Business structure Flashcards
what is a private limited company
business that is owned by shareholders who are often members of the same family, this company cannot sell shares to the general public
what is initial public offereing
an offer to to the public to buy shares in a public limited company
what is public limited company
company whose shares are traded on a stock exchange and can be bought and sold by the public
primary sector business activity
firms that extract natural resources so that they can be used and processed.
secondary sector business activity
firms that manufacture and process products from natural resources,
tertiary sector business activity
firms providing services to consumers and other businesses, such as retailing, transport, insurance, banking, hotels and tourism.
quaternary sector business activity
businesses providing information services
what is industrialisation
the growing importance of secondary sector manufacturing industries in developing countries. relative importance of each sector is measured in terms of either employment levels or output levels as a proportion of the whole economy.
Benefits of industrialization
GDP increases and this raises average standards of living.
Increasing output of goods can result in lower imports and higher exports of such products.
Expanding manufacturing businesses will result in more jobs.
Expanding and profitable firms will pay more tax.
Value is added to the country’s output of raw materials, rather than exporting these as unprocessed products.
consequences of industrialization
people move to towns for job that could lead housing and social problems.
imports of raw material are needed which increases country’s import cost.
much of the growth in secondary sector is due to expansion of multinational companies
what is deindustrilization
in developed economies, there is a decline in the importance of secondary sector activity.
changes of deindustrilization
higher living standards have led consumers to spend much of their income on services rather than goods. spending on physical goods has risen more slowly
consequences of deindustrialization
job losses in primary sector.
movement of people to towns and cities.
job opportunities in tertiary and quaternary sector.
increased retraining programmes to allow workers to find employment in service industries
what is public sector
organizations accountable to and controlled by central or local government
what is private sector
businesses owned and controlled by individuals or groups of individuals
mixed economy
economic resources are owned and controlled by both private and public sectors. nearly every country with mixed economy, most business activity is in the private sector. in some countries, important goods and services are provided by government owned or state run organizations
free market economy
economic resource are owned largely by the private sector with very little state intervention. small public sectors
command economy
economic resources are owned, planned and controlled by state. has few business in private sector
public corporation
a business enterprise owned and controlled by the state aka nationalized industry. In some countries, important strategic industries, such as energy, water supply and public transport, are also owned and controlled by the state as public corporations.
what are the advantages of public corporations
managed with social objectives rather than solely with profit objectives.
loss making services will be kept operating if social benefit is great enough. finance is mainly from government
what are the disadvantages of public corporations
tendency towards inefficiency due to lack of strict profit targets.
subsidies from government can also encourage inefficiencies.
sole trader
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.
unlimited liability
business owners have full legal responsibility for the debts of the business.
features of sole trader
have unlimited liability.
limitations in raising additional capital.
dependent on owners savings, profits and loans for capital
advantages of sole trader
easy set up (no legal formalities).
owner has complete control.
owner keeps profit.
owner can choose times and patterns of working.
owner can establish close relationships with staff.
business can be based on interest or skills of owner.
disadvantage of sole trader
unlimited liability.
intense competition from bigger firms.
owner is unable to specialize in areas of the business that are most interesting.
difficult to raise additional capital.
long hours.
when the owner dies, the business dies because it doesn’t have a separate legal status
what is partnership
business formed by two or more people to carry on a business together, with shared capital investment and, usually, shared responsibilities. formed in order to overcome some of the drawbacks of being a sole trader. unlimited liability for all partners
deed of formal partnership
provides agreement on issues such as voting rights, the distribution of profits, the management role of each partner and who has authority to sign contracts. However, a partnership agreement does not create a separate legal unit; a partnership is just a grouping of individuals.
advantages of partnership
Partners may specialize in different areas of business management.
They share decision making.
Additional capital is injected by each partner.
Business losses are shared between the partners.
There is greater privacy and fewer legal formalities than in companies.
disadvantages of partnership
no continuity and the partnership will have to be reformed in the event of the death of one of the partners.
partners are bound by the decisions of any one of them.
not possible to raise capital from selling shares.
A sole trader, taking on partners, will lose decision-making independence.
partners have unlimited liability (with some exceptions).
Profits are shared.
Limited liability
the only liability - or 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 make further claims against shareholders
shares
certificate confirming part-ownership of a company and entitling the shareholder owner to dividends and certain shareholder rights.
shareholders
person or institution owning shares in a limited company.
effects of limited liability on shareholders
The risk of the company failing to pay its debts is transferred from investors to creditors such as suppliers and banks, Creditors, as a result, are very interested in analyzing the company’s accounts for signs of potential future weakness.
