Types, Size and Scope of organizations

Types, Size and Scope of organizations

In every country, starting a business requires making a critical decision on the type, size, and scope of activities the business will engage in when in existence. Such factors answer the question of what kind of business structure an organization will exist in within a particular jurisdiction without violation of any laid out legal stipulations. The chosen business structure will determine the type, size, and scope of the business one intends to operate. The following section discusses the different types of organizations, their scope, and relevant legal structures.

Types of Organizations

Organizations fall under three primary categories including public, private and voluntary organizations based on ownership. Public organizations encompass all not-for profit government owned organizations offering a plethora of services that improve social welfare. They deliver public goods and government services such as infrastructure and health (Khan and Khandaker 2016, p. 2875). A good example of a company in this category is Virgin money, a financial institution that offers the public different financial services. Private organizations includes all for-profit organizations that may be fully owned by the government or individuals (Khan and Khandaker 2016, p. 2875). An incredible example of a private organization in the UK is Tesco that focuses on profit and gaining a competitive edge in its industry. The last type of organizations are voluntary organizations which includes not for profit and non-governmental organizations. The main purpose of voluntary organizations is offering social benefits and enriching society without any profit motive or shaping and implementation of participatory democracy (Mellor 2018). They also play a critical role of creating social wealth and helping in the betterment of society.

 Organizations for Profit, not-for profit, and Non-governmental Organizations

Entrepreneur(s) start a business with a clear objective in mind. Some might start a business with an aim of making profits while others might start one with an aim of helping the community or promoting social welfare and hence without any profit motive. It is also critical to highlight that the two might fall under a non-governmental organization where they remain independent of the government or prefer to remain dependent on the government to promote their business operations. The objectives, ownership and degree of independence from the government lead to three business organizations including organizations for profit, not-for profit/ non-profit (NPOs) and non-governmental organizations (NGOs). The three have similarities in that they must have effective leadership, committed employees, cost-effective operations, and quality services (Aaker, Vohs, and Mogilner 2010). Nonetheless, they have significant differences as discssed below.

Differences

As the name suggests a for-profit organization is one that conducts business operations with a purpose of generating profits or having more income than expenses. The owner(s) of the business might decide to keep all the profit, spend some or all of it on the business. Ideally, they might share a part of the profit with employees through different forms of compensation plans such as employee profit sharing. In essence, three primary legal forms exists for for-profit businesses including unincorporated, corporations and limited liability companies. A majority of small for-profit businesses are unincorporated, and as such, the business might be in a sole proprietorship or in a partnership. For-profit and non-profit organizations have outright differences as highlighted in table 1.1.

Table 1.1: Differences between for-profit and not-for-profit Organizations

For-Profit Not-for-Profit
Stockholders responsible for ownership. Owned by the public.
Created to generate income for the owners. Created to offer critical services to the public.
Considered profit based on profit generated. Considered successful based on meeting public needs.
Board members receive an income Board members are volunteers with no pay.
Members have a huge share of profit. Members receive a reasonable income.
Not tax exempt Often receive tax exemption.
Invested money cannot be deducted from investor’s personal tax liability. Donations can be deducted from a donor’s personal tax liability.

 

Not for profit organizations focus on offering particular services to society. Such organizations exists within rules that forbid them from profit distribution to owners. In this context, profit, is an accounting term related but not identical to the idea of surplus of revenues over expenditures (Aaker, Vohs, and Mogilner 2010). Such organizations conduct their business operations without any profit motive but rather improving the welfare of society, which is the primary factor distinguishing it from for-profit organizations. Any money earned in such organizations goes towards pursuing or fulfilling the organization’s objectives and maintaining operations (Aaker, Vohs, and Mogilner 2010). In that case, in the UK not for profit organizations enjoy tax reliefs and exemptions but have to pay tax if they incur non-charitable expenditure. It is crucial to highlight that although not-for profit organizations are tax exempt in the UK, they have to pay tax on three major items including the following (Barrow and Tracy 2017).

  • Any dividend earned from UK based companies.
  • Any profit earned from developed land or property.
  • Any purchases made, although special VAT rules apply for charity organizations. In this case if a charity is a limited company or unincorporated association, then filling a company tax return is critical. If it is a trust then a trust and estate self-assessment tax return is the most appropriate.

