Chapters 4 & 5 Flashcards
What are the 7 forms of business organisation in the private sector?
- Sole trader
- Partnership
- Limited companies
- Franchise
- Joint venture
- Private limited company
- Public limited company
Why do people want to become sole traders?
- Be their own boss and make their own decisions
- Decide when and how many hours to work
- Have a business that uses their skills and interests
What are the advantages of being a sole trader?
- Quick and easy to set up a business
- Sole trader makes all of the decisions so has complete control
- Can be set up with a small amount of start-up capital
- E.g. someone setting up a window cleaning business may only need to buy a ladder, bucket, detergent and cloths
- The owner keeps all the profit
- It is very popular
What are the disadvantages of being a sole trader?
- The owner has unlimited liability for the debts of the business and risks losing personal wealth to pay for these
- Difficult to raise funds to expand the business
- Hard to compete with larger firms in the same industry
- Owners often lack some of the essential business skills needed for running a business, such as financial management
- Have to work very long hours to make a living from their business
- If a sole trader retires or dies, the business no longer exists
What are the advantages of a partnership?
- Easy to set up with a Deed of Partnership
- Partners invest in the business so greater access to funds
- Shared decision making
- Shared management and workload
What are the disadvantages of a partnership?
- Unlimited liability - responsible for business debts
- Share the profits
- Business ceases to exist if one partner leaves
- Decisions binding on all partners
- Difficult to raise finance
What are the two main types of limited company?
- Private limited companies
- Public limited companies
What are the shared features of private limited and public limited companies? (Card 1)
- Legal documents must be competed when setting up the business
- Shareholders invest their capital by purchasing shares (shares aren’t products) in the company
- Ordinary shareholders are the owners of the company
What are the shared features of private limited and public limited companies? (Card 2)
- Shareholders have LIMITED liability so if the business fails, they risk losing the value of their shares, the amount of money they’ve invested in the company
- Business continues even if one or more shareholders die
- Company can raise finance by selling shares
- Profit belongs to the ordinary shareholders
What are the shared features of private limited and public limited companies? (Card 3)
- Profit is shared between the shareholders through the payment of dividends
- Shareholders vote on major decisions taken by the company
- EOY financial statements must be produced and submitted to the correct authorities and the public can look at this
Top tip on page 49
Don’t confuse public limited companies with public sector organisations. Public limited companies are in the private sector as well as private limited companies.
Differences between private limited and public limited companies: Owners
Private limited:
Usually a very small number of shareholders, often members of the same family or friends.
Public limited:
Usually a very large number of shareholders.
Differences between private limited and public limited companies: Size
Private limited:
Usually fairly small.
Public limited:
Most common form of organisation for very large companies.
Differences between private limited and public limited companies: Sale of shares by the company
Private limited:
Can be only sold privately, often to family members, friends or employees.
Public limited:
Can be offered for sale to the general public and other organisations.
Differences between private limited and public limited companies: Sale of shares by shareholders
Private limited:
Difficult to sell as must be sold privately and with the agreement of other shareholders.
Public limited:
Quick and easy to sell as they can be offered for sale to the public.
Differences between private limited and public limited companies: Control
Private limited:
Only a few shareholders. One shareholder may own 51% of the shares in the company and so has control over major decisions. Ownership isn’t separated from control.
Public limited:
Often thousands of shareholders. The Board Directors appointed by shareholders at the AGM controls major decisions. Ownership and control are separated.
Differences between private limited and public limited companies: Raising additional capital share issue
Private limited:
Even if successful, it may be difficult to raise additional capital as shares can’t be sold to the general public.
Public limited:
If successful, it can often raise very large sums quite easily through the sale of additional shares.
Differences between private limited and public limited companies: Borrowing finance
Private limited:
Difficult to raise finance as unincorporated businesses because they’re usually small businesses with low-value assets to offer as security - known as collateral.
Public limited:
Can often raise very large sums at good rates of interest because of its reputation and valuable collateral.
What are the disadvantages of public limited companies?
- Legal formalities are costly
- Directors’ decision-making is sometimes influenced by major investors who seek to satisfy their own objectives
- Company is always at risk of a takeover by another company, because its shares can be freely bought and sold
- Any other business needs to only buy 51% of the shares in a company to become the new owner
Examples of franchises
- McDonald’s
- KFC
- Subway
- Pizza Hut
- Hilton Hotel
Franchisor and franchisee
A firm that already has a successful product or service - called the franchisor - agrees to allow another business - called the franchisee - to use the franchisor’s trade name, logo and products in exchange for a fee.
