The Purpose and Types of Business Organisation

One-page summary

Use this sheet in the last ten minutes before a practice attempt.

Chapter roundup

Every examinable point in this chapter, in order.

1. 1An organisation is a social arrangement which pursues collective goals, controls its own performance and has a boundary separating it from its environment.
2. 2Organisations are formed to obtain synergy: shared skills, pooled resources, division of work, accumulated knowledge and continuity.
3. 3All organisations share goals, people, resources, processes, structure, stakeholders and an external environment. Profit is not universal.
4. 4Organisations differ in purpose, ownership and control, funding, accountability, outputs, measures of success, scale and legal form.
5. 5Activity sectors: primary extracts, secondary manufactures, tertiary provides services.
6. 6Ownership sectors: private (investor owned), public (government owned or controlled), third sector (voluntary, charitable and community).
7. 7Commercial organisations exist to make a profit for their owners; a loss in one period does not change the classification.
8. 8Not-for-profit organisations pursue a mission and are judged on value for money — economy, efficiency and effectiveness.
9. 9Public-sector bodies are funded largely by taxation and are accountable to government and the electorate.
10. 10NGOs are independent of government and pursue social or humanitarian purposes; cooperatives are member owned and democratically controlled for mutual benefit.
11. 11Incorporation gives separate legal personality and limited liability, and separates ownership (shareholders) from management (directors).
12. 12Classify any entity with CONTROL + PURPOSE + ACTIVITY, and classify the entity named in the question, not its clients or its regulator.

Exam technique

• Objective-test questions in FBT are worth two marks each with no negative marking, so never leave an answer blank.
• Read the stem twice and underline the entity being classified before you look at the options.
• Where a question says ‘which TWO’, exactly two options are required; a single selection scores nothing.
• Eliminate options containing absolute words such as ‘always’, ‘never’ and ‘cannot’ — they are usually wrong in classification questions.
• Watch for mixed vocabulary: an option that combines an ownership term with an activity term is a common distractor.
• Allow roughly 1.2 minutes per two-mark objective question and flag anything that takes longer for review at the end.
• In multi-task questions, complete the classifications you are sure of first; the scenario usually supplies one decisive clue per entity.

Key terms glossary

Organisation

A social arrangement which pursues collective goals, controls its own performance and has a boundary separating it from its environment.

Synergy

The extra output obtained when people and resources work together, so that the combined result exceeds the sum of the individual efforts.

Stakeholder

Any person or group that affects, or is affected by, the activities of the organisation.

Formal structure

The documented division of authority, responsibility and reporting lines within an organisation.

Ownership

Legal title to the organisation and to any residual value or surplus it generates.

Control

The power to direct the policies and activities of the organisation.

Primary sector

Activity that extracts or harvests raw materials from natural resources.

Secondary sector

Activity that converts raw materials into finished or component goods.

Tertiary sector

Activity that provides services rather than tangible goods.

Profit

The surplus of income over expenditure, available to owners as a return on their investment.

Shareholder value

The total return to shareholders through dividends plus growth in the value of their shares.

Surplus

The excess of income over expenditure in a not-for-profit body, reinvested in its mission rather than distributed.

Value for money

The achievement of economy, efficiency and effectiveness in the use of resources — the three Es.

Public sector

Organisations owned or controlled by government and accountable, ultimately, to the electorate.

Accountability

The obligation to explain and justify the use of resources to those who provided them.

Non-governmental organisation

A body independent of government, typically pursuing humanitarian, developmental or social objectives.

Cooperative

An organisation owned and democratically controlled by its members for their mutual benefit, usually on a one-member-one-vote basis.

Limited liability

The liability of a member of a company is limited to the amount unpaid on their shares or their guarantee.

Separate legal personality

A company is a legal person distinct from its owners; it contracts, sues and is sued in its own name.

Unlimited liability

The owner is personally liable for all debts of the business, as for a sole trader or general partner.

Fund administrator

A service provider that maintains books and records, prepares valuations and reports and services investors on behalf of an investment fund.

Distinctions to master

• Public sector vs public company: Government control versus a company ownership or share concept.
• Not-for-profit vs no surplus: A not-for-profit may generate a surplus but normally reinvests it.
• NGO vs public-sector body: An NGO is operationally independent of government.
• Private sector vs tertiary sector: Ownership or control versus economic activity.
• Commercial purpose vs profit every year: A commercial organisation may temporarily make a loss.
• Shareholders vs directors: Owners versus those responsible for direction and management.
• Fund administrator vs investment fund: Service provider versus administered vehicle.

Syllabus coverage

• A1(a)Define business organisations and explain why they are formed.
• A1(b)Describe common features of business organisations.
• A1(c)Outline how business organisations differ.
• A1(d)List the industrial and commercial sectors in which business organisations operate.
• A1(e)Identify the different types of business organisation and their main features.