1 - Business Ownership Flashcards
What Are The 4 Different Business Forms?
~ Sole traders.
~ Private and public limited companies.
~ Private and public sector organisations.
~ Non-profit organisations such as charities and mutuals.
What Is A Sole Trader?
(2 Points)
~ Business that is owned by one individual who retains all the profits generated by the business.
~ Unincorporated, meaning unlimited liability.
What Are The Benefits Of Being A Sole Trader?
(4 Points)
~ Simple set up process, cheap, quick and taxes are aligned with income tax.
~ No need to publish accounts due to private finances.
~ Retain all the profits as there are no shareholders or partners.
~ Complete control over decision making.
What Are The Drawbacks Of Being A Sole Trader?
(4 Points)
~ Unlimited liability, personal assets are at risk if the business fails.
~ Fewer sources of finance, as you cannot issue shares, expansion may be harder.
~ Little specialist skills, must be multi-skilled.
~ Difficult to find cover when unwell or to take a holiday.
Describe Limited Companies
(6 Points)
~ They exist in their own right.
~ Owners and the company are separate legal entities.
~ The companies finance are separate from the owners personal finances.
~ Shareholders are the owners.
~ Have limited liability.
~ Only lose the money that they have invested in the business in the form of shares.
What Is A Private Limited Company?
(4 Points)
~ LTD.
~ Company that is owned by its shareholders and managed by a director.
~ Shareholders will choose its directors.
~ Incorporated, meaning limited liability.
Describe Private Limited Companies
(2 Points)
~ Owned by shareholders who are known to the company.
~ Can only sell shares to other shareholders, cannot sell shares openly on a stock exchange.
What Are The Benefits Of Private Limited Companies?
(4 Points)
~ Limited liability, shareholders personal possessions are not at risk which can encourage investment.
~ Additional source of finance, can raise finance through selling shares.
~ Control of who shareholders are, at less risk of the divorce of ownership problem.
~ Financial records remain relatively private.
What Are The Drawbacks Of Private Limited Companies?
(4 Points)
~ No access to the stock exchange, meaning smaller volume of finance is available.
~ Shared profits, as many shareholders means diluted profits.
~ Legal requirement to publish finical accounts, meaning that competitors may be able to see.
~ Some loss of control as shareholders have voting rights.
What Is A Public Limited Company?
(2 Points)
~ Company that commonly offers shares to the general public via the stock exchange.
~ PLC.
Describe Public Limited Companies
(4 Points)
~ Limited liability, as it is a limited company.
~ Shares can be sold to the public via the stock exchange.
~ Must raise a minimum of £50,000 share capital.
~ Must have a minimum of 2 directors and 1 company secretary.
What Are The Benefits Of Public Limited Companies?
(4 Points)
~ Limited liability.
~ Separate legal entity.
~ Financial records remain relatively private.
~ More capital can be raised through the sales of shares.
What Are The Drawbacks Of Public Limited Companies?
(4 Points)
~ Lack of privacy as financial performance is available for all to view.
~ More complex to set up due to increased legal requirements and ongoing administrative costs.
~ Some loss of control as shareholders have voting rights.
~ Risk of hostile takeovers, if anyone can obtain 51% of shares in the company.
What Is Unlimited Liability?
(3 Points)
~ Unincorporated businesses have it. E.g. Partnerships and sole traders.
~ Owners and business is the same legal entity.
~ Owner is responsible for all debts the business incurs.
What Is Limited Liability?
~ Incorporated businesses have it. E.g. PLC and LTD.
~ Owner and the business are different legal entities.
~ Shareholders assets are not at risk in the event of the business incurring debts.
What Are Examples Of Incorporated Businesses?
(2 Points)
~ PLC.
~ LTD.
What Are Examples Of Unincorporated Businesses?
(2 Points)
~ Sole traders.
~ Partnerships.
What Is The Private Sector & Give Examples?
(2 Points)
~ Sector of the economy that is financed by entrepreneurs.
~ Has unincorporated businesses and incorporated businesses, franchises can be produced from both.
