1.2 Understanding different business forms

Question 1

Private sector

Answer 1

The private sector is part of the economy made up of private enterprises - businesses that are owned and controlled by individuals or groups of individuals.

Question 2

Businesses in the private sector fall into the categories

Answer 2

• Corporate businesses (private limited companies, public limited companies)
• Non-corporate businesses (sole traders, partnerships)

Question 3

Corporate businesses

Answer 3

Corporate businesses are businesses which have a legal identity that is separate from that of their owners.
They benefit from limited liability.

Question 4

Limited liability

Answer 4

Limited liability restricts the financial responsibility of shareholders for a company’s debts to the amount they have individually invested.

Question 5

Methods by which the liability of shareholders can be limited

Answer 5

• By shares: shareholder’s liability is limited to the value of the shares that s/he has purchased
• By guarantee: liability is restricted o the amount s/he has agreed to pay in the event of the business being wound up

Question 6

Two main types of corporate company:

Answer 6

Private limited companies (ltd)
- Much smaller than plc’s
- Share capital must not exceed 50 000 pounds
- Shares of ltd’s cannot be bought and sold without the agreement of other shareholders
- Company’s shares cannot be sold on the Stock Exchange

Public limited companies (plc)
- Shares can be traded on the Stock Exchange and bought by any business/ individual
- Must have a minimum capital of 50 000 pounds
- Public limited companies have to publish more details of their financial affairs than ltd’s

Question 7

Non-corporate businesses

Answer 7

Non-corporate businesses and their owners are not treated as separate elements - an owner’s private possessions are all at risk in the event of failure. They have unlimited liability.

Question 8

Types of non-corporate businesses:

Answer 8

Sole traders:
- Business owned by a single person
- May have a number of employees
- Common in retailing and services

Partnerships:
- Comprise between two and 20 people who contribute capital and expertise to a business
- Partnership is usually based on a Deed of Partnership (states how much capital each partner has contributed, share of profits each shall receive e.t.c.)

Question 9

Not-for-profit business

Answer 9

A not-for-profit business is an organisation that has business objectives other than making a profit.

Question 10

Objectives of not-for-profit businesses (social enterprises):

Answer 10

• To provide services to local communities
• To give people a job-related skills
• Fair-trading activities

Question 11

The public sector

Answer 11

The public sector is part of the economy that is owned and controlled by the government or local authorities.

Question 12

Privatisation

Answer 12

Privatisation is the process of converting government owned and controlled industries/ businesses to the private sector.

Question 13

Reasons for choosing different forms of business

Answer 13

• Formalities and expenses
• Size and risk
• Objectives of the owners

Question 14

Reasons for changing business form

Answer 14

• Circumstances - owners may wish to become incorporated in order to benefit from limited liability
• Capital - owner’s may find it easier to raise capital if they were incorporated
• Acquisition or takeover - may cause a change of structure

Question 15

Shareholders

Answer 15

Shareholders are the owners of a limited company and include any person, company or other institution that owns at least one share.

Question 16

Dividend

Answer 16

A dividend is a share of the company’s profits that are given to shareholders.

Question 17

Why shareholders invest?

Answer 17

• Dividends
• Capital growth - shareholders hope that the value of their shares will increase over time

Question 18

Influences on share price changes

Answer 18

• Performance - worse than expected profits = shares will go down in value
• Expectation of better or worse performance - might be a result of a new product due to be launched
• Changed within the market or competitive objective
• World uncertainty - global conflicts or economic downturn will cause share prices to fluctuate

Question 19

Effects of ownership on mission, objectives, decisions and performance

Answer 19

Public limited companies:
- Owned by shareholders who are driven by profit
- Focus on short-termism
- Decision-making will be made on the basis of achieving profit

Sole traders/ Private limited companies:
- Will be less affected by the need to achieve profits
- May be able to keep a closer focus on their mission statement and objectives