MGMT20144 Management Business Context Master of Business Administration (MBA) School of Business and Law MGMT20144 Management Business Context Unit 1 The Emergence of the Organization Introduction Organizations are one of the fundamental components within human society. Business Organizations are one form of the many organizations operating in our society. They exist primarily as a key form designed to facilitate human interactions and conversions and exchanges of tangible and intangible resources. These exchanges are designed to maintain an efficient economic market and sustain fair and reasoned stable social system providing sufficient benefits for social cohesion. In other words Business Organizations provide a coordinating capacity within the socio-economic framework of our world. As a definition the following is offered: A business organization is an individual or group of people that collaborate to achieve certain commercial goals. Some business organizations are formed to earn income for owners. Other business organizations, called nonprofits, are formed for public purposes. The timeline below indicates some of the major human civilizations and the dates during which they flourished. Civilizations such as these were dependent upon human organizations to operate. Even though there may have been a single ruler or a ruling group of a limited number, the other members of the civilization would be ‘organized’ into various different roles to ensure the successful operation of complex systems, processes and structures to support the civilization. Organizations to develop and coordinate, growing and gathering of food, designing and constructing buildings, ensuring safety & security (armed forces), services aimed at healing, and of course commerce and trade with close and more distant human groupings outside the civilization. From: rufinos2ciclo.blogspot.com accessed 25 May 2016 This unit covers some introductory concepts that will again be relevant to courses later in the MBA program or other programs undertaken by students. For example, the structure and form of a business has implications to the type of accounting and finance arrangements that will best serve its needs. It also defines the type of accounting and finance reporting structures it needs to maintain whether a publicly listed entity, private firm or not for profit organization. Courses such as ACCT20077 Accounting for Management Decisions and FINC20018 Managerial Finance will refer to the structure and form of the organization when discussing business decisions involving accounting and finance issues. Learning objectives This unit has the following learning objectives: ⦁ To understand the concept of the Business Organization and how they emerged as a product of human civilization and the contributions made. ⦁ Examine the role and nature of various forms of Business Organization and how they operate. ⦁ Recognize the ongoing role of Business Organizations in the 21st century in achieving outcomes for business and society. ⦁ Consider the various choices that a potential business owner needs to consider in establishing a business and selecting an appropriate structure under which to operate now and into the future. ⦁ Apply knowledge and skills gained from this unit towards resolving business challenges and issues. ⦁ The emergence of the Business Organization The Emergence of the Business Organization occurred as civilizations became more complex and reliant on trade between differing regions for needed products and services. The Roman empire at its height presented a sophisticated civilization requiring organizations to fulfil the variety of social and economic operations. During this period the corporation or company as a Business Structure came firmly into reality. The word "corporation" comes from corpus, the Latin word for body, or more precisely a "body of people." By the mid sixth century A.D. Roman Law recognized a range of corporate entities. The state itself (the populus Romanus), municipalities, political groups, and guilds of craftsmen or traders. Such bodies commonly had the right to own property and make contracts, to receive gifts and legacies, to sue and be sued, and, in general, to perform legal acts through representatives. Private associations were granted designated privileges and liberties by the emperor (Berman, 1983). In medieval Europe, churches became incorporated, as did local governments. The Catholic Church operating from the Vatican and the City of London Corporation. Incorporation would survive longer than the lives of any particular member, existing in perpetuity. This was the key advantage of the corporation the ability of the entity to continue beyond he lives of the first founders. In medieval times traders would do business through common law constructs, such as partnerships. Whenever people acted together with a view to profit, the law held that a partnership existed. So it can be seen that a number of Business Structures that operate today have had a long presence in human history supporting both for profit and not for profit endeavors. Two of the major refinements to the legal view of corporations over time has been both the limitation of liability but also the expectation of obligation to society. Despite not being human beings, corporations, are regarded as legal persons with many of the same rights and responsibilities as natural persons. Corporations can exercise human rights against real individuals and also the state, Corporations can also be held responsible for human rights violations. Corporations if found guilty under the law are certainly censured, are fined and depending on the nature of the violation governments may pursue a regulatory response to attend to what may be seen as a market failure. The Dodd-Frank Wall Street Reform and Consumer Protection Act, 2010 made changes to the American financial regulatory environment that affects all federal financial regulatory agencies and substantial sections of the nation's financial services industry (Sweet, 2010). This unit will help you to understand the the emergence of the Business Organization in internal environment of an organization and the key elements of organization structure and its approach to managing people