CIMA BA3 Syllabus A. ACCOUNTING PRINCIPLES, CONCEPTS AND REGULATIONS - Types Of Organisation - Notes ^{1 / 22}

The organisation can be:

1. Private

   Owned and operated by private individual

2. Public

   Owned by state
   

Motive of Private organisations can be:

• For - Profit

• Not-for-profit
  

For - Profit organisation

Business organisations engage in commercial and industrial activities, with the purpose of making a profit.

Profit-seeking organisations typically exist to maximise their owners' wealth.

Types of For - Profit organisation:

1. Sole Trader

   An individual sets up business on his own

   Sole traders are people who work for themselves.  

   Examples include a hairdresser, the local stationer, a plumber.  

   The owner has UNLIMITED LIABILITY for the debts of his business.

   It means that the law will not distinguish between the private assets and liabilities of the owner to those of the organisation.

   In case of bankruptcy the owner can lose his personal assets.

   e.g. if the business has debts that it is unable to pay, the sole trader will become personally liable for the unpaid debts and would be required, if necessary, to sell his private possessions (e.g. his car or house) to repay them.

2. Partnership

   Partnerships occur when two or more people decide to run a business together.

   Examples include an accountancy practice, a legal practice and a medical practice.

   The owners have UNLIMITED LIABILITY for the debts of their business.

   In general, the partners have unlimited liability although there may be circumstances when one or more partners have limited liability

3. Corporations (Companies)

   These companies have a LIMITED LIABILITY

   This means that the maximum amount that an owner stands to lose in the event that the company becomes insolvent and cannot pay off its debts, is his share of the capital in the business.

   In all cases, we apply the separate entity concept, i.e. the business is regarded as being separate from the owner (or owners) and the accounts are prepared for the business itself.

   The shareholders cannot normally be sued for the debts of the business.
    
   Their risk is generally restricted to the amount that they have invested in the company when buying the shares (limited liability).
   

   Examples:
   Private Limited Company (LTD):
   - Shares in private companies cannot be offered to the general public
   - The owners are actively involved in running the business
   - In this way, they are similar to sole traders and partnerships

   Public Limited Company (PLC): 
   - Shares in a public company can be freely sold and traded to the general public and their shares can be listed on a stock exchange
   - The owners may not become involved in the day-to-day activities of the business
   - Listed companies may have many thousands of owners (shareholders) who are even further removed from the running of the business

Not-for-profit organisations

A non-profit organisation (NFP) works with a prime intention (primary goal) of providing a good or a service to different sectors of society for which they are set up to provide a benefit.

NFP has to be efficiently managed so that their resources are used effectively to meet the objectives of the organisation while not making a financial loss

Examples:

• Charities:

  These exist to provide services to particular groups (for example, people with special needs) and to protect the environment. 

  Although they are regarded as non-profit-making, they too often carry out trading activities such as running shops.

• Clubs and societies:

  These organisations exist to provide facilities and entertainments for their members. 

  They are often sports and/or social clubs and most of their revenue is derived from the members who benefit from the club's facilities. 

  They may carry out some activities that are regarded as 'trading' activities in which profits are made, but these are not seen as the main purpose of the organisation.

• Local and central government:

  Government departments are financed by members of society (including limited companies). 

  Their finances are used to provide the infrastructure in which we live and to redistribute wealth to other members of society.

Public Sector organisations are owned or run by the government

They are funded by and accountable to the government.  

A major challenge that any government faces is that of balancing their limited resources with a huge demand for public services.

Examples of a public sector organisation are:

1. Hospitals

2. Armed Forces

3. Centrally funded agencies

4. Most schools & Universities

5. Government Departments