Legal personality
companies have their own legal identity against law. company can be sued and itself sue. managers, owners and directors can still be legally responsible if they knowingly act irresponsibly.
continuity
the death of an owner or director does not lead to its break up or dissolution. ownership continues through inheritance of shares and there is no break in ownership at all.
sole trader to Private limited companies
usually shares are owned by the original sole trader, relatives, friends and employees. former sole trader often have the controlling interest. new issue of shares cannot be sold on open market. existing shareholders may sell with the agreement of other shareholders. legal formalities are same as plc
advantages of private ltd companies
limited liability.
has a separate legal personality.
has continuity in the event of the death of a shareholder.
original owner is still often able to retain control.
able to raise capital from the sale of shares to family, friends and employees.
has greater status than an unincorporated business.
disadvantages of private ltd companies
legal formalities involved in establishing the business.
Capital cannot be raised by the sale of shares to the general public.
difficult for shareholders to sell shares.
End-of-year accounts must be sent to the government office, and are available for public inspection (so there is less secrecy over financial affairs than for a sole trader or partnership).
private limited company
to Public limited companies
Similar to pvt but shares can be sold on open market. can raise very large sums from public issue of shares. existing shareholders may also quickly sell their share if they wish to
features of PLC
many investors like institutions and individuals buy the shares.
shareholders own company.
they appoint directors at AGM to control management and decision making.
shareholders and directors objectives can clash.
possible for plc to become pvt.
advantages of plc
shareholders have limited liability.
the company has a separate legal identity.
there is continuity.
easy for share holders to buy and sell shares, encouraging investments.
substantial capital can be accessed due to the ability to issue a prospectus to the public and to offer shares for sale ( flotation)
disadvantages of plc
formation entails legal formalities.
high charges for advice from business consultants when creating plc.
share price are subject to fluctuation.
disclosure of information to shareholders and public.
risk of takeover due to the availability of the shares on the stock exchange.
directors may be influenced by short term objectives of major investors
legal formalities in setting up a company
Certain legal stages to protect investors and creditors. documents like memorandum of association and articles of association are needed. the registrar of companies will issue a certificate of incorporation when the documents are completed satisfactorily. private limited companies can start trading
memorandum of association
this states the name of the company, the address of the head office through which it can be contacted, the maximum share capital for which the company seeks authorization and the declared aims of the business. knowing max share capital means relative importance of a share can be determined. shareholders can avoid busines they do not want to be associated with by knowing the aims
Articles of association
this document covers the internal workings and control of the business, the names of directors and the procedures to be followed at meetings.
Cooperatives
jointly owned business operated by members for their mutual benefit, to produce or distribute goods or services.
features of cooperatives
All members can contribute to running the business and sharing the workload, responsibilities and decision-making.
In larger cooperatives some delegation to professional managers takes place.
All members have one vote at important meeting
Profits are shared equally among members
Advantages of cooperatives
buying in bulk.
working together to solve problems and take decisions.
good motivation for all members to work hard as they will benefit from shared profits
drawbacks of cooperatives
poor management skills, unless professional managers are employed.
capital shortages because the sale of shares to non members is not allowed.
slow decision-making if all members are to be consulted on important issues
Franchises
the legal right to use the name, logo and trading systems of an existing successful business. contract allows franchisee to use name, logo and marketing methods. rapidly expanding form of business
franchiser
a person or business that sells the right to open stores and sell products and services, using the brand name and brand identity
franchisee
a person or business that buys the right from the franchiser to operate the franchise
advantages of franchises
There are fewer chances of a new business failing because it is using an established brand name and product.
Advice and training are offered by the franchiser.
The franchiser pays for national advertising.
Supplies are obtained from established and quality-checked suppliers.
The franchiser agrees not to open another branch in the local area.
disadvantages of franchises
A share of the profits or revenue has to be paid to the franchiser each year.
The initial franchise license fee can be expensive.
Local promotions may still have to be paid for by the franchisee.
The franchisee cannot choose which supplies or suppliers to use.
Strict rules over pricing and layout of the outlet reduce the franchisee’s control over their own business.
joint ventures
two or more businesses agree to work closely together on a particular project and create a separate business division to do so.
reason for joint ventures
The costs and risks of a new business venture are shared, which is a major consideration when the cost of developing new products is rising rapidly.
Different companies might have different strengths and experiences, and therefore fit well together.
They might have major markets in different countries and they could exploit these with the new product more effectively than if they both decided to ‘go it alone’.
risks of joint ventures
Styles of management and culture might be so different that the two teams do not blend well together.
Errors and mistakes might lead to one company blaming the other for mistakes.
The business failure of one of the partners would put the whole project at risk.
social enterprise
business with mainly social objectives that re-invests most of its profits into benefiting society rather than maximizing returns to owners. they often keep the profits. uses business principles to achieve social objectives
common features of social enterprise
They directly produce goods or provide services.
They have social aims and use ethical ways of achieving them.
They need to make a profit to survive as they cannot rely on donations as charities do. `
why would business change the form of ownership
access to more finance.
gaining legal identity.
protecting owners’ capital through limited liability.
disadvantages of changing the form of business ownership
legal costs and formalities.
some loss of control and ownership by the original owner.
profits are shared.