and how they influence the way people behave. Common Business Structures There are a number of commonly used business structures that operate in most market based economy systems around the world. The principal ones to operate in a developed economy like Australia which demonstrate developed legal and regulatory systems and a mature democracy, would be as follows: ⦁ Sole Trader ⦁ Partnership ⦁ Company ⦁ Trust Each of these will be discussed in turn. Sole Trader Sole trader is the simplest business structure of the four. It is simple to establish because there are few legal and tax requirements. Under the Sole Trader model the business income is treated as the owner operators’ individual income. The Sole Trader is responsible for any tax the business is liable to pay. In Australia Sole Trader businesses with business turnover of $A75,000.00 must register for GST (Goods and Services Tax). Business name It is not necessary for a business to register a business name if the owner uses their own personal name. For more details and examples read more in Register a business name. Registering a business name does not give ownership or legal protection of that name. Trade marking will legally protect the name and stops others from trading with it - read more in Protect your business name or idea. Tax registrations Tax File Number (TFN) A sole trader can trade on their individual TFN. Australian Business Number (ABN) An ABN is required to avoid having amounts withheld from payments to the business (business clients must withhold 46.5% of any payments they make to you if you don't quote an ABN). An ABN is compulsory if the business collects GST. When a business owner applies for an ABN with the Australian Business Register (ABR), they will be asked to indicate if they want to register under the sole trader business structure. Sole traders who are working as an employee or in connection with earning payment as a company director, office holder or under a labour hire arrangement, are not entitled to an ABN. Goods and Services Tax (GST) The business needs to register for GST if your expected or current turnover is $75,000 or over. Superannuation As a sole trader, owners are responsible for their own super arrangements. They may also be able to claim a deduction for any personal super contributions they make. Before a deduction can be claimed, owners have to notify the fund of their intention to claim the amount as a deduction and wait until the fund confirms that they can claim the amount as a deduction. Once the owner receives this confirmation, they can claim the super as a personal deduction on their tax return. Employing people If an owner employs people, they will have responsibilities, including employee payroll tax and PAYG (including reporting and paying tax on fringe benefits) and superannuation payments for any eligible employees. Insurance A sole trader owns all the business assets and is responsible for the liabilities of the business. Liability is unlimited and includes all personal assets, including any assets the owner shares with another person (such as a jointly-owned home or money in a joint bank account). Find the right insurance to protect your business from trade interruptions. Partnership A partnership is created when two or more people (up to 20) go into business together. Partnerships can either be general or limited. General partnership A general partnership is one where all partners are equally responsible for the management of the business, and each has unlimited liability for the debts and obligations which that business may incur. A family partnership is where two or more members of that partnership are related to one another. Limited partnership A limited partnership is one where the liability of one or more partners for the debts and obligations of the business is limited. A limited partnership consists of one or more general partners (whose liability is unlimited) and one or more limited partners (whose liability is limited in proportion to their investment). There is no maximum number of limited partners. A further form of limited partnership is an incorporated limited partnership. An incorporated limited partnership is primarily used by businesses engaged in high-risk venture capital projects. To establish such a partnership legal advice and documentation would be advised. In the Australian state of Victoria limited and incorporated limited partnerships must be registered with Consumer Affairs Victoria (CAV). In Victoria partnerships are governed by the Partnership Act 1958. In Queensland partnerships are governed by the Partnership Act 1891. In New South Wales partnerships are governed by the Partnership Act 1892. Each Australian State and Territory will have corresponding legislation regarding dealing with partnership business structures. Refer to the State or Territory legislation website that is appropriate for detail. Similarly in jurisdiction around the globe the partnership business structure will have legislation enacted at either a local state, federal or national level. Company A Company is a more complex business structure which requires establishment and continuing administration costs that are higher than for Sole Trader or Partnership. All monies the business earns and all liabilities it accrues belong to the Company. A Company must have its own separate banking account to owners of the business. Companies must lodge an annual Company tax return, indicating income, business related deductions and income tax that it is liable to pay. Company further explained A company has members (shareholders) who own the company and directors who run it. However, if you're an independent contractor you can set up a 'one person company' with a sole director and member. Companies can also be listed as public companies, meaning the public can buy shares to invest in the company. Legal obligations with Australian Securities and Investments Commission (ASIC) There are strict standards (under the Corporations Act 2001), which include reporting to members and ASIC. Legal liability of a company Companies have limited liability, but directors can be personally liable under the Corporations Act 2001 if found to be fraudulent, negligent or reckless. Due to limited liability, a company structure may be advantageous to a high-risk business. However, major creditors often insist directors personally guarantee the company's liabilities. Personal liability of directors and employees can also arise if they commit an offence under the Corporations Act 2001, or are found to have negligently performed their duties. A company can sue and be sued in its own right. Proprietary and limited companies A proprietary company must have no more than 50 non-employee shareholders and be either limited by shares or an unlimited company that has a share capital A company limited by shares, limits the liability of shareholders to the value of their shares. This structure is suitable for most trading businesses. A company limited by guarantee is most often used by non-trading organizations, for example, sporting clubs. 