1. What is Business? Flashcards
What is the private sector?
Part of the economy that’s made up of private businesses - businesses owned or controlled by individuals or groups of individuals.
What are corporate businesses? Name two types of corporate businesses.
Businesses which have a legal identity that is seperate from that of their owners.
Two types: Private limited company and public limited company.
What is limited liability?
It restricts the financial responsibility of shareholders for the company’s debts to the amount they have individually invested in.
What are private limited companies? 3
- Smaller than PLCs. Often family businesses.
- Share capital mustn’t exceed £50,000 and ‘Ltd’ must be after companies name.
- Shares cannot be sold without the agreement of other shareholders, and they cannot be sold on the Stock Exchange.
What are public limited companies?
- There shares can be traded on the Stock Exchange and bought by any business or individual.
- Must have the term ‘plc’ after their name.
- Must have a minimum capital of £50,000 by law.
- They have to publish more details of their financial accounts than an ‘ltd’.
When forming a company what two documents do they send and to who?
Memorandum of Association - company’s name, address and objectives in trading.
Articles of Association - internal arrangements of company, frequency of shareholders’ meetings
They send it to the Registrar of Companies.
What are non-corporate businesses? Name two types of non-corporate businesses.
A non-corporate business and it’s owners are not treated seperately - and owner’s private possessions are at risk in the event of failure.
Two types: Sole Traders and Partnerships
What are sole traders?
These are owned by a single person, although they may have a number of employees.
What are partnerships?
- These comprise between 2-20 people.
- Usually based on Deed of Partnership which states how much capital each partner has contributed and the share of profits.
Advantages of a Sole Trader (4)
- Simple and cheap to establish with few legal formalities.
- The owner receives all the profits.
- Able to respond quickly to changes in the market.
- Confidentiality is maintained as financial details do not have to be published.
Disadvantages of a Sole Trader (4)
- The owner is likely to be short of capital for investment and expansion.
- Few assets or collateral to support applications for loans.
- Unlimited liability.
- It can be difficult for sole traders to take holidays.
Advantages of a private limited company (4)
- Shareholders benefit from limited liability.
- Companies have access to greater amounts of capital.
- Private limited companies are only required to divulge a limited amount of financial information.
- Companies have a seperate legal identity.
Disadvantages of a private limited company (3)
- Private limited companies cannot sell their shares on the Stock Exchange.
- Requiring permission to sell shares limits potential for flexibility and growth.
- Private limited companies have to conform to a number of expensive administrative formalities.
Advantages of a public limited company (4)
- Public limited companies can gain positive publicity as a result of trading on the Stock Exchange.
- Stock Exchange quotation offers access to large amounts of capital.
- Stock Exchange rules are strict and this encourages investors to part with their money.
- Suppliers will be more willing to offer credit to public limited companies.
Disadvantages of a public limited company (3)
- A Stock Exchange listing means emphasis is placed on short-term financial results, not long-term performance.
- Public limited companies are required to publish a great deal of financial information.
- Trading as a public limited company can result in significant administrative expenses.
What is ordinary share capital?
Money invested in a company by shareholders entitling them to part-ownership of the company.
It’s permanent and will never be paid back to the owners by the company.
No. of shares x flotation share price (price when it was first issued)
What are some of the roles and rights of a shareholder? (3)
- Approve major decisions that impact them at a general meeting.
- Attend this general meeting and discuss what’s on the agenda.
- Certain actions that can only be done by shareholders; removal of directors or changing the name of a company.
What are two reasons for investing in shares?
Income: Shareholders are entitled to a share of company profits known as dividend. The total amount given to shareholders is decided by the board of directors and can vary, but investors hope that the return they get will increase over time.
Capital growth/gain: Shareholders hope that the value of their shares will increase over time.
What is a shareholder?
They are the owners of a limited company and include any person, company or other institution that owns at least one share.
What is a dividend?
A dividend is a share of the after-tax profit of a company distributed to its shareholders according to the number of shares held.
What is the public sector?
business owned by the government
e.g. NHS, police, BBC, fire service
what is privitisation?
when the government sells a business in the public sector (sells shares)
what is nationalisation?
when the government takes over a business in the private sector (buys the shares)
what are mutuals?
businesses owned by its members, e.g. nationwide and co-op
what is market capitalisation?
number of shares x CURRENT share price
3 reasons for choosing different forms of business
formalities and expenses - sole traders are easier and have few formalities
size and risk - sole trader better for remaining small
objectives of owners - if objectives involve growth, then forming an incorporated business might be more appropriate - more access to capital and limited liability would reduce risk
3 reasons for changing business form
circumstances - growth of the business, may wanted to become incorporated and benefit from limited liability
capital - may find it easier to raise capital becoming incorporated or a plc if its an ltd
acquisition or takeover - may cause change or structure, e.g. ltd taken over by an plc
4 reasons why share price may fluctuate
performance - if there are worse than expected profits, shares will go down. if profits are higher, share value will increase
expectation of better or worse profit performance - result of a new product due to be launched in the market
changes within the market or competitive environment - e.g. move of consumers from the mainstream supermarkets (Tesco) to discounters (Lidl), adversely affect tesco shares
world uncertainty - covid, economic downturn, conflict in middle east
effects of ownership on mission, objectives, decisions and performance
plc owned by shareholders who are driven by profit - leads to short term approach
decisions made on acheiving profit (short-termism and profit maximisation
E.g. In 2014, tesco saw falling profits and reported higher profits than they were. This led to a big fall in its share price and the CEO resigned
sole traders and ltd less affected by need to achieve profit - keep closer focus on mission statement and objectives
scientific decision making
what is unlimited liability?
the owners of a business are entirely responsible for its debts
what is a share price how is it affected
determined by the demand for it
if demand for a share increases then the share price increases
if demand for a share decreases then the share price decreases
external factors
availability of more performant investments
level of interest rate
state of the economy
changes in customers’ tastes, behaviour, income
how the external environment can affect cost and demand 5
competition market conditions economic factors (incomes and interest rates) social and environmental issues demographic factors
PESTLE + C
what is fair trade?
a scheme (cooperative) to ensure that producers in developing countries are paid fair prices