A non-governmental organization’s operations remain free from government intervention although most may profoundly rely on government funding to function. A majority of them engage in international philanthropic, developmental and social missions (Werker and Ahmed 2008, p. 78). Their operations may span from local, national to international levels promoting specific social and political purposes. NGO’s fall under two broad categories including operational focusing on developmental projects and advocacy promoting particular causes (Werker and Ahmed 2008, p. 76). NGOs and not-for profit organizations may appear similar in most ways but they have two distinctive differences. One, NGOs may receive funds from the government but they maintain a non-governmental position without any need for a government council. Two, not for profit organizations use their extra funds to push forward their objective rather than dividing it between shareholders and owners (Werker and Ahmed 2008, p. 79). Nonetheless, the largest difference lies on scope of operations. Not-for profit organizations have an affiliation to churches, boys and girls clubs and alumni associations. On the other hand, NGOs have broader operations spreading across nations to push forward a plethora of issues such as climate change, diseases, and large scale disaster among others.

Size and Scope of Organizations at Different Levels

Differences between micro, small, and Medium-sized Enterprises (SMEs)

A clear difference exists between micro, small and medium-sized enterprises in the UK. The difference is important as it determines their eligibility for European Union (EU) and national financial and support programs. A micro enterprise is the smallest business unit having not more than ten employees and an annual turnover or balance sheet below€2 million (Guide 2016). They are the smallest businesses characterized by low employment level and require the least amount of starting capital and operating resources produced by a micro entrepreneur. They are the most common in developing nations as they add value to the economy. In the UK, the nation had 1.11 million micro enterprises in 2017 employing more than four million citizens and accounting for at least five hundred billion pounds in sales (Howell 2018). On the other hand, small enterprises should have fewer than fifty employees and an annual turnover or balance sheet below €10 million (Guide 2016). Owners of small enterprises are independent bodies or sole proprietors with a purpose of increasing their sales revenue compared to micro enterprises. Lastly, medium-sized enterprises have fewer than two hundred and fifty employees and an annual turnover below €50 million or balance sheet below €43million (Guide 2016). Most medium-sized enterprises includes multinational companies working as part of the government sector to earn huge profits.

 Legal structures associated with different forms of business

Sole Proprietorship/Trader

A sole proprietorship is one where an individual runs a business and only small amount of finance are required in setting up. In modern business environment, the scope of sole proprietorship is extremely limited and characterized by extreme risk and small size (Cowton 2017). A sole trader might employ salaried or waged employees but he/she has to incur all finances while bearing all types of risk. They have a high degree of autonomy in running the business and hence they enjoy all the proceeds (Cowton 2017). Ideally, sole traders have unlimited liability for their debts. That is, in case of insolvency, the owner of the business must pay all debts using personal assets. In the UK, a sole trader is considered as self-employed meaning they must register with HM Revenue and Customs (HMRC) for purposes of self-assessment (Cowton 2017). In addition, payment of income tax and national insurance to profit earned is critical. An example of a successful sole proprietorship in the UK is MaBaker. The business has operations in Fulham, London engaging in delivering fresh, homemade, real bread in the SW6 area. The owner of the business is Liz Wilson a teacher and passionate home cook and baker (MaBaker 2016). The sole proprietorship have in the past won several awards due to its outstanding and tasty products.

Partnerships

A sole proprietorship experiences numerous difficulties. A partnership solves such issues where two or more people come together to create a business with every partner remaining responsible for the debts of the partnership. Locally, business people enter into partnerships due to pragmatic factors including resource constraint and ideological factors such as the belief in the advantages of a partnership (McQuaid 2000). Prior to starting operations, partners must prepare an articles of partnership. Usually, personal property of partners in a partnership cannot settle the debt of the partnership upon insolvency with an exception in cases of limited partnership. A limited partnership arises when a partnership intends to raise additional finance but with no desire to take in new active members (McQuaid 2000). Most partnership overcome the problem by taking in sleeping or silent partners who offer finance but lack any input regarding the entity’s operations. Upon insolvency of a partnership, sleeping partners can only pay debts to the extent of their contributions and not their personal property (limited liability). No matter the difference between a sole proprietorship and a partnership, the latter is also an unincorporated business. Most businesses that succeed have more than one person running them. An incredible example of a successful partnership in the UK is Yoomoo, a yoghurt business co-owned by Daniel and Amanda Gestetner. The partnership have over the years become the number one frozen yoghurt brand in the UK (Russell 2013). Due the partner’s desire to succeed, their business has been strengthened by their great personal relationship. A partnership agreement between them spells out their liabilities, ownership, profit sharing, and what happens when one partner leaves. It is crucial to mention that in a partnership such as Yoomoo, every partner must register as self-employed and submit a separate tax return.

