Business Organization and Management

Business Organization |1

Module 1 Business
Organization

Course Learning Outcomes:

1. To discuss what is Business Organization

2. To know what are the different types of business organization.

Business Organization

The term business organization describes how businesses are structured and how their
structure helps them meet their goals. In general, businesses are designed to focus on either
generating profit or improving society. When a business focuses on generating profits, it is known
as a for-profit organization. When an organization focuses on improving the social good through
the arts, education, health care, or some other area, it is known as a nonprofit (or not-for-profit)
organization and is not typically referred to as a business.

There are different categories of business organizations that relate to how the business
is established, owned, and operated. The basic categories of business organization are sole
proprietorship, partnership, and corporation. Each type of business organization has benefits as
well as disadvantages. For example, a sole proprietor of a small business is able to operate
independently of much of the government regulation that affects larger businesses, but he or
she is liable (responsible) for all financial risks of the business. Therefore, the owner of a small
grocery store is able to keep all the profits for herself, but she is also liable for all of her business
debts, even if she must repay a debt with her personal finances.

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Business organization affects how a business is treated under the law. State and
federal governments provide incentives and rules for every type of business organization.
Profitability in industry helps a country’s economy grow, so governments generally
support corporations by passing laws that protect investors from liability for the debts of
the business.

When Did It Begin?

Contemporary forms of business organization have their roots in the Industrial

Revolution. During the Industrial Revolution, manual labor was largely replaced by machine-
based labor. Industry developed around factories in which machines, not people, were the
primary tools of production. Many individuals, artisans, and family groups ceased working in
homes, in small workshops, and on farms and took factory jobs offering pay for unskilled labor.
As organizations became more focused around machines, they divided up responsibilities among
workers and developed chains of command to organize workers and managers in order of
authority. Individual worker’s jobs became more specialized and more routine.

In 1776 Scottish economist Adam Smith (1723–90) published An Inquiry into the Nature
and Causes of the Wealth of Nations , which highlighted the division of labor in production.
Manufacturers understood that they increased a business’s efficiency and productivity by
assigning workers simple, machine-based tasks. Workers were trained to be disciplined and to
support the routines of factory production.

English mathematician and inventor Charles Babbage (1791–1871) also studied the
division of labor in production. He applied the methods of science and mathematics to his
analysis of organization, management, planning, and labor in factories. In the early twentieth
century Babbage’s ideas were gathered into a theory of organization and management called
scientific management, which profoundly affected how businesses operate.

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The theories of scientific management were further developed by American engineer

Frederick Taylor (1856–1915), who organized the theory into five essential principals. The first
principle called for the shifting of responsibility within a business organization from the worker
to the manager. Managers, Taylor believed, needed to plan and design all of the work, and
workers needed to carry out assigned tasks. The second principle called for using scientific
methods to gain maximum efficiency in the production of goods. This meant that workers needed
to complete their tasks in a cost- and time-saving way. The third principle called for the necessity
of choosing the best and most qualified person to perform each job so that the skill level of the
worker and the demands of the task would be matched. The fourth principle stated that the
worker must be trained efficiently. The fifth stated that worker performance had to be monitored
so that procedures could be followed and the desired financial results achieved. Taylor’s
principles can still be seen at work in such modern businesses as fast-food restaurants.

3 Types of Business

1. Service Business

A service type of business provides intangible products (products with no physical form).
Service type firms offer professional skills, expertise, advice, and other similar products.
Examples of service businesses are: salons, repair shops, schools, banks, accounting firms, and
law firms.

2. Merchandising Business

This type of business buys products at wholesale price and sells the same at retail price.
They are known as "buy and sell" businesses. They make profit by selling the products at prices
higher than their purchase costs.

A merchandising business sells a product without changing its form. Examples are:
grocery stores, convenience stores, distributors, and other resellers.

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3. Manufacturing Business

Unlike a merchandising business, a manufacturing business buys products with the

intention of using them as materials in making a new product. Thus, there is a transformation of
the products purchased.

A manufacturing business combines raw materials, labor, and overhead costs in its
production process. The manufactured goods will then be sold to customers.

Hybrid Business

Hybrid businesses are companies that may be classified in more than one type of
business. A restaurant, for example, combines ingredients in making a fine meal (manufacturing),
sells a cold bottle of wine (merchandising), and fills customer orders (service).

Forms of Business Organization

1. Sole Proprietorship

A sole proprietorship is a business owned by only one person. It is easy to set-up and is
the least costly among all forms of ownership. The owner faces unlimited liability; meaning, the
creditors of the business may go after the personal assets of the owner if the business cannot
pay them.

The sole proprietorship form is usually adopted by small business entities.

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Advantages
 It's the easiest to set up because it doesn't require the filing of any papers.
 States do not require the registration of proprietorships.
 Profits are only taxed once on the owner's personal tax returns.
 The owner has complete control of the business and makes all the decisions.
 Tax forms are not complicated.
 Assets are easy to liquidate upon the death of owner.

Disadvantages
 The owner is exposed to unlimited legal liabilities. If you lose a lawsuit, you could lose your
home, car and other personal assets.
 Proprietorships cannot accept capital from outside investors.
 Borrowing money is more difficult. Banks are reluctant to make business loans to sole
proprietorships. You will have to rely on savings, home equity loans or loans from family
members.
 Business will be liquidated when owner passes away.

