The Structure and Classification of Enterprises

1. The corporate form can take many shapes in order to respond efficiently to the environment. In Great Britain, The Companies Acts, 1956, 1985 recognize a multiple classification of companies. However, with the growth of the economy and increase in the complexity of business operation, the forms of corporate organizations keep on changing. If one wants to set up a business and form a company it is necessary to sign a document called a Memorandum of Association with the Registrar of companies. The owners file the name of the company, its objects, the amount of share capital and types of limited liability in this document.

Businesses are usually classified on one of the three basic business structures: Sole Proprietorship, Partnership and Corporation.

2. A sole proprietorship is an unincorporated business owned only by one person. All assets in the firm are owned by the proprietor. Without the owner, the business wouldn’t exist. The owner provides the most of the capital, and establishes the total management. As a sole business owner, one takes on all the responsibility, the liabilities, any losses incurred and assumes the risks. Of course, the owner also completely benefits from the profits.

3. A partnership is a business established by two or more people. Each person contributes something to the business – whether it’s money, labor, skill, or property. In turn, the partners share the profits along the lines of the investment input. Partnerships are based upon partnership agreements. Such agreements f oresee and cover all areas of possible disagreements between the partners. The agreement usually defines the authority, rights and obligations of each partner. Partners usually agree on how profits and losses are to be divided.

4. Corporations are businesses where the shareholders transfer money and/or property for the company’s capital stock. Profits of the corporation are distributed according to investment in the capital stock. A corporation has the same rights as an individual to own property, conduct business, sue or be sued. Corporations are either private or public.

Setting up a corporation involves more work and expense than establishing a sole proprietorship or partnership. Stockholders— the owners of the corporation—elect a board of directors at the company’s annual general meeting. They are described as non-executive directors. Since they do not have departmental responsibilities within the corporation, they are outsiders. Having particular knowledge of the industry, they bring expertise to the board. The board hires corporate officers, such as the president and the vice-presidents in charge of sales, production, finance, personnel and so on. These senior executives head up different departments; the marketing director is the head of the marketing department, the IT director is the head of the IT department. The executives are responsible for determining the objectives and policies of a business, and a smooth running of the corporation.

5. A private company is by far the most popular for a small business, or private investment entity which proposes to trade as a company. There is one feature which is common to all private companies, namely, a private company cannot lawfully offer shares in or debentures of the company to the public, and they cannot be listed or dealt with at The Stock Exchange. This company is registered with only a very small amount of initial paid up share capital, for example, say, £2. It may commence business immediately upon the certificate of incorporation issuing.

6. A public company (You may see an abbreviation plc after its name) obtains a trading certificate from the Registrar of Companies. A public company offers its stock to the public. Its stock is available to anyone who wants to buy it. A public company must have a substantial amount of initial share capital upon registration. At present, the requirement is that a public company must have allotted shares having a nominal value of at least £50,000 and at least a quarter of them (i.e. £12,500) must be paid up. A public company must have at least two directors.

7. Limited liability companies (Ltd) are corporations where the members have limited liability. It means that in case of any difficulties or termination of the business, the members are to pay debts up to a certain limit. Normally there are two types of limited liability: 'limited by shares' and 'limited by guarantee'. In limited liability companies the shareholders do not have to use their personal property to pay their company’s debts.

A company 'limited by shares' is a company formed on the principle of having the liability of its members (otherwise known as its shareholders or owners) limited to the balance amount (if any) which remains unpaid on the shares held by its members.

A company 'limited by guarantee' is a company formed on the principle of having the liability of its members limited to the respective amounts which the members undertake to contribute to the assets of the company if it is wound up.

8. Unlimited liability

Every member of an unlimited company is, in the event of its liquidation, liable for all the obligations of the company. An unlimited company would usually only be appropriate if the company will merely be used to hold land or other investments and will not trade as such. An unlimited company may be suitable, for example, as a service company for a professional firm i.e. in circumstances where limited liability is not vital.

9. Many hotel, motel, gas station, and fast-food chains are franchises. A franchise is created when one business, the franchiser, sells the right to use its name and the right to sell its products to another business. Franchisees, people or businesses that purchase a franchise, may pay a fixed fee for these rights, or they may pay a fee plus a portion of future profits from the business. Franchisers often help franchisees by providing training programs and setting standards of business operation. Organizations with ‘social’ aims such as helping those who are sick or poor, or encouraging artistic activity are non-profit organizations. They are usually paid by professionals, and they put a lot of effort into fund-raising, getting people to donate money to the organization.