity and profit. Risk of environmental changes, interest
rates, wages of labor could increase… In return they could get a fee for the service they are
providing a revenue (profit+cost) , it is a long term investment, reputation increases, meaning
more profit.

What is in it for the government and the taxpayers sector?

You get social benefits. More cost effective. Deliver the project faster. They make full use of the
service being provided. Meaning more demand as they are driven by the profit they generate so
they provide a better service. Increase investment in the public sector, more private sectors are
interested in investing in the social services as they are attracted by the good deals that the
government provides.
 B- Non for profit social enterprises including charities
(Paul Hoang, p 34, 35, and Attached Notes )

VII- Factors affecting the strategic choice of organizations

( Paul Hoang p.36, and Attached notes page )

1. Age of the business, when it's a startup business it's a sole proprietorship. But as the
business grows there is a change in the structure (more partnerships), the older it is then
the more it becomes bigger
2. The need for finance, the more the need for finance then the more you need to change
the status
3. The size can tell you what type of entity it is. The size of the business affects what type
of a business it is.
4. Limited liability, if you want to protect your own personal wealth, you have to create a
public or private limited company.
5. Degree of control, if you want more power you open your own business where you are
the sole proprietorship.
6. Nature of the business - the type of business PLC, PLC, Sole proprietorship

Attached Notes
II- Reasons for public sector activities (Paul Hoang, p 22 and Attached note )
III- Problems associated with the public sector business activities (Attached notes)
V- Franchises (Attached notes)
3) Microfinance providers (Attached notes)
4) Public sector companies and P3’s (Public - Private Partnership)
(Paul Hoang p. 32 and Attached notes)
B- Non for profit social enterprises including charities
(Paul Hoang, p 34, 35, and Attached Notes )
VII- Factors affecting the strategic choice of organizations
( Paul Hoang p.36, and Attached notes page )