CIPS L3M1 Define the different types and functions of the private sector

There are 3 major things you need to understand about assessment criteria 1.1, Which requires you to Define the different types and functions of the private sector these are;

• Definitions and different types of private sector organisations
• The size and scope of the private sector in different economies
• Functions of private sector organisations such as: profit, growth, market share, share price, other financial measures, corporate and social responsibility

DEFINITIONS AND DIFFERENT TYPES OF PRIVATE SECTOR ORGANISATIONS

There are two types of companies in private sector; Incorporate and unincorporated associations

Let’s start at with UNINCORPORATED COMPANIES OR ASSOCIATIONS

In unincorporated company there is no legal distinction between the company and its owners, what does that mean?

Its means that owners are liable for any actions or debts of the company

So, if you are in debt the business is in debt too and the reverse is also true

Examples of these kind of businesses are; Sole traders and partnerships

What type of business is a SOLE TRADE

This type of business is also known as sole proprietorship

This is the kind of business that is owned by one person and there is no legal difference between that person and the business

Unlimited liability which is the nature of this business means that the owner of the business is liable for any and all losses

And depending on which country you are from you could be thinking “but what if I have registered the business with relevant authorities?”

That doesn’t create a sperate legal entity, in fact you most just do that because;

1. You want to have a bank account under that name, which is still you
2. Its just a branding thing

You are still going to file taxes under your name and you are still going to be personally held liable for breach of contracts etc

Advantages of being a sole trader

1. The business is easy to start dues to less legal requirements
2. You get to keep all the profits
3. You quickly make decisions etc

Disadvantages of being a sole trader

1. Ideas are limited
2. The liability is unlimited
3. You incur all the loses

What type of business is a PARTNERSHIP?

Partnership is the relation which subsists between persons carrying on a business in common with a view of profit.

You have to remember that just like a sole proprietorship the partners and the business are still the same.

Meaning, the debts of the business will still become the responsibilities of the partners because the liability is still unlimited

What are the advantages of a partnership as a form of business?

1. There are easy to form since they don’t require many legal formalities
2. Business resources are easy to acquire through contribution from the partners
3. In case of professional firms there is specialization of labour
4. Losses are shared among the partners
5. Management duties are shared among the partners

What are the disadvantages of a partnership as a form of business?

1. Liabilities of partners for debts and obligations of the firm is unlimited i.e. partners are liable to use personal assets if the firm is insolvent.
2. Sharing of profits reduces the amount available to individual partners.
3. A single partner’s mistake affects all partners.
4. Disagreements between partners often delay decision-making.
5. Death, bankruptcy, or insanity of a partner may lead to dissolution

Partnerships can be general or they can be limited, and it kind of just comes down to what you have written in the partnership deed.

To sum it up…

Unincorporated associations make sense if your business is small but when you grow things start talking different shapes,

• More people want to sue you
• The government expects more from you
• Your finances and assets are growing

In short you have a lot to lose and you need to protect yourself hence the need to incorporate.

WHAT ARE INCORPORATED COMPANIES?

Incorporated companies and the kind of companies where the owners and the company are considered two different persons

There are two main types of incorporated company, private limited company and public limited company

• A Private Limited Company is a business entity that is privately owned and its shares are not publicly traded.

The number of members (shareholders) in these company is restricted, for example between 2-50 depending on the country

• A Public Limited Company is a business entity whose shares are traded publicly. This can be on a stock exchange or can be offered to the general public. These companies are heavily regulated

Remember: In both companies’ shareholders have limited liability, meaning their personal assets are not at risk beyond their investment in the company.

The difference between these two can be in terms of;

1. Ownership
2. The way the raise capital
3. Number of directors
4. Number of members etc

What are the reasons to prefer incorporated associations?

there are a number of benefits associated with this kind of business structure for instance;

1. perpetual succession
2. it can own property
3. limited liability etc
4. tax benefits and write offs

Remember incorporated associations can be costly to start and also controlling them depends on how many shares you own in the company. The more share you own the more control you have

Which one works for which type of business?

• Private Limited Company – works best for startups, family businesses, or companies that don’t want to deal with external shareholder control and pressure.
• Public Limited Company – works best for large businesses that are in need of substantial capital and are willing to meet regulatory requirements.

practical application

Choose and organisation you are familiar with. Make a list of some of the things that it might need to purchase. Then think about the differences between incorporated and unincorporated companies and decide which type is best suited for each type of purchase for your organisation and why.

THE SIZE AND SCOPE OF THE PRIVATE SECTOR IN DIFFERENT ECONOMIES

Size can be used to distinguish companies in the private sector

Small and medium-sized enterprises (SMEs)

Small companies are often classified as SME. This is an enterprise that is independent of other companies and is defined in terms of the number of employees it has

The definition can also be expanded to include micro, small and medium enterprises (MSME) which in this case will be small companies with fewer than 10 employees

What Challenges do SMEs face?

Different factors can hold smaller companies back for example;

1. Lack of access to finance
2. Regulatory requirements
3. Insufficient management skills or resources

Over to you!

State 2 challenges that faces SMEs and suggest how they can overcome such challenges

Multi-national companies

At the other end of the scale, you have multi-national companies.

Here you have companies like, Coca-Cola, Unilever Samsung etc

These are companies that have assets and facilities in multiple countries but are all managed from central company

One definition of such companies is a company that gets at least one-third of its revenue from overseas subsidiaries

So, lets do a quick recap here, at this point you are aware of;

1. Unincorporated and incorporated associations, there examples benefits and challenges
2. and you can also classify private sectors companies according to their size

Here is a question for you

pop quiz!

what are the benefits of private sector organisations to a country they exist in?