'Proprietary' or 'Pty' must be included in a company name to indicate legal status as a company. 'Limited' or 'Ltd' also needs to be included in a company name if it's a limited liability company. The Australian Securities and Investment Commission (ASIC) has more information on your legal obligations as a company External link (opens in same window), including rules governing the selling of shares, the keeping of company and financial records and registers and preparing. Tax File Number (TFN) A company has its own tax return and business Tax File Number (TFN). ABN & ACN - what's the difference? A company's ACN is a unique, nine-digit number issued by ASIC that offers identification while transacting business. It is a legal requirement for the ACN to be displayed on a range of documents, including invoices, official company notices, cheques and business letterheads. Trust A trading trust is usually an entity that holds property (capital) for certain beneficiaries. This type of business structure is formed when either a gift or settlement is made to a trustee (a person or a company) on behalf of a yet-to-be-formed trust. A solicitor then draws up a Trust Deed setting out the trust's powers and formalizing its administration. While there may be ease of succession in a trust business structure, trading trusts are a complex and expensive business structure and are subject to higher compliance costs. Tax registrations Tax File Number (TFN) A trust must have its own TFN to use when lodging its annual tax return - the trustee needs to apply for it on the ABN application form. Australian Business Number (ABN) If the trust is carrying on an enterprise in Australia, the trustee must register for an ABN for the trust. Goods and Services Tax (GST) If the trust is carrying on an enterprise, and it's turnover is over $75,000 or more, it must register for GST. For non-profit organisations, the registration threshold is $150,000. Employing people If a trust employs people, the trustee will have responsibilities, including employee payroll tax and PAYG (including reporting and paying tax on fringe benefits) and superannuation payments for any eligible employees. Distribution of income, taxation Rather than shareholders, a trust has beneficiaries who are entitled to distributions of capital and/or income. These distributions are controlled by the trustee and form part of a beneficiary's personal income, subject to income tax and provisional tax. The ATO has more information on how a trust can file its tax returns External link (opens in same window). Winding up a trust A trust can be wound up and the assets distributed, but only where there is consent of the beneficiaries. Where beneficiaries are specified as a class (which is usual), or are children, it can be difficult to obtain consent. If you are considering using this structure, you will need to carefully consider the relevance of any tax savings and the potential difficulties involved in winding up. Other forms of Business Structures Incorporated association An incorporated association is a registered legal entity usually established for recreational, cultural or charitable purposes. It must have at least five members and all profits are put back into the association's activities. This structure offers many benefits to suitable organizations. Incorporation makes an association a legal entity and gives it a legal structure independent of its individual members, making it easier for the organization to enter into contracts. Incorporation allows your association to: ⦁ continue regardless of changes to membership ⦁ accept gifts, bequests and grants ⦁ buy and sell property ⦁ enter into enforceable contracts ⦁ sue or be sued, and ⦁ invest and borrow money. An incorporated association can be established for any legal purpose. Registration is inexpensive and it's relatively easy to establish and operate - the profits are also not subject to tax. Consumer Affairs Victoria, which regulates all incorporated associations, have information on whether your club should be incorporated. External link (opens in same window) However, profits cannot be distributed to members - they must be applied to the objectives of the association. There is an annual financial reporting requirement to both the members and to Consumer Affairs Victoria which attracts a fee. Membership Incorporated associations require an approved constitution with rules covering such matters as qualifications for membership, quorums for meetings and provisions for elections. Incorporation provides benefits for members and officers, including: ⦁ protection against personal responsibility for any debts or liabilities incurred by the association, and ⦁ limiting of personal liability to outstanding fees. If all your members are Aboriginal you may like to consider an Incorporated Aboriginal Corporation. Non-profit Incorporated associations are non-profit organisations. Any profits made should be put back into the association and not provided as personal gain for its members. Liability Incorporated associations can own and fully control property. If the organization is sued, the liability of club members for debts or damage is limited. Members or office-bearers of unincorporated associations on the other hand may be sued or held personally liable for the debts of the organization. Bequests, gifts and funding An incorporated association can invest a bequest, or