2. Partnership

A partnership is a business owned by two or more persons who contribute resources into
the entity. The partners divide the profits of the business among themselves.

In general partnerships, all partners have unlimited liability. In limited

partnerships, creditors cannot go after the personal assets of the limited partners.

Advantages
 They're easy to form.
 A partnership can bring together a group of individuals with different talents to share in the
responsibilities of running a business.
 If the partnership agreement permits, a partnership could continue to exist if one of the
partners dies.

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Disadvantages
 Partners are exposed to unlimited liabilities.
 Owners will not always agree on decisions. This could lead to management conflicts.
 Partners share in the profits of the business, but will not always feel they are being
adequately compensated for their contributions and services.

3. Corporation

A corporation is a business organization that has a separate legal personality from its
owners. Ownership in a stock corporation is represented by shares of stock.
The owners (stockholders) enjoy limited liability but have limited involvement in the company's
operations. The board of directors, an elected group from the stockholders, controls the activities
of the corporation.

In addition to those basic forms of business ownership, these are some other types of
organizations that are common today:

Limited Liability Company

Limited liability companies (LLCs) in the USA, are hybrid forms of business that have
characteristics of both a corporation and a partnership. An LLC is not incorporated; hence, it is
not considered a corporation. But, the owners enjoy limited liability like in a corporation. An LLC
may elect to be taxed as a sole proprietorship, a partnership, or a corporation.

Advantages
 Owners do not have personal liability for debts of the corporation. A shareholder only risks
the amount of the investment in the company.
 Has more access to financial resources. A corporation can sell stock to raise capital, obtain
bank loans or issue bonds for long-term financing.
 Corporations are better able to attract more talented and skilled employees than
proprietorships.
 The corporations continues to exist separately from the lives of its stockholders.

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Disadvantages
 A C Corp is the most complex business structure and requires a lawyer to set up.
 Earnings could be subject to double taxation.

Cooperative

A cooperative is a business organization owned by a group of individuals and is operated

for their mutual benefit. The persons making up the group are called members. Cooperatives may
be incorporated or unincorporated.

Some examples of cooperatives are: water and electricity (utility) cooperatives,

cooperative banking, credit unions, and housing cooperatives.

Henri Fayol's Principles of Management

Early Management Theory

Today's managers have access to an amazing array of resources which they can use to
improve their skills. But what about those managers who were leading the way forward 100 years
ago?

Managers in the early 1900s had very few external resources to draw upon to guide and
develop their management practice. But thanks to early theorists like Henri Fayol (1841-1925),
managers began to get the tools they needed to lead and manage more effectively. Fayol, and
others like him, are responsible for building the foundations of modern management theory.

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Henri Fayol was born in Istanbul in 1841. When he was 19, he began working as an
engineer at a large mining company in France. He eventually became the director, at a time when
the mining company employed more than 1,000 people.

Through the years, Fayol began to develop what he considered to be the 14 most
important principles of management. Essentially, these explained how managers should organize
and interact with staff.

In 1916, two years before he stepped down as director, he published his "14 Principles of
Management" in the book "Administration Industrielle et Générale." Fayol also created a list of
the six primary functions of management, which go hand in hand with the Principles.

Fayol's "14 Principles" was one of the earliest theories of management to be created, and
remains one of the most comprehensive. He's considered to be among the most influential
contributors to the modern concept of management, even though people don't refer to "The 14
Principles" often today.

The theory falls under the Administrative Management school of thought (as opposed to
the Scientific Management school, led by Fredrick Taylor ).

Fayol's 14 Principles of Management

1. Division of Work – When employees are specialized, output can increase because they
become increasingly skilled and efficient.
2. Authority – Managers must have the authority to give orders, but they must also keep in
mind that with authority comes responsibility.
3. Discipline – Discipline must be upheld in organizations, but methods for doing so can vary.

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4. Unity of Command – Employees should have only one direct supervisor.

5. Unity of Direction – Teams with the same objective should be working under the direction
of one manager, using one plan. This will ensure that action is properly coordinated.
6. Subordination of Individual Interests to the General Interest – The interests of one
employee should not be allowed to become more important than those of the group. This
includes managers.
7. Remuneration – Employee satisfaction depends on fair remuneration for everyone. This
includes financial and non-financial compensation.
8. Centralization – This principle refers to how close employees are to the decision-making
process. It is important to aim for an appropriate balance.
9. Scalar Chain – Employees should be aware of where they stand in the organization's
hierarchy, or chain of command.
10. Order – The workplace facilities must be clean, tidy and safe for employees. Everything
should have its place.

11. Equity – Managers should be fair to staff at all times, both maintaining discipline as
necessary and acting with kindness where appropriate.
12. Stability of Tenure of Personnel – Managers should strive to minimize employee turnover.
Personnel planning should be a priority.
13. Initiative – Employees should be given the necessary level of freedom to create and carry
out plans.
14. Esprit de Corps – Organizations should strive to promote team spirit and unity.

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References

https://www.encyclopedia.com/finance/encyclopedias-almanacs-transcripts-and-
maps/business-organization

https://www.accountingverse.com/accounting-basics/types-of-businesses.html

https://smallbusiness.chron.com/advantages-disadvantages-different-types-business-entities-
22544.html

https://www.mindtools.com/pages/article/henri-fayol.htm

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