Chapter 2: Business structure Flashcards
Explain 3 advs to your own country from increased industrialisation?
1) New firms can form, therefore will create more jobs- which can..
2) Increase GDP, due to the increase in outputs of goods and services from the firms.
3) Which can lead to increased medical advances and transportation development.
What’s the difference between private sector and public sector organisations?
Private sector:
Comprises firms owned + controlled by individuals or a group of them. Main aim is to make a profit, make returns to shareholders, be competitive)
Public sector:
Comprise organisations owned and controlled by Central or local government who’s main aims are to provide a service, not profit
Main differences between a
Sole trader (4) and a
Private limited company (5)
Sole trader:
- a business where one person provides: permanent finance, and in return gains all the profit.
- they have unlimited liability, so if the firm goes into debt, the owner will have to pay it off with personal possessions.
- lack of continuity, since the firm has no legal status, therefore if the owner dies, so does the firm.
- difficult to raise additional capital.
Private limited company:
- it’s a small to medium sized business owned by shareholders that consist of family+friends.
- Shareholders have limited liability.
- They have continuity, through the inheritance of shares.
- the original owner can retain control
- able to raise add. Capital from the selling of shares to family or friend.
Who owns/controls a public limited company.
Explain why this may lead to a conflict?
Public limited company is owned by shareholders, as they have to legal right to sell shares to the general public on the stock exchange.
But the board of directors control the management and decision making of the company.
Resulting in a conflict over the objectives that are set. And the direction of the business
Eg- shareholders think of short term profits. Whereas directors want long ter growth.
What’s a joint venture?
When 2 or more firms agree to work closely together on a particular project and create a separate business division.
State 2 benefits+risks of joint venture
Benefits:
- different companies might have different strengths and experiences. Which might fit well together.
- costs and risks are shared.
Risks:
- styles of the management + culture might be too different.
- the business failure of one of the patners would put the whole venture at risk.
Why might the directors of a public limited company convert back into a private limited company, by buying a majority of the shares?
- this will enable the directors of the plc to have more control over the direction of the business. And overcome the “divorce of ownership and control”
- in private lc’s it’s normal for the senior executives to be the majority shareholders (have the most say)
Explain how legal identity and continuity help firms to operate effectively
Legal identity-
Can help firms because the company itself can be taken to court but not the owners!
This doesn’t take away the legal responsibility away from owners/managers.
Continuity:
When the owner dies, the ownership continues through the inheritance of shares.
How does limited liability make it easier to raise finance?
Your possessions aren’t sold to pay off debts, instead only the amount of money invested by the shareholders,
therefore, people can buy shares of the business and become shareholders.
Explain how the legal structure of a partnership affects it’s inability to raise finance?
A partnership is a business formed by two or more people with shared capital investment and responsibility
therefore it’s not possible to raise capital from selling shares.
Only from borrowing- which leads to debt.
A sleeping partner can invest but has no active role in the business.
Explain how the legal structure of a public limited company affects it’s inability to raise finance?
A plc offers shares to the general public in order to raise finance.
Why might a business stand a greater chance of success, if it bought a franchise, rather than trying to establish it’s own identity.
Franchise= a business that uses the name, logo and the trading systems of an existing successful business.
Thus- fewer chance of firm failing.
It’s already established brand+ products and customer base.
However- may decide not to because
- a share of the profit/ sales revenue has to be paid to the franchisor each year.
- initial licence fee can be expensive
- no suppliers are used
- there are strict rules over pricing and layout of outlet to reduce individual owners control.
Eg of public sector organisations ?
Library government agencies
State (4) advs of privatisation
State (4) disadvantage ?
Privatisation: the selling of state owned and controlled business organisations to investors in the private sector.
1) profit motive for private sector will lead to greater efficiency (than when subsidised and controlled by state)
2) puts direct responsibility in hands of manager, this leads to strong motivation as they have direct involvement.
3) market forces will be allowed to operate ,therefore, declining firms will be forced to change or die allowing successful ones to expand and new ones to form
4) The sale of nationalized industries can raise finance for the government which can be spent on other state projects
Drawbacks:
1) the state ends up putting the needs of shareholders ahead of society’s.
2) The price of goods and services can increase
3) many strategic industries can be operated as “private monopolies” if privatised and they could exploit consumers with high prices.
4) it’s much more difficult to achieve coherent + coordinated policy for the benefit of the country with competing privately run firms.
(theoretical situation that grants one firm 25% of market)
What’s Protectionism in International Trade?
Protectionism is the use of barriers to free trade (to protect a country’s own domestic industries) such as tariffs (tax imports) and quotas (physical limits)
