Private sector

Question 1

What is the private sector

Answer 1

The private sector consists of businesses that are owned by individuals or groups of individuals with the main aim of making profits.

Question 2

What are some examples of private sector businesses?

Answer 2

Sole trader
Partnerships
Limited companies
Cooperatives
Franchises
Joint ventures

Question 3

What is a sole trader?

Answer 3

A sole trader refers to a business owned and operated by one individual. While there is only one owner, he/she may employ other people to carry out different functions for which those people would be paid.

Question 4

Characteristics of a sole trader

Answer 4

-Easy to start
-The owner is in control of the business
-Requires little start-up capital
-The owner and the business are one (they are the same legal entity)
-Lack of continuity.

Question 5

How might a sole trader obtain capital?

Answer 5

A person wanting to start a sole-trader business may opt to use their own personal savings, obtain bank loans or borrow from family and friends.

Question 6

Advantages of a sole trader

Answer 6

-It is easy to form, as there are few or no legal requirements
-Decisions can be made quickly
-The owner enjoys all the profits
-With the exception of tax returns, business affairs are private
-Can be most suitable where capital is scarce.

Question 6

Disadvantages of a sole trader

Answer 6

-The owner has unlimited liability, i.e. he/she stands to lose personal assets if the business fails
-Difficulty in sourcing finance
-The business dies with the owner, hence there is a lack of continuity
-It may be difficult to achieve economies of scale
-There may be great demand on the owner’s time and attention.

Question 7

What is a partnership?

Answer 7

A partnership is defined as a business where two to twenty people work together towards a common goal of making profits.

Question 8

What is the partnership deed

Answer 8

This shows how profits or losses
should be shared; the rights of each partner; rules for taking in new partners or dissolution of the partnership; and the capital to be contributed by each partner.

Question 9

Who is a sleeping partner?

Answer 9

Someone who invests capital in the business but does not want to take any active part in how it is run.

Question 10

Characteristics of partnerships

Answer 10

-There is unlimited liability for a partner
-Two or more members
-Profits/losses are shared
-Few legal requirements
-No separation between business and partners

Question 11

Advantages of partnerships

Answer 11

-They are easy to form, as there are few or no legal requirements
-Each partner contributes to the capital of the business
-Responsibilities may be shared among the partners
-It allows for division of labour, as partners may have specialized skills
-There is privacy of affairs, as it is not compulsory to publish the partnership’s accounts.

Question 12

Disadvantages of partnerships

Answer 12

-There is unlimited liability for a partner
-Decision making may be tedious and low
-There might be conflict among partners
-There is a lack of continuity – that is, once a partner leaves or dies the partnership has to be dissolved.

Question 13

What is a limited company?

Answer 13

This is a business unit that is regarded by law as separate from owners.

Question 14

How does a limited company gain capital?

Answer 14

A company’s main source of funding is from the shares that it issues (equity capital). However, the company may also be financed by debt capital (loans).

Question 15

What is a private limited company?

Answer 15

This is an incorporated business venture which is separate and distinct from its owners. Its membership is limited to
50 individuals and its shares cannot be sold publicly (on the stock exchange).

Question 16

Characteristics of private limited companies

Answer 16

-Usually small and owned by family members or friends
-The name of the company must be registered
-Shares cannot be traded on the stock exchange
-Shareholders cannot sell their shares without the agreement of the other shareholders
-Limited liability
-Involve two to fifty people.

Question 17

Advantages of private limited companies

Answer 17

-Each shareholder has limited liability
-Continuity of existence
-There is greater capital potential, as shares can be sold to family members
-Lower possibility of loss of control to outsiders
-The company has a legal identity separate from that of its owners.

Question 18

Disadvantages of private limited companies

Answer 18

-Raising of capital may be hampered since shares cannot be traded publicly
-Profits have to be shared among a larger group of people
-A copy of the audited financial statement must be submitted to the Companies Office (so a lesser degree of privacy than for partnerships and sole traders)
-Transfer of shares is limited by the approval of existing members
-Legal requirements may be time consuming and costly to implement.

Question 19

What is a public limited company?

Answer 19

This type of limited company is usually larger than a private limited company. Public companies may be listed on a country’s stock exchange, where they can raise capital.

Question 20

Characteristics of public limited companies

Answer 20

-Must be registered with the Companies Office
-Separate legal identity from that of its owners
-Can raise capital through the sale of shares to the public
-Managed by a board of directors elected by shareholders
-Limited liability for its owners.

Question 21

Advantages of public limited companies

Answer 21

-Shareholders have limited liability
-Continuity of existence
-Easier to raise capital on a large scale
-Freedom to transfer shares via the stock exchange
-Better credit rating, therefore it is easier to secure loans
-Benefits from economies of scale due to size and lower production costs.

Question 22

Disadvantages of public limited companies

Answer 22

-Many legal requirements which may be costly and time consuming to implement
-There is a risk of takeover bids, as shares can easily be purchased on the stock exchange
-Published accounts can be viewed by the public, including competitors
-Can become large, impersonal and difficult to manage.