3.1.2 - Understanding different business forms

Question 1

What legal responsibilities does choosing a business form determine?

Answer 1

1. the paperwork they must fill in to get started
2. the taxes they will have to manage and pay
3. how they can personally take the profit their business makes
4. their personal responsibilities if their business makes a loss

Question 2

What is the most common reason for a business to change its structure?

Answer 2

A business expands and grows.

Question 3

What are aspects of unincorporated businesses?

Answer 3

1. Owners have unlimited liability for business actions (including debts).
2. The owner is not a separate legal entity to the business.
3. They operate as sole traders.

Question 4

What are incorporated businesses?

Answer 4

1. Owners have limited liability.
2. Legal difference between the business and the owners.
3. They operate as private limited companies.

Question 5

What are some examples of unincorporated businesses?

Answer 5

Sole traders and partnerships

Question 6

What are some examples of incorporated businesses?

Answer 6

Private limited companies and public limited companies

Question 7

What is unlimited liability?

Answer 7

Where business owners are personally responsible for the debts and liabilities of the business so are required to cover these costs if the business was to collapse.

Question 8

What is limited liability?

Answer 8

Where a company is a separate legal entity to its shareholders so they are not legally responsible for the liabilities or debts or the business.

Question 9

What is the main benefit of limited liability?

Answer 9

1. It serves as a protection for the shareholders of a company so they can only lose the value of their investment but they are not liable for any company debt.

Question 10

Describe sole traders

Answer 10

• Most common type of business
• Owned by a singular shareholder/individual
• Individual owns all business assets personally so has unlimited liability for the business debt if it was to fail.

Question 11

What are the advantages of sole traders?

Answer 11

1. Quick and easy to set up - can be easily transferred to a limited company once launched.
2. Simple to run as decision making is down to the owner only.
3. Minimal paperwork/admin.
4. Easy to shut down.

Question 12

What are the disadvantages of sole traders?

Answer 12

1. Unlimited liability
2. Harder to raise finance due to limited personal funds.
3. The business suffers if the owner becomes ill or less interested.
4. Can pay a higher tax rate than a company.

Question 13

Describe a limited company.

Answer 13

• Exists as a separate legal entity to the shareholders so they have limited liability.
• Companies are owned by their shareholders and run by directors who work in the interest of the shareholders.

Question 14

What are the advantages of a limited company?

Answer 14

• Limited liability means shareholders are protected from financial liability.
• Easy to raise finance as shares can be sold.
• A stable form of structure so the business remains even when shareholders change.

Question 15

What are the disadvantages of a limited company?

Answer 15

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

Question 16

What are private sector businesses?

Answer 16

Businesses that are operated and owned by private individuals and companies and are generally run for profit (to earn dividends for shareholders)

Question 17

What are public sector businesses?

Answer 17

Businesses and organisations that are owned by the government and run on behalf of the public. They exist to provide goods and services to the public using public funds, not for profit.

Question 18

What are some examples of public sector businesses?

Answer 18

1. NHS
2. Network Rail
3. RBS

Question 19

Describe private limited companies.

Answer 19

• Privately - owned
• Shares cannot be traded publicly (public stock exchange)
• Most popular incorporated business form
• Quick and cheap to set up and administer
• Usually 1 or minimal shareholders.

Question 20

Describe public limited companies.

Answer 20

• Minimum share capital of £50,000
• Shares can be traded publicly
• Usually many shareholders (not involved in the day to day running of the business
• More information disclosed to public
• More expensive to administer.

Question 21

What is a share?

Answer 21

An individual part of the issued share capital of a company

Question 22

What are some influences on the share price?

Answer 22

• Proposed takeovers
• Competition in the market
• The performance of the business - if the business is performing well, the share price will increase
• Investors expectations and their response to rumours
• Extreme events cause market recession.
• business reputation

Question 23

What are the effects of being a sole trader on mission and objectives?

Answer 23

More likely to focus on survival, cash flow and profit satisficing objectives

Question 24

What are the effects of being an LTD on mission and objectives?

Answer 24

More likely to focus on long-term performance and profit.

Question 25

What are the effects of being a PLC on mission and objectives?

Answer 25

More likely to focus on short-term performance and profit maximising.

Question 26

What are the effects of being a social enterprise on mission and objectives?

Answer 26

More likely to focus on ethical and social objectives.

Question 27

What is ordinary share capital?

Answer 27

The most common and riskiest type of share as there is no guaranteed dividend. The ordinary share capital refers to the value of all the issued ordinary shares of a business.

Question 28

What is market capitalisation?

Answer 28

The value of the company determined by multiplying the share price by the number of shares issued.

Question 29

What are the rewards from being a shareholder?

Answer 29

-Dividends - payments made to shareholders by the company from earned profits. The amount paid out to shareholders is always per share.
-Capital growth - an increase in the value of the business is reflected in an increase in the share price. Capital gain occurs when a share is sold for a higher price than it was initially purchased.

Question 30

What is demand?

Answer 30

The quantity of a product/service that a consumer is willing and able to buy at different prices.