Ownership Of Firms

Question 1

Public enterprises

Answer 1

Firms owned by the government under public ownership
1. Government departments
2. Public corporations

Question 2

Private enterprise

Answer 2

Firms owned by private individuals
1. Sole proprietorship
2. Partnership
3. Limited companies

Question 3

Unlimited liability

Answer 3

Liability of owners are not limited to the investment in the firm and may have to use their personal assists to repay firm debts

Question 4

No separate legal entity

Answer 4

Owners are personally responsible for all legal charges against the firm

Question 5

Uncertain continuity ( or lack )

Answer 5

Firm will dissolve with the death/ withdrawal/ admission/ bankrupt of owner

Question 6

‘Disadvantages’ of sole proprietorship and partnership

Answer 6

1. Unlimited liability
2. No separate legal entity
3. Lack of business continuity ( is uncertain )

Question 7

‘Advantages’ of sole proprietorship and partnership

Answer 7

1. Simple and inexpensive set up procedure ( only register with Inland Revenue Department )
2. No need to disclose financial information
3. Lower profit tax rate

Question 8

Partnership advantages over sole proprietorship

Answer 8

1. Wider source of capital -> easier to expand business
2. Wider scope of specialization in management -> division of labor, increase productivity
3. More prudent and feasible decisions -> consultation and collab among partners

Question 9

Advantages of Sole proprietorship over partnership

Answer 9

1. Can freely transfer business. ( partnership needs consent of all partners )
2. More flexibility in decision making
3. X need collective responsibility ( X need to bear the consequence of mistake made by a partner )

Question 10

Limited companies

Answer 10

Private enterprises whose owner are called shareholders

Question 11

Advantages of limited companies

Answer 11

1. Limited liability of owners. The liability of owners is limited to the amount they invested in the firm.
2. 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
3. Lasting business continuity: existence unaffected by admission/ withdrawal/ bankruptcy/ death of shareholders, remain in operation continuously until its liquidated.

Question 12

Disadvantages of limited companies

Answer 12

1. Complicated and expensive set up procedure ( obtain both a business registration certificate + certificate of incorporation )
2. Higher profit tax rate

Question 13

Private > public limited

Answer 13

1. No need to disclose financial accounts to the public
2. Lower risk of being taken over ( more difficult <- shares X traded in the stock market + transfer of ownership needs approval from board of directors )

Question 14

Public > private limited

Answer 14

1. Shares are freely transferable in stock exchanges
2. Wider source of capital

Question 15

Sole + partnership > limited

Answer 15

1. Lower profit tax rate
2. Simple and inexpensive set up procedure
3. X need to disclose financial accounts to the public
4. Lower risk of being taken over

Question 16

Limited > sole proprietorship + partnership

Answer 16

1. Limited liability of owners
2. Separate legal entity
3. Lasting business continuity
4. Wider source of capital <- ( 5. Freely transferable ownership )

Question 17

Shares + shareholders

Answer 17

Certificate of ownership and rights to share the company’s profit
Shareholders: owners of the company

Question 18

Bonds + bondholders

Answer 18

Certificate of debt against the firm and the right to receive interest income until maturity
Bondholders: creditors of the company

Question 19

Shares + bonds receive…

Answer 19

Shares: dividends, varies with the company’s profit and dividend policy
Receives: interests, fixed and must be paid

Question 20

Owners: shares > bonds

Answer 20

1. No interest burden. The company does not need to pay dividend to shareholders when it does not make a profit
2. No redemption obligation. For bonds, the company has to repay the loans upon maturity
   ( bonds opposite )

Question 21

Owners: bonds > shares

Answer 21

1. Lower risk of being taken over +
2. 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 )

Question 22

Investors: shares > bonds

Answer 22

1. Can affect firm’s decision ( have voting rights )
2. May have larger dividend return than bondholders when firm is making profit

Question 23

Investors: bonds > shares

Answer 23

1. Fixed interest returns even when the company does not make a profit. Shareholders X receive dividend when the firm does not make a profit
2. Higher priority to get back their investment upon liquidation of company than shareholders

Question 24

Public enterprises

Answer 24

Firms owned by the gov under public ownership
W/ government department + public corporations Eg. HK airport Authority, Ocean Park Corporation

Question 25

Public > private enterprises

Answer 25

1. Easier to get loan with government backup
2. Easier to get info abt general public from the gov for decision - making

Question 26

Private > public enterprises

Answer 26

1. Less efficient management as weaker incentives to improve efficiency and reduce sensitivity to price signals
2. Misallocation of resources - tolerance of inefficiency and unnecessary high cost of production

Question 27

Gov departments & public corporations differences

Answer 27

Staff: civil servants vs non - civil servants
Management: gov officials vs board of directors appointed by the gov