4.1 – Types of Business Organizations Flashcards
What is a Sole Trader?
A business organization owned and controlled by one person. Sole traders can employ other workers, but only he/she invests and owns the business.
What are the Advantages of Sole Trader?
Easy to set up: there are very few legal formalities involved in starting and running a sole proprietorship
Full control: the sole trader has full control over the business
Sole trader receives all profit: Since there is only one owner, he/she will receive all of the profits the company generates.
Personal: since it is a small form of business, the owner can easily create and maintain contact with customers
What are the Disadvantages of Sole Trader?
Unlimited liability: if the business has bills/debts left unpaid, legal actions will be taken against the investors, where their even personal property can be seized.
Full responsibility: Since there is only one owner, the sole owner has to undertake all running activities.
Lack of capital: This is a major disadvantage to sole proprietorship. As only one owner/investor is there, the amount of capital invested in the business will be very low.
Lack of continuity: If the owner dies or retires, the business dies with him/her.
What are Partnerships?
A partnership is a legal agreement between two or more (usually, up to twenty) people to own, finance and run a business jointly and to share all profits.
What are the Advantages of Partnerships?
Easy to set up: Similar to sole traders, very few legal formalities are required to start a partnership business.
Partners can provide new skills and ideas: The partners may have some skills and ideas that can be used by the business to improve business profits.
More capital investments: Partners can invest more capital than what a sole trade only by himself could.
What are the Disadvantages of Partnerships?
Conflicts: arguments may occur between partners while making decisions.
Unlimited liability: similar to sole traders, partners too have unlimited liability.
Lack of capital: smaller capital investments as compared to large companies.
No continuity: if an owner retires or dies, the business also dies with them.
What are Joint-stock companies?
These companies can sell shares, unlike partnerships and sole traders, to raise capital. Other people can buy these shares (stocks) and become a shareholder (owner) of the company. Therefore they are jointly owned by the people who have bough it’s stocks. These shareholders then receive dividends (part of the profit; return on investment), according to the amount of capital they invest.
What are the features of a Joint-Stock Company?
Limited Liability
incorporated (have a separate legal identity)
Continuity
Board of Directors
What are the 2 types of Joint-Stock Companies?
Private Limited Companies: One or more owners who can sell its’ shares to only the people known by the existing shareholders.
Public Limited Companies: Two or more owners who can sell its’ shares to any individual/organization in the general public through stock exchanges.
What are the Advantages of a Joint-Stock company?
Limited Liability: this is because, the company and the shareholders have separate legal identities.
Raise huge amounts of capital: selling shares to other people (especially in Public Ltd. Co.s), raises a huge amount of capital, which is why companies are large.
Public Ltd. Companies can advertise their shares, in the form of a prospectus, which tells interested individuals about the business, it’s activities, profits, board of directors, shares on sale, share prices etc. This will attract investors.
What are the Advantages of a Joint-Stock company?
Required to disclose financial information
Private Limited Companies cannot sell shares to the public.
Public Ltd. Companies require a lot of legal documents and investigations before it can be listed on the stock exchange.
Public Limited Companies must also hold an Annual General Meeting (AGM). This is very expensive to set up, especially if there are thousands of shareholders.
Public Ltd. Companies may have managerial problems: since they are very large, they become very difficult to manage
In Public Ltd. Companies, there may be a divorce of ownership from control: The shareholders can lose control of the company when other large shareholders outvote them or when board of directors control company decisions.
What are Multinational Corporations (MNCs)?
A multinational is a firm that has business operations in more than one country, but will usually have its headquarters based in it’s country of origin. They are all usually joint-stock companies.
What are the Advantages of MNCs?
Reach more consumers globally
Avoid trade barriers and import tariffs by setting up operations in countries that impose them
Minimize transportation costs
Minimize wage costs
A large scale of production will lower it’s average costs
What are the Advantages to host country of MNCs?
They increase investments in the country.
They provide jobs and incomes for local workers.
They bring in new knowledge and skills
They will have to pay taxes on their profits to the host country.
What are the Disadvantages to host country of MNCs?
They may exploit workers: In economies with a low wage, multinationals may pay employees far less than what they do in other countries.
Natural resources may be exploited
Profits maybe switched to origin countries, to avoid taxation
They can use their power and reputation to obtain subsidies and tax deductions form the govt..
Local competition may be threatened