What are the benefits of a franchise?
- There is less chance of business failure because the product and brand are already well established.
- The franchisor often provides advice and training as part of the agreement.
- The franchisor will finance the promotion of the brand through national advertising.
- The franchisor will have checked the quality of suppliers.
What are the disadvantages of a franchise?
- Initial cost of buying into a franchise can be very expensive
- The franchisor will take a percentage of the revenue or profits made by the franchisee each year.
- Very strict controls over what the franchisee is allowed to do with the product, pricing and store layout
- E.g. all McDonald’s restaurants sell identical products
- Franchisee will still have to pay for any local promotions they decide to do
What are the main reasons for a joint venture?
- Reduces the risk for each business and cuts costs
- Each business brings various expertise
- Market and product knowledge can be shared to the benefit of the businesses in the JV
What are the limitations of a joint venture?
- Any mistakes made may damage the reputation of all firms in the JV, even if they weren’t the cause of the mistake
- Businesses may have different business cultures or styles or leadership, making decision-making more difficult
What are the differences between unincorporated businesses and limited companies?
- An unincorporated business is one which doesn't have a separate legal identity from its owners - This means that the owners are legally responsible for the activities of the business - Owners have unlimited liability - E.g. sole traders and partnerships
- An incorporate business, such as a limited company, has a separate legal identity from its owners.
- The company, not the owners (shareholders), is legally responsible for the activities of the business
- Shareholders have limited liability
What are the main features of public corporations?
- Owned and controlled by the state
- Financed mainly through taxation
- Social objectives rather than profit objectives
- Free or low priced
Chapter 5
What are the SMART objectives?
- Specific
- Measurable
- Achievable and Agreed
- Realistic and Relevant
- Time-specific
What are the 5 business objectives for businesses in the private sector?
- Make a profit
- Stay in business beyond the first two years
- Expand the size of the business
- Increase market share
- Be socially, ethically and environmentally responsible in all business activities
What are the 3 business objectives for businesses in the public sector?
- Accessible (can be used by everyone regardless of location or income)
- Affordable (must be cheaper than if the service was provided by the private sector or free)
- Open to all (regardless of income, class, ethnicity, religion etc.)
Survival
- Many new businesses fail in their first or second year
- Short-term objective
Profit
- Important objective
- Aim to produce and sell the level of output where there’s the greatest difference between revenue and total costs
Growth
- May benefit from economies of scale
- Reduce the cost of producing each item
- Increase the firm’s competitiveness, revenue and profits
Market share
- As a business grows, it may achieve a larger share of the market
- Increased market share often benefits a business
- Helps to develop a strong brand image
- Easier to sell the product to consumers
Corporate social responsibility (CSR)
- Businesses that ignore their social responsibility run the risk of bad publicity and possible legal action
- Both can affect the reputation, sales, revenue and profits of a business
What are the objectives of social enterprises?
- Businesses mainly concerned with social objectives
- Activities relate to the needs of the community and environment
- Profit is reinvested back into the business
What are the two types of stakeholders?
- Internal stakeholders (owners and shareholders, managers, employees)
- External stakeholders (lenders, suppliers, customers, government, local community)
Objectives of internal stakeholders: Owners and shareholders
- To receive high returns/dividends as reward for risking their investment in the business
- To benefit from an increase in share value
Internal stakeholders: Managers
- To have job satisfaction and status
- To receive salary increase and bonuses
Internal stakeholders: Employees
- To have job security
- To receive a fair wage that reflects their contribution to the business’s success
Objectives of external stakeholders: Lenders
- To receive interest payments when due
- To have borrowing repaid by the due date
External stakeholders: Suppliers
- To receive prompt payment for goods supplied on credit
- To be treated fairly and not be forced to reduce their prices by businesses with strong buying power
External stakeholders: Customers
- To receive quality goods and after-sales service
- To be charged a fair price which gives value for money
External stakeholders: Government
- To be paid the correct amount of taxes on time
- To have minimal spending on unemployment benefits
External stakeholders: Local community
- To receive benefits for the local economy such as employment and subsidising of community facilities
- To avoid the negative impact of business activities such as noise, air and traffic pollution
