Business Structure Flashcards

Question

Advantages of a PLC

Answer 1

*All shareholders maintain limited liability. More market power maybe enjoyed due to larger size. *Huge amounts of money can be raised from the sale of shares to the public on the stock exchange – this can be used to expand the business. *Economies of scale may be enjoyed as the company grows. *May gain greater presence/dominance in the market. *Often easier to raise finance – financial institutions, such as banks, are more willing to lend to plcs.

Answer 2

*It can be expensive – setting up costs can run into millions for some businesses. *Outside interests could take control as shares are on sale to the public. *Greater divorce of ownership and control than in a private limited company. The company’s board may lose control. *Accounts can now be inspected by the public or competitors who could use them to their advantage. *Have to publish more information than private limited companies. *Greater size may lead to slower decision making. *Can be time consuming to gain listing. *If they grow too big, they may become inflexible, e.g. they may find change difficult to cope with.

Answer 3

* large amounts of money can be raised for the business from the sale of shares to the public *may gain economies of scale *easier to raise loan finance helps growth – might give a business a bigger market share *may motivate employees/managers *brand recognition *more capital for investing in new products

Answer 4

*setting up costs for the business would be expensive *there would be an even greater divorce of ownership for the business between ownership and control *a business may lose control and be involved in a takeover *the business accounts can be inspected by the public – used by competitors *a loss of personal touch between the business and its customers *the business may become inflexible because of its size.

Answer 5

*potentially more capital – ideal for example if the business needs to find new premises as the current one is becoming too small * a new partner brings new skills *possibility of specialisation *more ideas/problems can be shared *share workload – presents an opportunity to reduce working hours/take holidays *avoids need to employ somebody – a risk – new staff need training – not sure of their capabilities.

Answer 6

*original sole trader will lose their independence *will need to share profits – though possible to generate more *could result in disagreements/quarrels - though many family businesses are successful others end in acrimony *decision making potentially slower – need to consult/less flexibility *by employing a new worker, the original sole trader could retain their independence and also reduce their own working hours *If, after a short time, the new partner finds they want to leave the partnership, then the original sole trader is back to square one.

Answer 7

A non-profit-making organisation established with the aim of collecting money from individuals and spending it on a cause, which is usually specified in its title: * not established to make profits but they can earn surpluses * charities can often have a narrow focus (single issue) in what they are trying to achieve * charities raise the majority of their finances through voluntary donations, but more and more charities now operate retail outlets as well.

Answer 8

*potentially a lot more capital available for expansion *greater protection for personal assets – benefit of limited liability *easier to attract investors/shareholders because of security of limited liability *becomes a separate legal entity *likely to have greater continuity *possibly greater credibility with financial institutions *can still keep control *shareholders may bring in additional business ideas.

Answer 9

*loss of certain advantages associated with being a sole trader e.g. keeping all of the profit, may now need to consult when making key decisions *will need to consider the fact that they will need to publish accounts so that business affairs are less private *possibly less control over business – separation of ownership and control – but the sole trader can remain majority shareholder *cost of setting/private limited company setting.

Answer 10

Social enterprises include for-profit and not-for-profit businesses (e.g. cooperatives) with primarily social objectives, trading for social and environmental purposes, whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximise profit for shareholders and owners. And attempt to change lives for the better.

Answer 11

They do, however, need to make a profit to compete in the market, to ensure their continued survival, to invest in their social or environmental aims and to reduce any dependency on public grants. * Social enterprise businesses will seek to survive, make profit and wish to grow. In this sense, they are not essentially different from private enterprise businesses. * Social enterprises are distinctive because their social and/or environmental purpose is absolutely central to what they do – their profits are reinvested to sustain and further their mission for positive change. * An ethical business is not the same as a social enterprise. An ethical business tries to achieve its financial goals while minimising any negative impact on society or the environment. A social enterprise’s main purpose is to fulfil its social and/or environmental goals.

Answer 12

A stakeholder is an indivdual, group or organisation that is affected by and/or has an interest in the operations and objectives of a business

Answer 13

* Owner/Shareholder – they are interested in how much profit the business makes. *Managers – they are concerned about their salary. *Employees /workers – they want to earn high wages, have job security and a nice working environment. *Customers – they want the business to produce quality products at reasonable prices and to have a variety of products/services to choose from. * Suppliers – want the business to continue to buy their products at a fair price. *Competition – they have interest in what the business is doing. If they do not “keep up” with them then they risk losing customers. *Financiers/Lenders – want to be repaid on time and in full. *Local Community – they have a stake in the business as employers of local people. Business activity also affects the local environment. For example, noisy night-time deliveries or a smelly factory would be unpopular with local residents. *Government – they are concerned with whether or not the business is operating within the constraints of the law; how many jobs the business is providing and how much tax the business has to pay. *Pressure Groups/Trade Unions – they will fight for the rights of their members and put pressure on the business to behave in a certain manner.

Answer 14

A shareholder is an individual, company, or other entity that owns shares in a company. These shares represent a piece of ownership in the company and entitle the shareholder to a portion of the company's profits and assets. Shareholders are the owners of a limited company. In theory, all shareholders share the common objective of sustained long-term growth, giving both capital gain and increasing income

Answer 15

* Institutional shareholders (investment and pension funds) are often driven by the need to achieve in the short term. This means that they require high dividends and strategies to achieve short-term growth from the businesses that they have invested in. * However, these strategies may be at odds with achieving long-term growth through reinvestment of profits and investing in brand value, which are what the individual, long-term investor may be looking for.

Answer 16

When stakeholders want the same thing from a business, it makes it easy to make decisions that please everybody. - When stakeholders want different things from the business, it results in stakeholder conflict - If this results in a win lose situation, it can create a negative relationship with that stakeholder going forwards - So it's best for a business to try create a win win situation, where no stakeholder think they're losing out or being put in a worse situation

Answer 17

A conflict is a struggle and a clash of interest, opinion or even principles

Answer 18

*Employee v Managers - Jobs/Wages v bonus (cost efficiency) *Customer v Shareholder -Product quality/Service levels v profits/dividends *Public v Shareholder -Effect on the environment v profits/dividends *Managers v Shareholders -Growth v independence

Answer 19

* Efficient service and a quality product, at a competitive price. These requirements should not be at odds with good business practice, but unfortunately sometimes they are. The short-term nature of businesses can mean that achievement of immediate profit comes ahead of long-term customer satisfaction. * They like to feel needed and respected. It is all too easy to alienate your customer base. Maintaining good public relations is increasingly important – something that the banking and financial industry has come to realise in relation to the treatment of its customers.

Answer 20

Satisfying customers’ needs profitably should lead to financial success to satisfy the other stakeholders.

Answer 21

* increased tax revenues * higher employment * lower benefit payments. However, the same economic success also means: * increased pollution * increased traffic * loss of greenfield sites through development.

Answer 22

* employment * increased regional wealth * improved facilities and infrastructure.

Answer 23

* potential pollution * environmental damage * loss of open space

Answer 24

* Following supply and demand theory, each market should achieve an equilibrium price, which should allocate rewards between supplier and buyer efficiently in a competitive market. * However, unfortunately for suppliers, the power in the market often rests with the buyer, and we are seeing this market imperfection more and more. * The big four supermarkets dominate the UK’s farming industry, continually forcing down the prices they pay to producers, reducing farm incomes (for example, consider the recent milk price war and its impact). * The situation is often worse when suppliers are based in developing countries, with the original producer receiving a tiny proportion of the product’s final sale value. Fair trade goods try to make the supplier– buyer relationship more balanced.