Chapter-4 Flashcards
Types of business organiztion
What is sole trader?
Sole trader is a business that is owned and controlled by just one person who takes the risk and receives all of the profit.
What are businesses that come under private sector businesses?
1) Sole trader
2) Partnership
3) Limited companies -i) Private Limited company
ii) Public Limited company
4) Franchise
5) Joint venture
Why people often choose to become sole traders?
1) Be their own boss and make their own decisions
2) Decide when and how many hours to work
3) Have a business that uses their skills and interests.
What are the advantages of a sole trader?
1) It’s quick and easy to set up a business
2) The sole trader makes all of the decisions so has complete control over the business.
3) The business can often set up with a small amount of start-up capital.
4) The owner keeps all the profit.
What is a partnership?
A partnership is a business where two or more people collaborate as owners with the aim of making profits.
What is start up capital?
Start up capital is the finance needed when first setting up a business.
What are the disadvantages of sole trader?
1) Unlimited liability
2) May not be able to raise funds
3) May have to work long hours
4) Difficult to compete with larger rival firms
5) May not have business skills to run a business.
What are the advantages of a partnership?
1) Additional finance is available.
2) More knowledge, experience, and skills are accessible.
3) Responsibilities are shared.
4) Risks are shared.
5) Discussions can take place before decisions are made.
What are the disadvantages of a partnership?
1) Profits are shared among the partners.
2) Decisions must be approved by all partners.
3) Decision-making can take longer.
4) One partner’s actions bind all partners.
5) Disagreements can arise.
6) All partners are responsible for the business’s debts.
What is unincorporated business?
An unincorporated business is a business that does not have a legal identity separate from it’s owners. The owners have unlimited liability for business debts.
What is unlimited liability?
Unlimited liability occurs when an unincorporated business fails, then the owners might have to use their personal wealth to finance any business debts.
What is a shareholder?
A shareholder is a person or organization who owns shares in a limited company.
What is a private limited company?
A private limited company is often a small to medium-sized company; owned by shareholders who have limited liability. The company cannot sell it’s shares to the general public.
What is a public limited company?
A public limited company is often a large company; owned by shareholders who have limited liability. The company can sell it’s shares to the general public.
What are ordinary shareholders?
Ordinary shareholders are the owners of a limited company.
What is a limited liability?
Limited liability means that if a limited company fails, shareholders only risk losing the amount they invested and not their personal wealth.
What is a dividend?
A dividend is a payment, out of profits, to shareholders as a reward for their investment.
What are the features that a public and a private limited company share?
1) Complete legal documents like Articles and Memorandum of Association.
2) Shareholders invest by buying shares.
3) Ordinary shareholders own the company.
4) Shareholders have limited liability.
5) The business continues if shareholders die.
6) The company raises finance by selling shares.
7) Profits belong to shareholders.
8) Dividends are paid to shareholders.
9) Shareholders vote on major decisions.
10) Submit year-end financial statements; accounts are public.
What is collateral?
Collateral are non-current:assets offered as security against the borrowing.
What are the main differences between private and public limited companies?
*Owners:-
1) In a private limited company there are usually a small number of shareholders. Often members of the same family of friends.
2) In a public limited company, usually there is a very large number of shareholders.
*Size:-
1) Private limited company is usually fairly small.
2) Public limited companies are in the most common form for very large companies.
*Sale of shares by shareholders:-
1) In Private limited companies shares can only be sold privately, often to family members, friends or employees.
2) In a public limited company shares can be offered for sale to the general public and other organisations.
*Sale of shares by shareholders:-
1) It is often difficult in a private limited company to sell as must be sold privately and with the agreement of other shareholders in a private limited company.
2) In a public limited company it is quick and easy to sell as they can be offered for sale to the general public.
Control:-
1) In a private limited company, few shareholders exist, and one owning 51% has control over major decisions, combining ownership and control.
2) Often, thousands of shareholders exist. A board of directors, appointed at the annual general meeting, controls major decisions, separating ownership from control.
*Raising additional capital through share issue:-
1) In a private limited company even if successful, it may abe difficult to raise additiona capital as shares cannot be sold to the general public.
2) In a public limited company it successful, it can often raise very large sums quite easily though the sale of addtional shares.
*Borrowing Finance:-
1) In a private limited company it is often difficult to raise finance as unincorporated businesses because they are usually small businesses with low- value assests to offer as security- known as collateral.
2) Public limited companies can often raise very large sums at good rates of interest because of it’s reputation and valuable collateral.
What are the disadvantages of public limited companies that are not shared by private limited companies?
1) Setting up a public limited company is costly.
2) Directors’ decisions may be influenced by major investors seeking their own interests, such as demanding higher dividends, reducing reinvestment.
3) The company is vulnerable to takeover, as shares can be bought and sold, and owning 51% gives control.
4) Legal requirements for publishing company information are stricter than for private limited companies.
What is a franchise?
A franchise is a business system where entrepreneurs buy the right to use the name, logo and product of an existing business.
What are the benefits of a franchise?
1) Business failure is less likely as the product and brand are well-established.
2) The franchisor provides advice and training under the franchise agreement.
3) National advertising for the brand is financed by the franchisor.
4) Quality supplies are guaranteed as suppliers are pre-vetted by the franchisor.
What are the limitations of a franchise?
1) The initial cost of buying into a franchise can be high.
2) The franchisor takes a percentage of the franchisee’s revenue or profits each year.
3) The franchisee faces strict controls on product, pricing, and store layout.
What is a joint venture?
A joint venture is when two or more businesses agree to work together on a project and set up separate business for this purpose.
What are the advantages of joint venture?
1) It reduces the risk for each business and cuts costs.
2) Each business brings different expertise to the joint venture.
3) Market and product knowledge can be shared to the benefit of the business in the joint venture.
What are the disadvantages of joint venture?
1) Any mistakes made may damage the reputation of all firms in the joint venture, even if they were not the cause of the mistake.
2) The businesses may have different business cultures or styles of leadership, making decision-making difficult.
What are the differences between unincorporated business and limited companies.
Unincorporated business:-
An unincorporated business has no separate legal identity from its owners, making them legally responsible for its activities and debts. Owners have unlimited liability. Sole traders and partnerships are key examples.
Incorporated Business:-
An incorporated business, like a limited company, has a separate legal identity from its owners. The company, not the owners, is responsible for its activities. Owners have limited liability for the business’s debts.
What are the risks of owners when running an unincorporated business?
1) Owners and the business have the same legal identity.
2) Owners have unlimited liability for business debts.
What are the risks for owners when running an incorporated business?
1) Owners and the company have separate legal identities.
2) Owners have limited liability for business debts.
How to decide which form of business organization to use while setting up a business?
1) The number of owners
2) Does the owner want to manage the business directly
3) Is the business to be unincorporated or incorporated
4) How quickly does the business need to be set up
5) What is the size of the business
What are the reasons for owners wanting to become incorporated?
1) To reduce the legal and financial risk to owners.
2) Separate legal identity also has the benefit of business continuity.
3) The business may want to raise additional capital to invest in growth plans.
What is a public corporation?
Public corporation is a business organisation that is owned and controlled by the state.
What are the main features of public corporations?
1) They are owned and controlled by the state.
2) They are financed mainly through taxation.
3) In many countries, public sector organizations prioritize social objectives, focusing on serving the public and addressing societal needs. In some cases, they may also pursue profit alongside social goals.
4) The services of public corporations are often provided to the population free or at low price.
