Forms of business

Question 1

Disadvantages of being a sole trader (6)

Answer 1

1. Unlimited liability
2. May not have all the skills needed to handle all areas of the business
3. Making all decisions can be stressful
4. Can be difficult to raise finance
5. Heavy workload
6. Might be charged higher interest rate on loan as bank wants to cover potential losses

Question 2

Advantages of being a sole trader (3)

Answer 2

1. All the profit
2. Independence in making decisions and control
3. Less documentation required

Question 3

Advantages of private limited company (4)

Answer 3

1. Limited liability -> encourages investment
2. Easier or raise finance as the company can sell shares
3. Stable form of structure - the company continues to exist even when the shareholders change
4. Original owners are likely to retain control

Question 4

Disadvantages of private limited companies (5)

Answer 4

1. Shareholders have to agree about how profits are distributed
2. Greater administrative costs than setting up as sole trader or partnership
3. Finance limited to ‘’friends and family’’
4. Less privacy - public disclosure of company information, but not as extreme as plc
5. Director’s legal duties are stricter

Question 5

A company -

Answer 5

• business organisations that has its own legal identity and that has limited liability

Question 6

Incorporation -

Answer 6

• the process of establishing a business as a separate legal identity that allows it to benefit from limited liability

Question 7

Market capitalisation -

Answer 7

• total value of issued shares of a public limited company

Question 8

Advantages of public limited companies (3)

Answer 8

1. Access to capital
2. Publicity
3. Ability to takeover

Question 9

Disadvantages of public limited companies (3)

Answer 9

1. Decisions taken in short term interest to encourage investment
2. Loosing control over the business as shares are sold -> might not be the main shareholder anymore
3. Takeover without consent when shareholders are selling their shares to other businesses

Question 10

Privatisation -

Answer 10

• process when the state sells businesses that it has previously owned and managed to private individuals and businesses

Question 11

Public corporations -

Answer 11

• enterprises owned by the state but offering products for sale to the public and private sector businesses, might be managed by central government or local governments

Question 12

Public services -

Answer 12

• includes organisations that provide services to the whole nation

Question 13

Municipal services -

Answer 13

• services offered by local governments and councils

Question 14

Not for profit businesses -

Answer 14

• set up for a purpose and can be a part of both private and public sector. Owners operate them for strong belief in particular idea, providing hobby or replacing employment

Question 15

Mutual businesses -

Answer 15

• run for the benefit of their members such as consumers, employees, suppliers or the local community

Question 16

Cooperatives -

Answer 16

• well-known example of mutual businesses and run by groups of people (members) each of whom has a say in the management of the business. Must reflect their ethical values: honesty, openness, social responsibility and caring for others. Principals: voluntary and open membership, democratic member control, provision of education, provision of training and information and concern for the community

Question 17

Types of cooperatives (3)

Answer 17

1. Consumer cooperatives (customers are members)
2. Worker cooperatives (owned and operated by employees)
3. Producer cooperatives (group of businesses work together to benefit from factors such as increased bargaining power)

Question 18

Criticism of cooperatives

Answer 18

Lack of skills that is not suited for some positions, relying on elected members who may be well intentioned, but not suited for their roles.

Question 19

Primary sector -

Answer 19

• the economic sector that resolves around the extraction of raw materials

Question 20

Secondary sector -

Answer 20

• sector that involves manufacturing, production and transportation

Question 21

Tertiary sector -

Answer 21

• selling goods or providing service to the consumers

Question 22

Private sector -

Answer 22

• owned by private entrepreneur

Question 23

Public sector -

Answer 23

• owned by government

Question 24

Charity -

Answer 24

• organisation that fundraisers to help people in need

Question 25

Social enterprise -

Answer 25

• organisation that applies commercial strategies to maximise improvements in financial/social and environmental well-being

Question 26

Sole trader -

Answer 26

• an individual owning the business on his own, cannot sell shares

Question 27

Ltd -

Answer 27

• raise funds from investors, such as friends and family, but not from general public as it’s shares are not listed on the stock exchange

Question 28

Unlimited liability -

Answer 28

• owners may have to use their own personal funds to pay any debts

Question 29

Limited liability -

Answer 29

• shareholders are not responsible for the company’s debt, might only lose their investment