chapter 4 - types of business organization

Question 1

what are the advantages of being a sole trader? (5)

Answer 1

• There are fewer legal regulations.
• The owner is independent – has complete control over the business and is responsible for the decisions made.
• Can make close contact with one’s own customers.
• The owner does not need to share profits.
• The owner does not need to give information about his business other than the tax office.

Question 2

what are the disadvantages of being a sole trader? (6)

Answer 2

• No one to discuss business matters.
• The owner does not have the benefits of limited liability, hence they are fully responsible for any debts.
• Limited capital. The sources of finance for the owner is limited to their savings, profits and small bank loans – hard to expand the business.
• Business is likely to stay small as expansion is restricted.
• Business is unlikely to benefit from economies of scale.
• When the owner passes away, the business goes with them.

Question 3

what happens in a partnership business?

Answer 3

• The partners will contribute to the capital of the business, will usually have a say in the running of the business and will share any profits made.

Question 4

what is the importance of a partnership agreement?

Answer 4

• Without this document, partners may disagree on who put most capital into the business or who is entitled to more of the profits.

Question 5

what are the advantages of partnership? (3)

Answer 5

• More capital could now be invested into the business, and this would allow expansion of the business.
• The responsibilities of running the business are now shared.
• Both/all partners are motivated to work because they will both benefit from the profits

Question 6

what are the disadvantages of partnership? (5)

Answer 6

• The partners do not have limited liability. If the business failed, the creditors can still force the partners to sell their own property to pay business debts.
• The business does not have a separate legal identity. Both sole traders and partnership are said to be unincorporated businesses because they do not have a separate legal identity from the owners.
• Partners can disagree on business decisions.
• If one of the partners is very inefficient or actually dishonest, then the other partners could suffer by losing money.
• Most countries limit the number of partners, leading to a limited amount of capital.

Question 7

private limited companies is said to be incorporated businesses. what does that mean? (3)

Answer 7

 A company exists separately from the owners and will continue to exist if one of the owners dies.
 A company can make contracts or legal agreements.
 Company accounts are kept separate from the accounts of the owners.

Question 8

what are the advantages of a private limited company? (3)

Answer 8

• Shares can be sold to a large number of people. The sale of shares could lead to much larger sums of capital to invest in the business, therefore making more room for the expansion of the business.
• All shareholders have limited liability. If the company fails with debts owing to creditors, the shareholders cannot be forced to sell their possessions to pay the debts. The shareholders are only responsible for the amount they invest in shares.
• The people who started the company are able to keep control as long as they do not sell too many shares to other people.

Question 9

what are the disadvantages of a private limited company? (4)

Answer 9

• These are many legal matters which have to be dealt with before a company is formed. The company will need to follow many rules so it will run correctly and reassure shareholders.
• The shares cannot be sold or transferred to anyone else without the agreement of other shareholders. This can make some people reluctant to invest because they may not be able to sell their shares quickly if they require their investment back.
• The accounts of a company will be shown to Registrar of companies.
• The company cannot offer its shares to the general public, hence it will not be possible to raise really large sums so capital to invest back into the business.

Question 10

describe public private companies

Answer 10

• businesses owned by shareholders, but they can sell shares to the public and their shares are tradeable on the Stock Exchange.
• This form of business organization is most suitable for very large business. most large, well-known businesses are public limited companies as they have been able to raise the capital to expand nationally or even internationally.
• Public limited company is in the private sector.

Question 11

advantages of public limited company? (5)

Answer 11

• Offers limited liability to shareholders.
• It is an incorporated business and has a separate legal identity to the owners or shareholders.
• There is now the opportunity to raise very large sums to invest in the business. there is no limit to the number of shareholders a public limited company can have.
• There is no restriction on the buying, selling or transfer of shares.
• A business trading as a public limited company usually has high status and should find it easier to attract suppliers prepared to sell goods on credit, and banks willing to lend to it than other types of business.

Question 12

disadvantages of public limited company? (3)

Answer 12

• The legal formalities of forming such a company are quite complicated and time-consuming.
• There are more regulations and controls in order to try to protect the interests of the shareholders.
• Selling shares to the public is expensive. The directors will often ask a specialist merchant bank to help them, and it charges money. The publication and printing of thousands of copies of the prospectus is an additional cost.

Question 13

what happens at the annual general meeting? (2)

Answer 13

• The only decision that shareholders can have a real impact on at the AGM is the election of professional managers as company directors.
• The directors cannot possibly control all of the business by themselves so they appoint other managers, who may not be shareholders at all, to take day-to-day decisions.

Question 14

what is the impact shareholders have at the AGM and its effect? (3)

Answer 14

• The directors and managers may run the business to meet their own objectives (ex. Reducing dividends). Shareholders do not have any control over these decisions other than to change the directors at the next AGM. Doing this can create bad reputation for the company and cause the business to be unstable as new directors can be inexperienced.

Question 15

what are the advantages to fanchisor? (4)

Answer 15

• The franchise buys a license from the franchisor to use the brand name  spreading awareness  high reputations.
• Expansion of the franchised business is much faster than if the franchisor had to finance all new outlets.
• The management of the outlets if the responsibility of the franchisee.
• All products sold must be obtained from the franchisor.

Question 16

what are the advantages to fanchisee? (6)

Answer 16

• The chances of business failure are much reduced because a well-known product is being sold.
• The franchisor pays for advertising.
• All supplies are obtained from a central source – the franchisor.
• There are fewer decisions to make than with an independent business – prices, store layout and range of products will be decided by the franchisor.
• Training for staff and management is provided by the franchisor.
• Banks are often willing to lend to franchisees due to relatively low risk.

Question 17

what are the disadvantages to franchisor? (2)

Answer 17

• Poor management of one franchised outlet could lead to a bad reputation for the whole business.
• The franchisee keeps profits from the outlet.

Question 18

what are the disadvantages to franchisee? (3)

Answer 18

• Less independent than with operating non-franchised business.
• Maybe unable to make decisions that would suit the local area.
• License must be paid to the franchisor and possibly a percentage of the annual turnover.

Question 19

what are the advantages of joint venture? (3)

Answer 19

• Sharing costs – very important for expensive projects.
• Local knowledge where joint venture company is already based in the country.
• Risks are shared.

Question 20

what are the disadvantages of joint venture? (3)

Answer 20

• If the new project is successful, then the profits have to be shared.
• Disagreements over important decisions might occur.
• The two joint venture partners might have different ways of running a business – different cultures.

Question 21

describe public corporation (2)

Answer 21

• The business was once owned by private individuals but is then purchased by the government.

Question 22

what are the advantages of public corporation? (4)

Answer 22

• Some industries are considered so important that government ownership is thought to be essential (ex. Water and electricity supply).
• If industries are controlled by monopolies because it would be wasteful to have competitors.
• If an important business is failing and likely to collapse, the government can step in to nationalize it.
• Important public services, such as TV and radio broadcasting are often in the public sector.

Question 23

what are the disadvantages of public corporation? (4)

Answer 23

• There are no private shareholders to insist on high profits and efficiency.
• Government subsidies can lead to inefficiency as managers will always think that the government will help them if the business makes a loss.
• Often there is no close competition between public corporations. There is a lack of incentive to increase customer choice, efficiency and customer service.
• Government can use these businesses for political reasons (ex. To create more jobs just before an election).