business ownership and size and structure

Question 1

Private limited companies - LTD:

Answer 1

This is a small to medium sized business that is owned by shareholders who are often members of the same family. This company cannot sell shares to the general public.
Sole traders & partnerships have unlimited liability
Companies have LIMITED liability

Question 2

Who owns companies:

Answer 2

Ownership of companies is divided into small units called shares.
People who buy these are called shareholders
All shareholders benefit from limited liability

Question 3

Limited liability

Answer 3

This means that the only liability (responsibility/potential loss) a shareholder has if the company fails is the amount invested in the company, not the total wealth of the shareholder
Nobody can claim the shareholders personal assets such as their house or car
Because of this, people are more willing to invest in companies
i.e. it is easier for companies to raise finance to expand

Question 4

Limited Companies & Legal personality:

Answer 4

A company is recognised by the law as a SEPARATE person to its owners
It has its own identity
This means that a company can be taken to court if it does something wrong – not the owners
It also means the company can sue someone else in its own name – the owners are not suing the other person
Directors of companies must still operate within the law

Question 5

Limited companies and continuity:

Answer 5

The death of a shareholder does not lead to the break-up of the company – the shares of this shareholder will simply pass on through inheritance.

Question 6

Advantages of a private limited company:

Answer 6

Shareholders have limited liability
The company has a separate legal personality
There is continuity even if a shareholder dies
Capital can be raised from the sale of shares to family, friends and employees
A company has greater status than an unincorporated business
Owners keep control of the business

Question 7

Disadvantages of a Private limited Company:

Answer 7

There are several legal formalities (red tape) involved in setting up a company.
Capital cannot be raised by selling shares to the public
Difficult for shareholders to sell shares
The company must send its accounts to the Companies Office each year for review

Question 8

Public limited companies: plc:

Answer 8

This is a limited company, often a large business, with the legal right to sell shares to the general public – share prices are quoted on the national stock exchange.
This means that you or I could buy shares and become owners of a PLC
This means it is very easy for a PLC to raise funds (capital) for expansion and growth

Question 9

Plc – the divorce between ownership and control:

Answer 9

In a LTD there is a small group of shareholders (owners)
As a result they are often the same people who manage the company and control it
In a PLC, there are many more shareholders
The owners of the company (could be members of the public) do not exercise management control of the company
This can lead to conflict between the OWNERS and MANAGEMENT who might want different things for the company

Question 10

Advantages of plc:

Answer 10

Limited Liability
Separate legal personality
Continuity
Easy to raise finance – can sell to members of the public
Easy to buy and sell shares

Question 11

Disadvantage of plc:

Answer 11

Legal formalities at set-up (red-tape)
Expensive to start up
Divorce/separation between owners & management can lead to conflict.
Risk of take-over (shares are available on the stock market)
Accounts are made public

Question 12

Public sector enterprises – public corporations:

Answer 12

A business enterprise owned and controlled by the state – also known as nationalized industry
Often do not have profit as a main objective
Air nz is an example, the government owns 52% of air nz
The government owns the defense force and the police

Question 13

Advantages of public corporations

Answer 13

Advantages:
Managed with social objectives rather than solely with profit objectives
Loss making services might still be kept operating if the social benefit is great enough
Finance raised mainly from the government

Question 14

Disadvantages of public corporations

Answer 14

disadvantage:
Tendency towards inefficiency due to lack of strict profit targets
Subsides from government can also encourage inefficiencies
Government may interfere in business decisions for political reasons

Question 15

Different methods to measure size:

Answer 15

number of employees
Sales turnover
Capital employed
Market capitalization 
Market share

Question 16

Number of employees

Answer 16

This is the simplest measure, simply looking at the number of staff that a business employs

Question 17

Sales turnover:

Answer 17

revenue is often used when measuring business size – especially when comparing firms in the same industry

Question 18

Capital employed:

Answer 18

The total value of all long-term finance invested in the business
Generally, the larger the business, the greater amount of capital employed needed.

Question 19

Market capitalization

Answer 19

Market capitalization: the total value of a company’s issued shares
Formula:
Current share price x total number of shares issued.

Question 20

Market Share:

Answer 20

Market share: sales of the business as a proportion of total market shares
Formula
(Total sales of business/Total sales of industry) x 100

Question 21

Why is size important?

Answer 21

Investors
Governments
Competitors
Workers
Banks

Question 22

Business classification:

Answer 22

We have seen that we can classify business according to Industrial sector
i.e., primary, secondary, or tertiary sector businesses

Question 23

Private sectors vs public sector

Answer 23

• Private sector comprises businesses owned and controlled by individuals or groups of individuals
• Public sector comprises organisations accountable to and controlled by central or local government (the state)

Question 24

Mixed economy –

Answer 24

economic resources are owned and controlled by both public and private sectors

Question 25

Free market economy –

Answer 25

economic resources are owned largely by the private sector with little state intervention

Question 26

Command economy –

Answer 26

economic resources are owned and controlled by the state

Question 27

Governments own business:

Answer 27

To provide essential services
To control strategic industries/resources e.g., energy, telecommunications, public transport
Because of public goods (goods that cannot be charged for, and which private business would not profit from)

Question 28

Sole traders

Answer 28

Sole traders: Definition: this is a business in which one person provides the permanent finance and, in return, has full control of the business and is able to keep all of the profits.

Question 29

Advantages of sole trader

Answer 29

Advantages: 
Easy to set up – no difficult legal formalities
Keep all of the profits
Has full control over the business
Can choose own working hours

Question 30

disadvantages of sole trader

Answer 30

Disadvantages:
Unlimited liability: This means that the sole trader is personally responsible for paying the debts of the business.
They may lose their personal assets to pay business debts.

Lack of continuity: If the sole trader dies then the business “dies” with them.

Difficulty raising finance: It can be difficult for sole traders to raise finance/capital
Banks are less likely to give them finance – they are seen as riskier investment
Only one person’s personal finance to use

Question 31

Partnerships:

Answer 31

Definition: a business formed by 2 or more people to carry on a business together with shared capital investment and, usually, shared responsibilities

Question 32

Partnership advantages

Answer 32

Advantages:
• Easier to raise finance
• Shared decision making – may be easier at times
• Increased expertise
• Shared risk
• Shared losses
• Easy to set up – Deed of Partnership only

Question 33

disadvantages of partnership

Answer 33

Disadvantages: 
•	Shared profits
•	Decision making may be more difficult
•	Unlimited liability
•	Still difficult to raise additional finance – banks still wary
no continuity if partners die