3.1.2 Understanding different business forms Flashcards
Draw a diagram relating to the public and private sectors of the UK economy
What is the private sector?
part of the economy that is not state controlled, and is run by individuals and companies, usually for profit
What is the public sector?
this refers to all the businesses and organisations which are owned and run by the government
What are 8 factors affecting the choice of business forms?
- Sources of finance
- Size
- Taxes
- Profit (who shared with)
- Risks
- Ownership and control
- Registrations and payment
- Liability (limited and unlimited)
What is unlimited liability?
owners are personally responsible for the debts of the business. This means their personal possessions such as their cars etc would pay for debts should the business go bankrupt
What is limited liability?
the business has its own legal identity from its owner
What is a sole trader?
a person who is the exclusive owner of a business, entitled to keep all profits after tax has been paid but liable for all losses.
What are strengths of a sole trader?
- Don’t need to register anywhere (only have to tell HMRC)
- Owner keeps all of the profits
- Can’t sell shares so have complete control
- Are their own boss – no arguments
Weaknesses of a sole trader
Unlimited liability – can take personal possessions if the business goes into debt
Complete control (no other option)
Can’t sell shares so no extra money
Little start up capital to begin with
What is a private limited company?
A private limited company (Ltd) does not publically trade shares and is limited to a maximum of fifty shareholders
Strengths of a private limited company
Limited liability – can only take assets that belong to the business to pay off debts
Can use lots of ways to raise finance
Weaknesses of a private limited company
Profits must be shared with the shareholders in the form of dividends
Corporation tax
Have to pay to register the business
What is a public limited company?
Organisation that is owned by shareholders, and managed by directors. Members of the public can purchase stock, and most pay out dividends once or twice a year
Strengths of a public limited company
Limited liability – can only take assets that belong to the business to pay off debts
Can use all types to raise finance
Weaknesses of a public limited company
- Profit must be shared with the shareholders in the form of dividends
- £50,000 raised money to register with the Companies’ House
- Corporation tax
What are shareholders?
they are the owners of a limited company and they gain their financial reward from share ownership
What are two ways in which shareholders gain financial rewards?
- A share of the profits earned by the company – paid out as a dividend
- Growth in the value of their shareholding (compared with the cost of buying the shares) – which is “realised” when the shareholder sells the shares to someone else
What role do shareholders play?
Shareholders play an important role in the financing, operations, governance, and control aspects of a business
What is share price?
The share price indicates the market value of the business
What is market capitalisation?
- = this represents the total market value of the issued share capital of the company.
- = the current share value x the number of shares issued
- When demand for shares increases, the share prices increase too
Factors that affect share price
- Number of shares available
- Business expansion
- Investment
- Publicity
- E-commerce
- A recession – this will devalue shares significantly
How does the number of shares available affect share price?
the more shares that are available, the more people will want to invest in them, eventually leading to an increase in share price
How does business expansion affect shareholder dividends?
Shareholders will receive more dividends due to an increase in profit margins
How does investment affect share price?
if investment decisions work, then share value will increase and so more people will want to buy them. However in the short term, most of the profit made will be reinvested back into the business so dividends will decrease significantly
