Business Organisations Explained
When a business is set up, the owner(s) need to decide what kind of business it will be, and then choose its structure. This is important information for potential investors to understand. The way the business is organised is usually shown in the business plan.
Organisations can broadly be set up as:
- Sole Trader
- Limited Company
Types Of OrganisationA sole trader is set up with funding from the owner’s savings, or banks, suppliers, government grants and loans. The owner of the business is usually the person who does everything in this single-person business.
A partnership is a fairly straightforward way for two or more people to own and run a business together. A Deed of Partnership is usually drawn up and agreed by the partners. The members of a partnership – unlike the shareholders in a limited company – have no financial protection if the business gets into debt, and each partner is responsible for the debts of the partnership as a whole – including debts run up by any single partner. In this way the personal assets of each partner may be at risk if the business fails.
There can be problems if disputes arise between partners, and the partnership may have to be dissolved if a partner resigns or dies as the deed of partnership may no longer be valid.
Organisations set up as partnerships allow two or more people to begin a business together, sharing the duties (in an agreed way) and the profits. The precise rights and responsibilities will depend on:
- The type of partner they are
- The deed of partnership
General partners share in funding the business, running it and share in its profits. Each general partner is equally liable for any debts that the partnership may have. All partnership organisations must have at least one general partner.
Sleeping partners do not take part in running the business, but do invest money in it and share in the profits. Just as with general partners, they share liability for the partnership's debts.
A limited company must be registered with the Registrar of Companies at Companies House. When a new or existing business is converted into a corporate it is said to be incorporated.
The officers of the company run it – these are the company directors and company secretary. Companies must, by law, have officers in place at all times. If there are any changes made to the officers of the company then the Registrar of Companies must be told straight away.
Private companies must have at least one director. A single individual can form a private company and can be the sole director of this company. If the company has a company secretary, it cannot be the same person as the sole director.
Public limited companies must have at least two directors and a formally qualified company secretary.
Directors of a company must be 16 years or over and must be a “natural person” (i.e. not another company).
HierarchyOrganisations need to define their hierarchy. For a sole trader this is simple. In a partnership, even with “equal” partnerships, there will sometimes be a senior or managing partner. The senior partner, as chairman of a board of partners, may exercise the same management oversight roles as a chairman in a public company does.
Organisations set up as limited companies are run by a board of directors. The board of directors is elected by the owners of the business. The board might also be known as a board of trustees, board of governors, board of managers, or executive board. It is often just called "the board."
The head of the board of directors is called the Managing Director (MD). The other directors will have titles, such as Finance Director, IT Director, though there is no definitive list, or set number of board members. The MD might also fulfil one or more of the director roles.
In this hierarchy the board of directors reports to the MD.
Reporting to each director will be a number of managers. For example, the Chief Accountant, Treasury Manager may report to the Finance Director. In small organisations the same person will fulfil many of these roles, and most roles will not even be named. For example, in a single person company, that individual performs every role, but is probably only known as the Managing Director, or by the main job function of the business, e.g. Accountant.
The way a business is set up, and the way it will be organised and run are important for investors to understand how a business may develop. For this reason, the business plan should contain this information.