gift, given through a will. It can also borrow money and operate a bank account in its own name. It is sometimes easier for an incorporated association to obtain government funding due to the association's stable structure. Online transactions Consumer Affairs Victoria allows you to conduct many of the transactions related to incorporated associations online e.g. purchase an incorporated association extract using your credit card. Legislation Incorporated associations are subject to the Associations Incorporation Act 1981. Register as an incorporated association Hold a meeting amongst members to vote on whether your organization wants to incorporate. A majority of votes must be obtained to authorize a person, who is at least 18 years old and lives in Australia to incorporate the association and approve proposed rules that comply with the Associations Incorporation Reform Act 2012 or approve the adoption of model rules. Cooperative As a registered legal entity, a cooperative differs from a company in that it requires at least five shareholders, each of whom hold equal voting rights. Cooperatives apply the concepts of sharing, democracy and delegation in order to benefit all members. Generally, all members are expected to participate and share the responsibility of running the organisation. Cooperatives are regulated by Consumer Affairs Victoria (CAV). Advantages Advantages of cooperatives are: Equal votes All shareholders have an equal vote at general meetings regardless of their shareholding or involvement in the cooperative. Lower debt risk Shareholders, directors, managers and employees have no responsibility for debts of the cooperative unless those debts have been caused recklessly, negligently or fraudulently. Age of members Members, other than directors, can be under 18, though these members cannot stand for office and do not have the right to vote. Support The Cooperative Federation of Victoria Ltd and Consumer Affairs Victoria External link (opens in same window) can provide you with assistance when establishing a cooperative. More control A cooperative is member owned and controlled, rather than controlled by investors. Share the load All members and shareholders have to be active in the co-operative. Disadvantages Disadvantages of cooperatives are: Number of members There must be a minimum of five members. Limited profit distribution There is a usually a limited distribution of surplus (profits) to members/shareholders and some cooperatives may prohibit the distribution of any surplus to members/shareholders Difficulty attracting members As cooperatives are formed to provide a service to their members rather than a return on investment, it may be difficult to attract potential members/shareholders whose primary interest is a financial return. One vote only Even though some shareholders may have a greater involvement or investment than others, they still only get one vote. Ongoing educational requirements Cooperatives require ongoing cooperative education programs for members. Key factors to decide Consider the following if you decide to register as a cooperative: Membership Anyone can apply to be a member of a cooperative, with the directors making decisions about the suitability of applicants. Directors are nominated and elected by members and have specific duties that are defined by common and statutory law. Any member may choose to nominate themselves as director. Legislation Cooperatives are subject to Corporations Law and the Cooperatives National Law. Change of rules Although a cooperative is an organization run under rules established at its incorporation, a cooperative may change its rules. Any such rule changes must be passed by special resolution at a general meeting, following submission of a draft of the resolution and the relevant form to the Registrar of Cooperatives at Consumer Affairs Victoria for approval. Director's duties According to the Cooperatives Act 1996, directors of a cooperative are subject to both common law and statutory duties. Common law duties According to common law duties, a director must: ⦁ act in good faith ⦁ act with care and diligence ⦁ avoid conflicts of interest ⦁ avoid the unauthorised use of cooperative property or information ⦁ avoid the taking of unauthorised benefits ⦁ act honestly ⦁ act within the powers granted to them. Statutory duties A director's statutory duties include those set out in the Cooperatives Act 1996. The duties specified are: ⦁ to act honestly ⦁ to exercise care and diligence ⦁ not to improperly use information gained as a director or misuse improperly his or her position to manage the co-operative ⦁ not to contravene any section of the act, particularly any applicable to directors. For example, a director must not act fraudulently or conceal, mutilate or falsify securities of the cooperative or any of its books, and must deliver up all documents they are required to. Further information for directors This information is presented as a guide to help you understand a director's role and responsibilities in a cooperative. Get more information and guidance about cooperatives External link (opens in same window) from the Consumer Affairs website. The activity presented below is designed to aid your thinking through issues associated with the choice of business structure for running a business. There are benefits and tradeoffs for each type of structure and the context of size and complexity of business is a primary consideration Required Reading References: Berman, H.J. 1983. Law and Revolution (vol. 1): The Formation of the Western Legal Tradition, Harvard University Press, Cambridge, M.A. ISBN 0674517768 Business Victoria, 2016. Setting up a Business, Business Victoria Website at http://www.business.vic.gov.au/setting-up-a-business/business-structure accessed 29 May 2016 Sweet, W. 2010. Dodd-Frank Act becomes Law. The Harvard Law School Forum on Corporate Governance and Financial Regulation. July 21, https://corpgov.law.harvard.edu/2010/07/21/dodd-frank-act-becomes-law/ Accessed 30 May 2016. Taxpayers Australia, 2016. Small Business – Business Structures, Taxpayers Australia website at http://www.taxpayer.com.au/KnowledgeBase/10185/Small-Business-Tax-Super/Business_structures accessed 30 May 2016.