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business > 4. Types of business organisation > Flashcards

4. Types of business organisation Flashcards

1
Q

what is a sole trader?

A

Is a business owned by 1 person

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2
Q

what are the legal regulations to be a sole trader?

A
  • The owner must register with and send annual accounts to the government Tax Office.
  • They must register their business names with the Registrar of Business Names.
  • They must obey all basic laws for trading and commerce.
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3
Q

what are the advantages of being a sole trader?

A
  • There are so few legal formalities are required to operate the business.
  • The owner is his own boss, and has total control over the business.
  • The owner gets 100% of profits.
  • Motivation because he gets all the profits.
  • The owner has freedom to change working hours or whom to employ, etc.
  • He has personal contact with customers.
  • He does not have to share information with anyone but the tax office, thus he enjoys complete secrecy.
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4
Q

what are the disadvantages of being a sole trader?

A
  • Nobody to discuss problems with.
  • Unlimited liability.
  • Limited finance/capital, business will remain small.
  • The owner normally spends long hours working.
  • Some parts of the business can be inefficient because of lack of specialists.
  • Does not benefit from economies of scale.
  • No continuity, no legal identity.
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5
Q

what is a partnership?

A

A partnership is a form of business consisting of 2 or more people who agree to jointly own a business

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6
Q

what is a partnership agreement?

A

is the written and legal agreement between business partners it is not essential for partners to have such an agreement but it is always recommended

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7
Q

what are the advantages of a partnership?

A
  • More capital than a sole trader.
  • Responsibilities are split.
  • Any losses are shared between partners.
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8
Q

what are the disadvantages of a partnership?

A
  • Unlimited liability.
  • No continuity, no legal identity.
  • Partners can disagree on decisions, slowing down decision making.
  • If one partner is inefficient or dishonest, everybody loses.
  • Limited capital, there is a limit of 20 people for any partnership.
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9
Q

who are partnerships recommended to?

A
  • Want to make a bigger business but does not want legal complications.
  • Professionals, such as doctors or lawyers, cannot form a company, and can only form a partnership.
  • Family, when they want a simple means of getting everybody into a business (Warning: Nepotism is usually not recommended).

Note: In some countries including the UK there can be Limited Partnerships. This business has limited liability but shares cannot be bought or sold, it is a separate legal unit that still exists after partners death. It is abbreviated as LLP.

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10
Q

what is a private limited company?

A

are businesses owned by shareholders but they cannot sell shares to the public

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11
Q

what is an incorporated business?

A

are companies that have seperate legal status from their owners

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12
Q

what is a shareholder?

A

are the owners of a limited company. they buy shares which represent part-ownership of the company

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13
Q

what are the advantages of a private limited company?

A
  • The sale of shares make raising finance a lot easier.
  • Shareholders have limited liability, therefore it is safer for people to invest but creditors must be cautious because if the business fails they will not get their money back.
  • Original owners are still able to keep control of the business by restricting share distribution.
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14
Q

what are the disadvantages of a private limited company?

A
  1. Owners need to deal with many legal formalities before forming a private limited company:
     The Articles of Association: This contains the rules on how the company will be managed. It states the rights and duties of directors, the rules on the election of directors and holding an official meeting, as well as the issuing of shares.
     The Memorandum of Association: This contains very important information about the company and directors. The official name and addresses of the registered offices of the company must be stated. The objectives of the company must be given and also the amount of share capital the owners intend to raise. The number of shares to be bought by each of the directors must also be made clear.
     Certificate of Incorporation: the document issued by the Registrar of Companies that will allow the Company to start trading.
  2. Shares cannot be freely sold without the consent of all shareholders.
  3. The accounts of the company are less secret than that of sole traders and partnerships. Public information must be provided to the Registrar of Companies.
  4. Capital is still limited as the company cannot sell shares to the public.
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15
Q

what is a public limited company?

A

are businesses owned by shareholders but they can sell shares to the public and their shares are trade-able on the stock exchange

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16
Q

how can a private limited company be converted into a public limited company?

A
  1. A statement in the Memorandum of Association must be made so that it says this company is a public limited company.
  2. All accounts must be made public.
  3. The company has to apply for a listing in the Stock Exchange.
17
Q

what are the advantages of a public limited company?

