Module 1, Chapter 1 - Legal Ownership Structure Flashcards
What are the three main sectors of the economy?
Public, private and the voluntary sector.
Define the private sector
The private sector consists of organisations that are owned and run by private individuals. These are not under direct government control and are run with the intention of generating a profit for the owners of the business.
Give examples of private sector organisations
Examples include: sole traders, partnerships, limited companies, parent & subsidiaries, unincorporated associations, and co-operatives.
Define a sole trader
This is a business that is owned by one, self-employed, individual who may or may not employ other staff on a full or part-time basis. Often financed using the owner’s personal funds (and sometimes topped up with borrowed funds, e.g. a bank loan), any profits made accrue to the owner.
What are the disadvantages of being a sole trader?
Whilst being eligible to receive all the profits is definitely an advantage for the owner, one significant disadvantage is that if the business makes any losses, the sole trader is personally responsible for them. Since this type of business does not have a separate legal personality, the owner has unlimited personal liability for its debts and liabilities. Despite being personally liable, there are more sole traders in the UK than any other business type because of the ease with which the business can legally be established.
Define a partnership
A partnership is established when two or more individuals combine money, resources and skills to operate and manage a business and share in the profits and losses of that business. A partnership is defined by the Partnership Act 1890 as ‘the relation which subsists between persons carrying on a business with a view to profit’. Benefits of partnerships are that they are easy to establish and combine the skills and resources of the partners involved.
Give three examples of partnership arrangements
There are various partnership arrangements to choose from; general, limited liability and limited partnerships.
Which type of partnership is the most popular model and why?
A limited liability partnership (LLP) is popular with businesses that carry out a trade or profession and is often the preferred legal structure of professional firms such as accountancy, law, and architecture firms. If one partner is being sued for misconduct or negligence (e.g. malpractice) the assets of the other partners are not put at risk.
Define a limited company
According to law, a limited company is a corporate association with its own legal identity that is separate from that of its owners. In essence, the company is set up as a ‘legal person’ in its own right. These companies have undergone the process of incorporation – the process by which a new or existing business registers as a limited company. They are limited by shares or guarantee.
Limited companies have a separate legal identity to that of its owners. What does this mean?
Having a separate legal identity means that if the company goes into insolvency, the company is liable for its debts and each member is only liable for the amount they originally invested in the business.
In respect of limited companies, who is responsible for the day-to-date running of the company?
The shareholders delegate the responsibility of the day-to-day running of the company to the board of directors, who act on the shareholders’ behalf in this capacity.
Define a parent & subsidiary
A subsidiary company is a company owned or controlled by another company, referred to as the ‘parent’ or ‘holding’ company. Generally, the parent will own 50% or more of the subsidiary but remains a legally separate entity. Companies might form or purchase subsidiaries for expanding business operations or to spread the risk of liability when engaging in new lines of business.
Define unincorporated association
An unincorporated association is an organisation set up through an agreement between a group of people who come together for a reason other than to make a profit (e.g. a voluntary group or a sports club). This type of association does not need to be registered with Companies House (hence the term unincorporated) and it doesn’t cost anything to set one up, however individual members are personally responsible for any debts and contractual obligations.
What is a co-operative organisation?
A co-operative is an organisation owned and run by its members, which can be, for example, the employees, the customers, local residents or suppliers. They are not run for the benefit of shareholders and operate in the interests of the members, who have an equal say in how the business is run and decide how its profits are used. Co-operative organisations range from multi-billion pound businesses to small community enterprises and offer a wide range of products and services, including healthcare, housing, renewable energy, retail products, sports and social care.
What is the public sector?
The public sector is the part of the economy that is controlled by the government.
How is the public sector financed?
Organisations in this sector are mostly financed by using the taxes people pay to the government. The government uses this money to provide essential public services for citizens.
The public sector is split into two distinct parts. Please name both parts.
To provide essential services, the public sector is split into two distinct parts – central government and local government.
Which type of services does the central government provide?
Central government (e.g. Parliament in London) provides nationwide services such as police, defence, healthcare, prisons, roads and social security.
Which type of services does the local government provide?
Local government (e.g. local borough councils), provides services for their local community such as social services, council housing, refuse and recycling collections, primary and secondary education and parks and recreational services.
Are Public Corporations and Municipal Enterprises (Public Sector) run to generate profits?
In contrast to the private sector, these organisations are run without the intention of generating a profit. However, some public sector organisations – public corporations and municipal enterprises – more closely resemble private sector organisations.
What are companies owned by the central government known as?
Companies owned by the central government are known as public corporations.
How are public corporations set up, run, and funded?
A chairperson and board of directors are appointed by a government minister to run the company on behalf of the government. An example of this is the BBC in the UK, whose Chair is appointed on the recommendation of the Secretary of State. The organisation is financed through grants from the government and from raising finance through charging the general public a fee for a TV licence.
What are the advantages of public corporations?
Significant advantages of this type of enterprise are that it creates jobs and provides services for local communities without having to rely on funds generated from taxes to run the enterprise.
Why are public corporations (such as the BBC) viewed as controversial?
The concept of local government running a business that is usually regarded as a private-sector enterprise is controversial. Critics have argued that money generated from taxes should not be used to provide the capital to start these enterprises.
