Ownership of Firms Flashcards
Firm
Planning unit of production
It takes place without a physical location (e.g. online store)
Plant
It takes place with physical location
Public enterprises
1.Owned by the government
2.Do not aim at profit maximisation
Features of public enterprises
- Reliable supply of goods at lower price
- Adequate supply of capital
- Better access to information
Private entertprises
Refers to firms privately owned
2 types of private enterprises
Unlimited company (sole proprietorship and partnership) and limited company ( private and public limited company)
Sole proprietorship
- Not a legal entity (bakery)
- Unlimited liabitlity
- Lower profit tax rate
- Limited continuity
- Simple set-up procedure
- Accounting Information can be kept secret
- Strong working incentive
Partnership
- Not a legal entity
- Unlimited liability
- Lower profit tax rate
- Limited continuity
- Simple set-up procedure
- Information can be kept secret
- Limited source of capital
- Collective responsibility
- 2 to infinity partner
Common advantage of sole proprietorship and partnership
- Lower profit tax rate
- Easier to set-up
- Accounting information can be kept secret to the public
- Close relationship with employees and customers
Common disadvantage of sole proprietorship and partnership
Unlimited liablity
Limited continuity
Limited source of capital
Advantage of partnership over sole proprietorship
Wider source of capital
Wider scope of specialisation
Disadvantage of partnership to sole propriertorship
Difficult to transfer business
Slower decision making
Limited company
Limited liability
Lasting continuity
Legal entity
Separation of ownership and management
Higher profit tax rate
More complicated set up procedure ( business certificate)
Wider source of capital
Public limited company
1.Can issue shares
2.Can have no restriction on the transfer of shares however the risk of company being taken over increase
3. Need to disclose financial information to the public
Listed company must be public limited company but not all public limited company are listed company
Private limited company
Selling shares need the approval of the director
Need not to disclose financial information
Advantage of limited company over a sole proprietorship and a partnership
Wider source of capital
Lasting continuity
Limited liability
Legal entity
Disadvantage of limited company over a sole proprietorship
Accounting information cannot be kept secret (Public Ltd CO.)
Higher profit tax rate
More complicated set-up procedure
Weaker incentive to work efficiently
Share
Is a certificate of ownership issued by a company
Bond or debenture
Certificate of debt
Shares
1.Owner of the company
2.Holders receive variable rate of dividend depending on the profit of the company
3. Holders have voting rights during AGM
4. No maturity dates
Bonds
- Creditor of the company
- Holders receive fixed rate of interest regularly from the company
- Holders do not have voting rights during AGM
- Holders can claim repayment prior to shareholders
- A fixed maturity date
Advantage of issuing shares to small investors
- Potentially higher rate of return than bonds if company earns huge profit
- With voting rights in shareholders in AGM
- No maturity date
Advantage of issuing shares to the company
- No interest burden
- No redemption obligation as there is no maturity date for shares
Disadvantage of issuing bonds to the investors
- Potentially lower return than shares if the company earns huge profit
- No voting rights in shareholders’ meeting
- Maturity dates
Disadvantage of issuing bonds to the company
- Interest burden
- With redemption obligation as there is maturity for the bonds
Disadvantage of issuing shares to the small investors
- Unstable return
- Potentially have a lower return if company suffers losses
- Lower priority in having capital refunds when company liquidates
Disadvantage of issuing shares to the company
Higher risk of being taken over is incurred. Existing shareholder’s control over the company is diluted.
Advantage of issuing bonds to small investors
- Stable return
- Potentially higher return than shares if company suffers from the loss
- Higher priority in having capital refunds when the company liquidates
Advantage of issuing bond for the company
No risk of being taken over is incurred as bond holders are only the creditor of the company
Possible source of finance for a limited company
- To issue shares/ bonds
- To borrow money from a bank
- To use the retained profit
Advantage of private limited company over public limited company
Lower risk of being taken over
Not required to disclose the company’s accounting information to the public
Advantage of public limited company over private limited company
Easier transfer of its ownership
More sources of capital
