Module 1, Chapter 1 - Legal Ownership Structure

Question 1

What are the three main sectors of the economy?

Answer 1

Public, private and the voluntary sector.

Question 2

Define the private sector

Answer 2

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.

Question 3

Give examples of private sector organisations

Answer 3

Examples include: sole traders, partnerships, limited companies, parent & subsidiaries, unincorporated associations, and co-operatives.

Question 4

Define a sole trader

Answer 4

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.

Question 5

What are the disadvantages of being a sole trader?

Answer 5

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.

Question 6

Define a partnership

Answer 6

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.

Question 7

Give three examples of partnership arrangements

Answer 7

There are various partnership arrangements to choose from; general, limited liability and limited partnerships.

Question 8

Which type of partnership is the most popular model and why?

Answer 8

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.

Question 9

Define a limited company

Answer 9

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.

Question 10

Limited companies have a separate legal identity to that of its owners. What does this mean?

Answer 10

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.

Question 11

In respect of limited companies, who is responsible for the day-to-date running of the company?

Answer 11

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.

Question 12

Define a parent & subsidiary

Answer 12

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.

Question 13

Define unincorporated association

Answer 13

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.

Question 14

What is a co-operative organisation?

Answer 14

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.

Question 15

What is the public sector?

Answer 15

The public sector is the part of the economy that is controlled by the government.

Question 16

How is the public sector financed?

Answer 16

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.

Question 17

The public sector is split into two distinct parts. Please name both parts.

Answer 17

To provide essential services, the public sector is split into two distinct parts – central government and local government.

Question 18

Which type of services does the central government provide?

Answer 18

Central government (e.g. Parliament in London) provides nationwide services such as police, defence, healthcare, prisons, roads and social security.

Question 19

Which type of services does the local government provide?

Answer 19

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.

Question 20

Are Public Corporations and Municipal Enterprises (Public Sector) run to generate profits?

Answer 20

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.

Question 21

What are companies owned by the central government known as?

Answer 21

Companies owned by the central government are known as public corporations.

Question 22

How are public corporations set up, run, and funded?

Answer 22

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.

Question 23

What are the advantages of public corporations?

Answer 23

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.

Question 24

Why are public corporations (such as the BBC) viewed as controversial?

Answer 24

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.

Question 25

There are businesses owned and operated by the local government for the purposes of generating revenue. Provide two examples.

Answer 25

Examples include running the car park of a local hospital where visitors are required to pay to park or running a local community theatre and charging visitors for its services (e.g. tickets fees or event) or use of facilities.

Question 26

What is the purpose of the voluntary sector?

Answer 26

The purpose of voluntary organisations is to help a particular cause and benefit and enrich society. They are often set up without profit as a motive and instead of returning any profits made to its owners, any money raised or earned is usually invested back into the community or the organisation itself. Unlike public sector organisations, voluntary organisations are independent of government and are often referred to as non-governmental organisations (NGOs).

Question 27

What are the defining characteristics of a voluntary organisation?

Answer 27

The defining characteristics of voluntary organisations are:

1. Their voluntary nature.
2. In governance, they are run through a trustee board.
3. They are financed through donations and grants or in resources through the help of volunteers.

Question 28

Give an example of a charity

Answer 28

Examples include: Red Cross, RSPCA, Samaritans

Question 29

Give an example of a foundation

Answer 29

The Bill and Melinda Gates Foundation

Question 30

Give an example of a Advocacy Group

Answer 30

Examples include: World Wildlife Fund and Privacy International

Question 31

Give examples of faith-based organisations

Answer 31

Examples include: Churches, mosques, and temples

Question 32

Give an example of a community group

Answer 32

Neighbourhood Watch

Question 33

Give an example of a recreational sports group

Answer 33

Running clubs and tennis clubs