1.2 Understanding Different Business Forms

Question 1

Forms of businesses link with?

Answer 1

Shares & shareholders
Organisational structures
Business objectives
Stakeholders

Question 2

Business forms

Answer 2

Private sector ( unincorporated ) + (incorporated)

Unincorporated: Sole trader/ partnership
Incorporated: PLC/LTD

Question 3

Unincorporated

Answer 3

The owner is the business - no separate entity
Unlimited liability
Mostly composed by Sole Traders

Question 4

Incorporated

Answer 4

Company is a separate entity from the owner
Owners have limited liability
Mostly composed by LTD

Question 5

Unlimited liability

Answer 5

Business owner is personally responsible for debts and liability of the business

If the business fails, the owner is responsible for the amounts owed - liable

Question 6

Sole trader

Answer 6

The most common type of business structure

An individual owning a business on their own

Can employ people but do not share ownership

Owns all business assets and is responsible for unlimited liability

Question 7

Sole trader Advantages & Disadvantages

Answer 7

Benefits:

Quick & easy to set-up
Simple to run - complete control
Minimal paperwork
Easy to close

Drawbacks:

Full personal liability
Hard to raise finance
The business is the owner
Higher taxes than a company

Question 8

Importance of limited liability

Answer 8

Important protection for shareholders in a company

Shareholders can only lose the value of their investments

Limited liability does not cover:
- Wrongful/fraudulent trading
- When personal guarantees have been given by directors

Question 9

LTD (Limited Company)

Answer 9

Limited company are separate legal entities to the founders.

Companies are owned by shareholders and run by directors.

Shareholders own shares in the company but not the assets of the company and are not liable for any debts of the company.

Question 10

Limited company (part. 2)

Answer 10

The company owns assets and pays it’s debts. If the company becomes insolvent (cannot pay back debts) it gets closed.

Limited liability

Not traded (shares) publicly

Question 11

Private company Benefits & Drawbacks

Answer 11

Benefits:

• Limited liability
• Easy to raise finance
• Stable form of structure - even with changes of shareholders the business continues to exist

Drawbacks:

• Greater admin costs
• Public discourse of company information
• Director’s legal duties

Question 12

Public Limited Company

Answer 12

• A specialist type of limited company
• Shares may be quoted and traded on a public stock market
• When traded on a stock market, public companies have substantially more shareholders
• subject to greater regulation in terms of public disclosure of information

Question 13

Public Sector organisations

Answer 13

Relatively small number of companies are owned/controlled by the government. (Public Sector company)

Many more organisations that provide goods or services are owned by public bodies. (Organisation, not company)

Funded by local/central government, but may still levy charges for some services.

E.g., NHS, Highway agency, TeachFirst

Question 14

Not for profit organizations and social enterprises

Answer 14

Trade in order to benefit the community

Have social social and ethic aims as well as making financial return. Examples of social and ethic aims are that of creating employment opportunities, providing community services and safeguarding the environment

Different types of organisations are:

• Community development trusts
• Housing association
• Worker owned co-operatives and sports clubs

Question 15

Issues with different business forms

Answer 15

Unlimited and limited liabilty

Ordinary share capital

Market capitalisation

Dividends

Question 16

Ordinary share capital, market capitalisation & dividends

Answer 16

Market capitalisation: value of the shares of a company in a market

Dividends: payments made to the shareholders based on a percentage from profits

Ordinary share capital: the amount of money which is raised by the companies from the sale of new shares to shareholders

Question 17

How to calculate market cap

Answer 17

Number of shares in issue × share price

(E.g.,)

1.000.000 shares × £25 per share = £25.000.000 in market cap

Question 18

Reasons why shareholders invest & their role

Answer 18

Responsible for appointing board of directors

In LTD shareholders might also be the same directors

In PLC there are more shareholders and divorce of ownership and control

Question 19

The role of shareholders and why they invest (Part.2)

Answer 19

Invest in limited companies to earn returns

There are two parts in return: dividends and increase in share price

The level of dividend is decided by the business, but higher dividends might attract more potential shareholders

Shareholders can also earn a return if the share price increases over the amount they paid for the shares

Question 20

Influences on share price and the significance of share price changes

Answer 20

The share price is determined by the interaction of supply and demand

If demand for a share is higher than the supply, the price of the share should increase

A fall in share price means there is more supply than demand

The share price increase is also an indicator of the financial performance and it’s growth aspect and overall state of the economy

Question 21

Influence on share price ( Part. 2 )

Within and outside of control

Answer 21

Within the company’s control:

Financial performance (profit growth)
Dividend policy
Relationship with key investors
Management reputation

Outside of company’s control:

State of the economy
General market sentiment
Alternative Investments in the company’s sector

Question 22

The effect of ownership on mission and objectives ( Part. 1 )

Answer 22

The objectives of a sole trader are usually survival, large proportion of start-ups fail in the first few years

Sole traders can make their own objectives and missions as they do not have shareholders

Question 23

The effect on ownership, objectives and mission ( Part.2 )

Answer 23

Because Shareholders might be involved in the running of the business, they might set objectives focusing on:

Market share
Customers satisfaction & revenue growth

This might be different in PLC:

Shareholders are often interested on higher dividends and rising of share price to maximise returns

Directors might set objectives to maximise profits