Private Limited Company

A private limited company (PLC) remains one of the most common forms of business. It is an incorporated business with a separate legal entity from the members. In most cases, they are small in scope with shareholders running most of their operations. Shareholders in a PLC play a key role but their shares are not sold to the public (Guinnane et al. 2016). A single share equates to a single vote in an annual general meeting. Shareholders in a PLC have limited liability, only losing their investment in the company and not their personal properties upon insolvency. Prior to its formation, promoters must prepare legal documents with the most critical ones being the memorandum of association (MOA) and articles of association (AOA) (Guinnane et al. 2016). The successful completion of these documents means the company begins its operations but after a thorough inspection by the registrar of companies, who issues a certificate of trading. The company must also raise at least £50000 of share capital. One of the most successful private limited companies in the UK is Bestway that started as a sole proprietorship in 1963 dealing with groceries. Currently, the London Company operates more than seven hundred pharmacy stores across the UK, a cement manufacturers and a Pakistan bank (Midgley 2014). The chair of the company is Sir Anwar Pervez.

Organizational Functions and their Link to Organizational Objectives and Structure

Organizations have a plethora of functions that help them fulfill their objectives. Undoubtedly, a business aims at fulfilling particular objectives such as public serving or business. Managers and employees must therefore engage in different organizational functions such as planning, coordination, structure selection, organizing, arrangement, running, logistics and management (Ahmady, Mehrpour and Nikooravesh 2016). The five primary characteristics of a business and the primary purpose of this section includesfinance, human resource, sales and marketing, administrative, research and development. These functions must work together to ensure the organization fulfills its aims and objectives. Achieving this requires effective communication with the starting point being setting clear company objectives.

Finance Function

The finance function facilitates the effective operation of a company. The finance section ensures it keeps electronic or manual records of company incomes and expenses. The information is later organized to generate statement of financial position and income statements among other critical documents to fulfill legal and tax obligations (Ahmady, Mehrpour and Nikooravesh 2016). Senior managers use finance statements to make plans and review business strategy. Sometimes, some organizations will task the finance department with the role of paying employee’s remunerations and handling tax issues. Every other organizational function depends on the success of the finance department.

Human Resource Function

Employees play a critical in an organization and without them an organization cannot fulfill its objectives. The human resource department aims at recruiting, selecting, training and developing staff (Ahmady, Mehrpour and Nikooravesh 2016). The role of developing employees and ensuring they fulfill an organization’s objectives is also a function of the human resource department. HR department must also comply with legal stipulations. For instance, in the UK the department must ensure they follow all stipulations of the UK Data Protection Act of 1984 through maintenance of accurate personal records (De Hert and Papakonstantinou 2017). To further promote the effective functioning of an organization, HR unit embrace a welfare role that entails looking after employees while they are at work or creation of policies that balance organizational needs with those of employees.

Sales and Marketing Function

The finance and human resource departments cannot fulfill organizational objectives if an organization fails to sell its products and services. In that case, the sales and marketing department plays a key role of researching customer needs and developing a strategy or product that satisfies customer needs. Satisfying customer needs requires the sales and marketing department to investigate the market by researching consumer behavior and preferences (Ahmady, Mehrpour and Nikooravesh 2016). The department will later persuade consumers to purchase the end product. A crippled sales and marketing department will lead to failure of the entire organization.

Administrative Function

All administrative duties such as receiving documents remains the role of the administrative department. Also, in case of any complaints the department ensures prompt resolution (Ahmady, Mehrpour and Nikooravesh 2016). The administrative function is sometimes not considered critical but plays a crucial role in holding an organization together. Without the department, customer complaints would escalate leading to adverse effects on the company’s operations including a lack of tools to complete tasks.

Research and Development

The R&D department plays a key role in an organization. They must ensure that an organization continues offering customers new and improved products while improving organizational processes in the production process. Such functions enables an organization reduce costs, increase profitability, and gain a competitive edge (Ahmady, Mehrpour and Nikooravesh 2016). Since not every research leads to improved products, companies must ensure that the R&D department receives reasonable funding to only focus on products that will positively impact company operations.

Summary

In summary, organizations falls under three basic types including public, private and voluntary organizations based on ownership. They further fall under three categories including profit, not-for-profit and non-governmental organizations. They all have the same purpose of offering goods and services to the public but have significant differences. Profit organizations purpose to make profit by having more income than expenses. Not-for-profit organizations operate with an aim of offering crucial services to the public without any profit motive. A non-governmental organization is a non-profit organization that operates independently from the government although a majority might profoundly rely on government funding to effectively function. The report has also laid clear the size and scope of organizations at different levels including micro, small and medium enterprises. The report has also discussed profoundly legal structures associated with different forms of business including sole proprietorship, partnerships, and private limited companies. Lastly, organizational functions and their interconnected to business objectives and structure have received appropriate attention.

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