What Is The Public Sector & Give Examples?
(2 Points)
~ Sector of the economy that is financed by the government.
~ State education, NHS, public services and BBC.
Describe Not-For-Profit Organisations / Social Enterprises
(5 Points)
~ Businesses which don’t have an objective of profit, has objectives that benefit society.
~ Any profits made are reinvested into the business to pursue social objectives.
~ Can be set up as incorporated or unincorporated.
~ They benefit from reduced taxes.
~ Examples -> Social enterprises, charities.
How Do Not-For-Profit Organisations Make Its Money?
From fundraisers.
How Do Social Enterprises Make Its Money?
From selling goods and services.
What Are Mutuals?
(2 Points)
~ Organisations that operate for the wellbeing of their members.
~ Members can be customers, employees and suppliers.
What Are Issues With Different Forms Of Business?
(4 Points)
~ Unlimited and limited liability.
~ Ordinary share capital.
~ Market capitalisation.
~ Dividends.
Describe Ordinary Share Capital
(2 Points)
~ External source of finance available.
~ Investment given to a business in return for a share of the profit and a voting right.
How Do You Calculate Ordinary Share Capital
(2 Points)
~ External source of finance available.
~ Investment given to a business in return for a share of the profit and a voting right.
Describe Market Capitalisation
(2 Points)
~ Value of all of the shares issued by a PLC.
~ Gives an indication to the market.
How Do You Calculate Market Capitalisation?
Number Of Ordinary Issued Shares x Price Of 1 Share
What Are Dividends?
(2 Points)
~ % of profit paid to shareholders as a reward for their investment.
~ Usually paid annually in cash.
What Are Issues With Dividends?
(2 Points)
~ Opportunity cost, could have been spent on something else.
~ Short termism, just focused on their shareholders, not other stakeholders.
Describe Shareholders
(4 Points)
~ Anyone that has a share in a company.
~ Limited liability, the amount they invested is the maximum they can make in losses.
~ Receive dividends in return for their investment.
~ Invited to an AGM where they have a proportional voting right.
Why Would Someone Become A Shareholder?
(4 Points)
~ Capital gain, buy the share with hope the value of the share increases.
~ Earn dividends, cut of profits.
~ If you want control, need majority shares in the company.
~ Wider beliefs, when you invest in a company for ethical or environmental reasons.
How Is The Price Of A Share Determined In An LTD?
Agreement between owner of the share and the investor.
How Is The Price Of A Share Determined In An PLC?
(3 Points)
~ Supply and demand will influence the price on the stock exchange.
~ An increase in supply of shares, decreases the price of shares. Vice versa.
~ A fall in demand for shares, decreases the price of the share. Vice versa.
What Are The Influences On Share Price?
(4 Points)
~ Business performance.
~ Interest rates.
~ Economy.
~ Rivals performance.
Describe ‘Business Performance’ As An Influence Of Share Price
(2 Points)
~ If it is a positive performance, this increases the demand for the share, increasing the price.
~ If it is a negative performance more selling of those shares occur, increasing the supply for the share, this then decreases the price of the share.
Describe ‘Interest Rates’ As An Influence Of Share Price
(2 Points)
~ If they rise, it incentives investors to sell off these, causing the supply of shares to increase, decreasing the price.
~ If they fall, less attractive to put cash in bank so investment into shares increase, this increase demand and therefore the price.
Describe ‘Economy’ As An Influence Of Share Price
(2 Points)
~ If the economy is performing well, demand for shares increase, causing the price to increase.
~ If the economy isn’t performing well, supply for shares increases due to sell offs, causing price to decrease.
Describe ‘Rivals Performance’ As An Influence Of Share Price
(2 Points)
~ If it is good, leads to a sell off in your shares, causing supply for shares to increase and price to decrease.
~ If it is bad, this leads to your business performance doing well, leading to demand for your shares increasing and prices to increase.
What Is The Significance Of Share Price Changes?
~ Fall Below Price Paid = Lost money.
~ Rise Above Price Paid = Make money.