A
  • Limited liability.
  • Continuity.
  • Potential to raise limitless capital.
  • No restrictions on transfer of shares.
  • High status will attract investors and customers.
18
Q

what are the disadvantages of a public limited company?

A
  • Many legal formalities required to form the business.
  • Many more regulations and control over public limited company to protect shareholders, including the publishing of annual accounts.
  • Selling shares is expensive, because of the commission paid to banks to aid in selling shares and costs of printing the prospectus.
  • Difficult to control since it is so large.
  • Owners lose control, when the original owners hold less than 51% of shares.
19
Q

Control and ownership in a public limited company:

A

The Annual General Meeting (AGM) is held every year and all shareholders are invited to attend so that they can elect their Board of Directors. Normally, Directors are majority shareholders who has the power to do whatever they want. However, this is not the case for public limited companies since there can be millions of shareholders. Anyway, when directors are elected, they have to power to make important decisions. However, they must hire managers to attend to day to day decisions. Therefore:
• Shareholders own the company
• Directors and managers control the company
This is called the divorce between ownership and control.
Because shareholders invested in the company, they expect dividends. The directors could do things other than give shareholders dividends, such as trying to expand the company. However, they might loose their status in the next AGM if shareholders are not happy with what they are doing. All in all, both directors and shareholders have their own objectives.
Dividends are payments made to shareholders from profits of a company. They are return (reward) to shareholders for investing in the company.

20
Q

what is an annual general meeting?

A

is a legal requirement for all companies. shareholders may attend and vote on who they want to be on the board of directors for the coming year

21
Q

what is dividends?

A

are payments made to shareholders from the profits (after tax) of a company. they are the return to shareholders for investing in the company

22
Q

what is a franchise?

A

is a business based upon the use of the brand names, promotional logos and trading methods of an existing successful business. the franchisee buys the licence to operate this business from the franchisor

23
Q

what are the advantages of a franchisor?

A
  • The franchisee has to pay to use the brand name.
  • Expansion is much faster because the franchisor does not have to finance all new outlets.
  • The franchisee manages outlets
  • All products sold must be bought from the franchisor.
24
Q

what are the disadvantages of a franchisor?

A
  • The failure of one franchise could lead to a bad reputation of the whole business.
  • The franchisee keeps the profits.
25
Q

what are the advantages of a franchisee?

A
  • The chance of failure is much reduced due to the well know brand image.
  • The franchisor pays for advertising.
  • All supplies can be obtained from the franchisor.
  • Many business decisions will be made by the franchisor (prices, store layout, products).
  • Training for staff and management is provide by the franchisor.
  • Banks are more willing to lend to franchisees because of lower risks.
26
Q

what are the disadvantages of a franchisee?

A
  • Less independence
  • May be unable to make decisions that would suit the local area.
  • Licence fee must be paid annually and a percentage of the turnover must be paid.
27
Q

what is a joint venture?

A

Two or more businesses agree to start a new project together, sharing capital, risks and profits.

28
Q

what are the advantages of a joint venture?

A
  • Shared costs are good for tackling expensive projects. (e.g aircraft)
  • Pooled knowledge. (e.g foreign and local business)
  • Risks are shared.
29
Q

what are the disadvantages of a joint venture?

A
  • Profits have to be shared.
  • Disagreements might occur.
  • The two partners might run the joint venture differently.
30
Q

what is a public corporation?

A

is a business in the public sector that is owned and controlled by the state (government)

31
Q

what are the advantages of being in a public corporation?

A
  • Some businesses are considered too important to be owned by an individual. (electricity, water, airline)
  • Other businesses, considered natural monopolies, are controlled by the government. (electricity, water)
  • Reduces waste in an industry. (e.g. two railway lines in one city)
  • Rescue important businesses when they are failing.
  • Provide essential services to the people (e.g. the BBC)
32
Q

what are the disadvantages of being in a public corporation?

A
  • Motivation might not be as high because profit is not an objective.
  • Subsidies lead to inefficiency. It is also considered unfair for private businesses.
  • There is normally no competition to public corporations, so there is no incentive to improve.

• Businesses could be run for government popularity.
Municipal enterprises

business (6 decks)

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