Ownership Of Firms Flashcards
Public enterprises
Firms owned by the government under public ownership
1. Government departments
2. Public corporations
Private enterprise
Firms owned by private individuals
1. Sole proprietorship
2. Partnership
3. Limited companies
Unlimited liability
Liability of owners are not limited to the investment in the firm and may have to use their personal assists to repay firm debts
No separate legal entity
Owners are personally responsible for all legal charges against the firm
Uncertain continuity ( or lack )
Firm will dissolve with the death/ withdrawal/ admission/ bankrupt of owner
‘Disadvantages’ of sole proprietorship and partnership
- Unlimited liability
- No separate legal entity
- Lack of business continuity ( is uncertain )
‘Advantages’ of sole proprietorship and partnership
- Simple and inexpensive set up procedure ( only register with Inland Revenue Department )
- No need to disclose financial information
- Lower profit tax rate
Partnership advantages over sole proprietorship
- Wider source of capital -> easier to expand business
- Wider scope of specialization in management -> division of labor, increase productivity
- More prudent and feasible decisions -> consultation and collab among partners
Advantages of Sole proprietorship over partnership
- Can freely transfer business. ( partnership needs consent of all partners )
- More flexibility in decision making
- X need collective responsibility ( X need to bear the consequence of mistake made by a partner )
Limited companies
Private enterprises whose owner are called shareholders
Advantages of limited companies
- Limited liability of owners. The liability of owners is limited to the amount they invested in the firm.
- Separate legal entity.
- The company is legally independent of shareholders or owners
- can engage in lawsuits and make contracts in its own name
- Any profits/ loss made belongs to the company, X owners - Lasting business continuity: existence unaffected by admission/ withdrawal/ bankruptcy/ death of shareholders, remain in operation continuously until its liquidated.
Disadvantages of limited companies
- Complicated and expensive set up procedure ( obtain both a business registration certificate + certificate of incorporation )
- Higher profit tax rate
Private > public limited
- No need to disclose financial accounts to the public
- Lower risk of being taken over ( more difficult <- shares X traded in the stock market + transfer of ownership needs approval from board of directors )
Public > private limited
- Shares are freely transferable in stock exchanges
- Wider source of capital
Sole + partnership > limited
- Lower profit tax rate
- Simple and inexpensive set up procedure
- X need to disclose financial accounts to the public
- Lower risk of being taken over
Limited > sole proprietorship + partnership
- Limited liability of owners
- Separate legal entity
- Lasting business continuity
- Wider source of capital <- ( 5. Freely transferable ownership )
Shares + shareholders
Certificate of ownership and rights to share the company’s profit
Shareholders: owners of the company
Bonds + bondholders
Certificate of debt against the firm and the right to receive interest income until maturity
Bondholders: creditors of the company
Shares + bonds receive…
Shares: dividends, varies with the company’s profit and dividend policy
Receives: interests, fixed and must be paid
Owners: shares > bonds
- No interest burden. The company does not need to pay dividend to shareholders when it does not make a profit
- No redemption obligation. For bonds, the company has to repay the loans upon maturity
( bonds opposite )
Owners: bonds > shares
- Lower risk of being taken over +
- No dilution of control over the firm: bondholders -> creditors X owners, no voting rights in shareholders annual general meeting -> acquire enough shares to control the firm
( shares opposite )
Investors: shares > bonds
- Can affect firm’s decision ( have voting rights )
- May have larger dividend return than bondholders when firm is making profit
Investors: bonds > shares
- Fixed interest returns even when the company does not make a profit. Shareholders X receive dividend when the firm does not make a profit
- Higher priority to get back their investment upon liquidation of company than shareholders
Public enterprises
Firms owned by the gov under public ownership
W/ government department + public corporations Eg. HK airport Authority, Ocean Park Corporation
Public > private enterprises
- Easier to get loan with government backup
- Easier to get info abt general public from the gov for decision - making
Private > public enterprises
- Less efficient management as weaker incentives to improve efficiency and reduce sensitivity to price signals
- Misallocation of resources - tolerance of inefficiency and unnecessary high cost of production
Gov departments & public corporations differences
Staff: civil servants vs non - civil servants
Management: gov officials vs board of directors appointed by the gov
