3.1.2 Understanding different business forms.

Question 1

Define a private sector organisation.

Answer 1

Organisations that are owned, financed and run by private individuals.
Most aim for profit, a large majority however are none-profit.

Question 2

Define a public sector organisation.

Answer 2

Aka State owned or government organisations.

Owned and operated by the government. Can be at a national, regional or local level.

Question 3

What is the purpose of a public sector organisation.

Answer 3

Mainly provide essential service, including education, health care, police services, refuse collection and street lighting.
Usually free at the point of delivery.

Question 4

How are public sector organisations financed?

Answer 4

Taxation.

Question 5

What is the main aim of a public sector organisation.

Answer 5

Provide services that would be difficult for individuals to provide for themselves.

E.g. street lighting.

Or services that are essential deemed and may be unaffordable for some.

E.g. healthcare or education.

Question 6

What are the two business form classifications in the private sector?

Answer 6

Incorporated and Unincorporated.

Limited and unlimited liability.

Question 7

Define an unincorporated business.

Answer 7

When you have a contract with an unincorporated business, the contract is with your employer and not the business as a separate legal identity.

Question 8

Define an incorporated business.

Answer 8

When you have a contract with an incorporated business, it is with the business as a legal identity and not the owners.

Question 9

Define unlimited liability.

Answer 9

Characteristic of businesses that are unincorporated.

Owners do not have a separate legal identity to the business - meaning they are liable for debts.

Question 10

Outline what happens if a company with unlimited liability goes into debt and cannot pay.

Answer 10

If debts are greater than personal assets of the owner, can be forced into bankruptcy.

Question 11

What are the main types of businesses with unlimited liability?

Answer 11

Sole traders and partnerships.

Question 12

Define limited liability.

Answer 12

Characteristic of an incorporated business.

Owners have a separate legal identity to the business - they are not liable for the debt.

Question 13

Outline what happens if a company with limited liability goes into debt and cannot pay.

Answer 13

Goes into liquidation.

Shareholders have no responsibility for further payments as long as they have paid in full for the shares they have bought.

Personal assets cannot be used to pay the debts, legally, such a business has ‘died’ and therefore, its debts ‘die’ with it.

Question 14

What are the main types of businesses with limited liability?

Answer 14

Private and public limited companies.

Question 15

What is a sole trader?

Answer 15

A business that is owned by one person.

Question 16

What are the disadvantages of a sole trader?

Answer 16

Little capital for expansion.

Heavily reliant on the owners personal commitment for success.

Unincorporated - if unsuccessful, there is no protection from limited reliability - no legal separation of identities.

Difficult to enjoy economies of scale, i.e. lower costs per unit due to higher levels of production.

Question 17

What are the advantages of a sole trader?

Answer 17

Cheap and easy to start up.

Keep all the profit.

Business affairs are private.

Total control of the business.

Question 18

Outline the two types of incorporated business forms.

Answer 18

Private and public limited companies.

Question 19

Define a private limited company.

Answer 19

A small to medium sized business that is usually run by the family or small group of individuals who own it.

Question 20

Outline the features of a private limited company.

Answer 20

Affairs kept reasonably private - owners can determine business objectives without pressure to achieve short term profit

Funded by shares - cannot be sold without the agreement of all shareholders therefore, shares cannot be sold on the stock exchange.

Share capital may be less than £50,000 - though many have much higher.

Tend to be limited in size.

Must have ‘ltd’ at the end of it - warn people that its owners have limited liability.

Question 21

Define what is meant by a public limited company.

Answer 21

A company that is able to offer its shares to the public through the stock exchange.

Question 22

What are the advantages of a public limited company.

Answer 22

Easy access to capital - raising share capital from existing and new investors.

Liquidity - able to buy and share sells.

Value of shares - value of frim is shown through the market capitalisation (based on the share price).

Opportunities to easily make acquisitions - offering shares to shareholders of the target firm.

More prestigious profile.

Question 23

What are the disadvantages of a public limited company?

Answer 23

Involves a loss of control - business moves away from the family and becomes responsible to shareholders, including the institutional investors.

Subjects businesses to constant scrutiny by the financial press.

May cause businesses to focus on short term profits for shareholders and maintaining share prices in order to avoid takeover pressure - this detracts from long-term decision making.

Some large successful ltd’s resist becoming public while other successful plc’s revert to ltd.

Question 24

What is ordinary share capital?

Answer 24

Used in private and public companies. Aka risk capital or equity capital. Means all the company’s issued share capital, other than the capital, the holders of which have a right to a dividend at a fixed rate but have no other right to share in the company’s profits.

Question 25

What is market capitalisation?

Answer 25

The total value of the issued ordinary shares of a plc.

Question 26

How do you calculate market capitalisation?

Answer 26

Current market price of an individual share x number of issued ordinary shares.

Question 27

What is a dividend?

Answer 27

Regular payments of profit made to investors who own a company’s stock. Not all stocks pay dividends.

Question 28

What is a non-profit organisation?

Answer 28

Knows as the third sector - not part of the for profit private sector or the public sector. An organisation that does not distribute profit to their owners.

Question 29

What features do all non-profit organisations share?

Answer 29

Non-government organisations.

They have a governing body for managing affairs.

Value driven and have social, environmental, community, welfare or cultural aims or objectives.

Usually established for purposes other than financial gain.

Many use volunteer staff along with employees.

May make profit, but their objective is not profit maximisation.

Can operate under any legal structures including charities, trusts etc.

Question 30

What is a shareholder?

Answer 30

The owners of a company Can be multiple, or singular.

Question 31

Why might shareholders invest?

Answer 31

To provide financial support to a business and have involvement in running it.
To gain control of a business - up to 51% of shares.
Dividends.
To make capital gain - sell at a higher price than they bought.

Question 32

What are the influences on share price and the significance on share price changes?

Answer 32

State of the economy - can invoke confidence in investors - better performance and higher profits, thus leading to higher dividends.

Performance of the company - Share price increases.

Competition in the market - influence business performance and profitability.

Proposed takeover - can influence share price and reflect whether investors think the takeover bid is likely to succeed.

Investors expectations and response to rumours - rumour that company is going into liquidation can cause investors to sell off shares - this along with little demand for shares can cause a fall in share price.

Question 33

How does being in the public sector effect missions, objectives?

Answer 33

Generally focused on meeting social needs an providing essential services.

Question 34

How does being in the public sector effect decisions and performance?

Answer 34

Will reflect a focus on meeting social needs and providing essential services - some activities that are not profitable and still funded as local authorities have judged that the benefits of providing them to the public outweigh the cost of providing them

Question 35

How does being a non-profit effect missions, objectives?

Answer 35

Focused on generating enough profit or surplus to reinvest their particular field of investment, however not maximising profit.

Question 36

How does being a non-profit effect decisions and performance?

Answer 36

Need strong leadership and well trained staff.

Question 37

How does being in the private sector effect missions, objectives?

Answer 37

Aim for profit maximisation for their owners and make processes as efficient as possible to enable them to perform effectively and achieve their objectives.

Question 38

Outline leadership in the case of sole traders, partnerships and private limited companies.

Answer 38

Owners usually have a significant role in the management and leadership of the business.

Question 39

Outline missions and objectives in the case of sole traders, partnerships and private limited companies.

Answer 39

When businesses begin to expand - ownership often changes - effects missions and objectives.

Question 40

How does being a sole trader effect decision making and performance?

Answer 40

A sole that expands by becoming a partnership - benefit from additional expertise and finance, however will have to take the other owners views into account - requires a different approach to decision making.